Can Applegate remain truly "independent" under Hormel?

Can Applegate remain truly "independent" under Hormel?

Hormel Foods has moved to acquire Applegate Farms to tap into growing demand for natural and organic protein in the US. But what makes Applegate different is its ethical take on food production. If the company is to retain consumer trust under its new corporate owner, Hormel must let Applegate remain true to its founding principles, Katy Askew argues.

"Applegate announced that we will be acquired by Hormel Foods. The decision may come as a surprise to our customers and many of you may be concerned," Applegate Farms founder Stephen McDonnell said as he confirmed plans to sell the US natural and organic meat group.

Tackling the issue of trust head on in a message to Applegate consumers, McDonnell explained he suffered a stroke on Christmas Eve in 2013. He continued: "As much as I hate to admit it, I’m no longer the best person to be at the helm of Applegate – especially as it continues to grow and pioneer changes to our food system. As I looked to sell the company, the most important thing for me was finding a partner that would let Applegate keep being Applegate."

Hormel's deal to buy Applegate is a direct response to the disruptive growth coming from emerging challenger brands – and particularly those that cater to the upmarket end of the US food sector. Applegate has witnessed rapid sales growth because its products feed in to growing consumer desire for natural, organic, GMO-free and antibiotic-free foods.

The personal and open way in which McDonnell detailed his decision to sell is an example of exactly why smaller upstart brands have had such a tumultuous influence on the US food sector. It is a far cry from the corporate-speak that dominates communications from legacy brand manufacturers.

More than that though, Applegate as a business stands for something. The company was founded 28 years ago at a time when, according to CEO Kerry Collins, there were only a "handful" of antibiotic-free animal farms. Today, the company works with almost 1,800 family farms who supply it with meat.

Applegate's sourcing policies have proven an important point of difference for the company, which estimates it will reach sales of US$340m this year. According to research from The Hartman Group, establishing this point of difference has been crucial for the challenger brands taking the US food industry by storm.

"How do these emerging food brands develop consumer trust, in the absence of any apparent brand recognition or meaningful resources to promote themselves aggressively? The short answer: quickly, but not through marketing a brand. Early in the product life cycle, trust is built mostly on having a truly differentiated product. Once a product is distinguished from existing products, the brand becomes the herald of this trust-inducing differentiation," Hartman notes.

So, can a company that is differentiated by its ethical stance remain distinct when it is swallowed up by a purveyor of legacy brands such as Spam? McDonnell conceded Hormel "may not seem like a likely partner to do business with". However, Applegate insisted its new owners would not alter the organic meat firm's mission, its social purpose.

"Here’s the big question: Can you still trust us? Will Applegate still support GMO-labelling? Antibiotic-free animal agriculture? Humane treatment? The answer is yes. The acquisition will not change our positions on any of the important issues," McDonnell insisted.

This sentiment was echoed by Gina Asoudegan, who has the unusually-entitled role of senior director of mission. "Applegate will continue to support labelling and transparency on genetically engineered foods, limiting the use of antibiotics in animal agriculture, and advocating for the advancement of humane standards. As a company, Applegate will continue to lead the way in searching for solutions on issues like non-GMO feed for naturally raised livestock and raising the bar on animal welfare."

With US consumer trust in 'big food' and legacy brands reaching what seems (must surely be?) its nadir, Applegate is aware the only way to convince the consumer is to stress it will remain an independently-operated, stand-alone subsidiary of Hormel. It will not be integrated into its corporate culture, it will not become another cog in the machine, Applegate insists.

Nevertheless, as a business owned by Hormel, can Applegate retain its values? Executives will, after all, have to answer to Hormel management and meet Hormel-imposed targets. In an industry where zero-based budgeting is becoming the norm and the pressure to cut costs is reaching all time highs, can Applegate's model remain unaltered?

Possibly. Let's look at the Ben & Jerry's ice cream brand, which was sold to Unilever over a decade ago in a deal that prompted much consumer agitation and cries of "sell out".

Under Unilever, Ben & Jerry's has retained decision making authority over the social issues that differentiate the business. It has been able to make decisions in areas such as phasing out GMO-ingredients and, indeed, to take a very vocal role in the argument over whether GMO labelling is a matter that should be tackled by state legislators.

Ben & Jerry's has even backed a different presidential candidate to its parent company, supporting the nomination of anti-big business politician Bernie Sanders for Democratic presidential candidate. Unilever is a donor to the Clinton Family Foundation.

This strategy has paid off for Unilever. Earlier this month, the global consumer goods giant insisted its "sustainable living brands" have seen the fastest growth within its portfolio. The likes of Ben & Jerry's are seeing "high single and double digit sales over the past three years", Unilever revealed.

"In a volatile world of growing social inequality, rising population, development challenges and climate change, the need for businesses to adapt is clear, as are the benefits and opportunities. This calls for a transformational approach across the whole value chain if we are to continue to grow. Consumers are recognising this too, increasingly demanding responsible business and responsible brands. Our experience is that brands whose purpose and products respond to that demand – sustainable living brands – are delivering stronger and faster growth," Unilever CEO Paul Polman said. "These brands accounted for half the company's growth in 2014 and grew at twice the rate of the rest of the business."

Allowing Ben & Jerry's to retain its distinct identity has proven an astute move, it would seem.

Hormel would be wise to pay heed to this example as it looks to unlock the growth opportunity presented by the natural and organic protein space. Savvy, digitally switched-on and engaged consumers will be all too quick to smell a rat.