By Leslie Josephs And Annie Gasparro
Orders for organic burritos, Thai stir-fry and other frozen
products from Amy's Kitchen Inc. have been growing so quickly that
late last year the company bought a second factory--an Idaho plant
H.J. Heinz Co. had just shut amid shrinking demand for its frozen
food.
Started in 1988 by a married couple who named it after their
daughter, Amy's in recent years has expanded beyond the world of
specialty grocers into mainstream supermarkets like Piggly Wiggly
and Price Chopper. Sales have surged 72% over the past five years
to $443 million in 2014.
"Everyone said when we reached a certain size our growth would
slow," said Andy Berliner, co-founder and chief executive. "We keep
waiting for that to happen, but we're still growing so fast."
Amy's and other smaller companies focused on natural and organic
foods are feasting on shifts in tastes among consumers distrustful
of established food giants' products and ingredients. The rise of
these smaller companies, helped by growing interest from big
retailers, is eating into demand for brands that for decades were
commonplace in American kitchens, like Kraft Foods Group Inc.'s
macaroni and cheese and Kellogg Co.'s breakfast cereals.
The latest illustration of the tumult came Wednesday with the
announcement that Heinz, two years after being taken over by
Brazilian private-equity firm 3G Capital Partners LP, will acquire
Kraft in a deal valued at around $49 billion. The hope is that the
pair's many well-known brands, under 3G's penny-pinching
management, will be able to revive growth.
The 25 biggest U.S. food and beverage companies collectively had
45.1% of the industry's $418 billion in 2014 sales, down 4.3
percentage points from five years earlier, according to Credit
Suisse analyst Robert Moskow. Smaller brands' share rose to 35.3%
from 32.1% in the period, with the rest going to companies that
produce store-brands for big grocers.
Other small food companies have grown even faster than Amy's.
Granola bar maker Kind LLC, started in 2004, has gone from less
than 0.5% share of the snack-bar market in 2011 to nearly 6% today,
according to Bernstein Research. Chobani Inc., whose Greek-style
yogurt revolutionized that sector, reached $1 billion in sales its
first five years of sales.
One big reason for these companies' success is retailers that
long worked hand-in-glove with giant national brands--who spent big
on advertising and paid for prime shelf space--have started seeking
out upstarts to spice up their aisles.
Kroger Co., the biggest conventional grocery chain, with over
$100 billion in sales last year, in 2013 started selling FlapJacked
pancake mix from a small Colorado company, in its King Soopers
chain there. After helping them develop a new package size,
marketing strategy and additional flavors, Kroger now sells
FlapJacked foods in more than 500 stores across the country.
"Our customers are increasingly telling us that buying local or
buying from boutique producers is something they want, and we are
working even harder to provide it," a Kroger spokesman said.
Last year, Bi-Lo Holdings LLC, a Southeastern grocery-store
operator with about 800 stores, including the Winn-Dixie chain,
launched two Shark Tank-like programs to offer local food makers a
chance to pitch their products for space on its shelves.
"The food industry is changing at such a rapid pace, and we want
to make sure we're not just keeping up with it but also driving
it," said Nicole Hatfield, a senior manager at Bi-Lo Holdings.
More than a decade ago, Bonny Shuptrine and her husband began
packaging her homemade spiced relish when patrons of their art
gallery bought artwork. The reception was good enough that they
founded Shuptrine's Twisted Products. Last year, Ms. Shuptrine
presented samples to Bi-Lo executives at a supermarket in
Chattanooga, Tenn. The chain put it in 23 stores, and Ms. Shuptrine
has moved her production into an industrial kitchen.
Being big used to be an advantage, with a bigger marketing
budget and buying supplies in bulk. Now it's a hurdle. Big
companies are responding by acquiring the upstarts, or rolling out
new products to try to compete with them. Kellogg recently came out
with Origins cereal and granola, described as "real food prepared
simply," while Campbell's launched a line of organic soups.
"We are well aware of the mounting distrust of Big Food,"
Campbell Soup Co. CEO Denise Morrison said last month.
Winning back consumer trust is proving hard for the incumbents.
"The biggest challenge is that they are prisoners of their own
heritage," said Mr. Moskow of Credit Suisse. "'Organic Velveeta' is
a contradiction in terms, for example."
Smaller companies make up for their lack of financial resources
with greater agility and a lack of historical baggage.
"New brands have a blank sheet of paper for telling their story.
Established brands have to work against negative perceptions," said
David Garfield, a consultant with AlixPartners.
Growth brings its own challenges for newcomers.
Alison Bailey Vercruysse, founder and chief executive of 18
Rabbits, a San Francisco-based maker of granola and granola bars,
in 2011 tapped an outside food manufacturer to help her ramp up
production. But the facility repeatedly failed to deliver her
order, she said. She said her products had been in 80% of Whole
Foods stores around the country, but the stumble knocked her down
to 10%.
"Since we didn't have our own production capabilities, that
almost killed us as a company," she said.
Now using a different producer, Ms. Vercruysse recently struck a
deal with Target Corp. to sell an 18 Rabbits Jr. granola line
targeted at children. "It took two years to bounce back" from the
outsourcing stumble, she said. "2016 will be break-even."
Amy's, too, has had its headaches. This week it voluntarily
recalled about 74,000 cases of lasagna, enchiladas and other meals
with spinach due to listeria concerns with its supplier.
Amy's, based in Petaluma, Calif., now has about 2,000 employees
who churn out more than 700,000 meals a day. Nevertheless, it
boasts that its workers still stretch pizza dough by hand and don't
use dehydrated vegetables. "Other companies manufacture food. We
cook it," said Mr. Berliner, who runs it with his wife, Rachel.
The founders fight hard to keep that reputation. In September,
when natural-foods peer Annie's Homegrown sold to General Mills
Inc., Amy's got phone calls from concerned customers, prompting it
to issue a news release headlined, "Which Mac & Cheese Brand
Just Got Sold? It Wasn't Amy's!"
"If we were to sell to a big food company, our product would
change, because they would want to improve profits," Ms. Berliner
added.
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