With first-quarter results rolling in, Jefferies consumer goods analyst Martin Deboo argues the numbers underline the issues facing the sector’s largest players.

The Q1 reporting season, unfolding just now on both sides of the Atlantic, can be expected to provoke fresh pangs of existential angst in the boardrooms of Big Food.
What is provoking this angst is the problem of growth. Or rather the lack of it. The first three months of 2017 marked the sixth quarter of sequential growth slowdown for the big European food producers (Nestle, Danone and Unilever Foods). Nestle have now formally abandoned their longstanding ‘Nestle Model’ top-line growth guidance of 5-6% and in 2017 are targeting growth of 2-4%, a range so wide it admits to almost any realistic possibility, in what are being described as “volatile” markets.
On the other side of the Atlantic, things are even worse. The big US food processors have not posted a quarter of positive growth on average in in the US since 2014. Volumes are consistently low single-digit negative. Pricing is as good as flat. General Mills’ shares fell by 6% in mid-February as it was obliged to trim its organic growth guidance for its 2017 financial year to minus 4%, on the back of a 10% volume decline in the US in its most recent quarter and a 20% decline in yogurt, one of the US group’s main categories.

It is hard to overstate how terrifying these sort of numbers are, both to managers and investors, in an industry that prides itself on its slow-and-steady, but consistently positive, earnings model.
The core problem in the US has been a more challenging growth outlook in the consumer market while the ‘market for corporate control’ (as it is known) has been shaken up by the presence of Kraft Heinz/3G Capital – an investor with firmly acquisitive instincts and a radically different perception of cost and margin. The result has been the likes of General Mills have felt obliged to promise investors big cost savings, just at a point when the top line is coming under pressure.
Kraft Heinz are now on the radar in Europe as the result of their failed-but-audacious takeover approach for Unilever. The result has been Unilever is merging its foods and refreshment (ice cream and tea) divisions and is targeting five percentage points of increased margin from the units over the next four years (a big number). Unilever is now also crossing the rubicon of disposing of its declining margarines business, one of the two pillars on which it was founded in 1929. 
Back in Vevey, new Nestle CEO Mark Schneider would seem to be feeling the burden of expectation when he said last week the company “had heard the message” from investors around more aggressive margin targets.
In the seventy or so years since the end of World War 2, so-called Big Food has been a global success story on the basis of product and process innovation in pursuit of taste and convenience, growing returns from scale, a big increase in working women and the parallel rise in the supermarket as a distribution channel (a much less malign influence on food processors than is commonly believed).
But this model has now arguably run its course with traditional food producers having to wrestle with the complex and multiple challenges of saturated demand, channel shift in favour of discounters and e-commerce and the fragmentation of consumer demand as growing segments such as millennials and Hispanics challenge conventional industry norms.
Does this mean the slow death of Big Food? Not necessarily. But what it will mean is fresh and radical thinking and industry incumbents having the courage to disrupt their own business models. This is hardly a new observation and a theme that was writ large in the PowerPoint at last month’s Consumer Analyst Group of New York conference in the US.  However, ultimately the impression was akin to watching one’s elderly Aunt boogieing on the dancefloor. Plucky but uncool and a little out of sync.
A provocative starting point would be that the industry needs to recognise the best innovation (on new products and new channels) is coming from the start-ups, not in-house. So if one can’t beat them, then own them. 
Unilever has led the way here – in HPC – by paying high multiples for the likes of Dollar Shave Club, in the hope distribution clout will accelerate growth sufficient to earn out the premium. The company’s acquisition last week of US mayo-to-mustard upstart Sir Kensington’s (‘condiments with character’) hints at an intent to replicate the strategy in food.
The Anglo-Dutch group arguably has an advantage here in that its youthful and socially responsible ethos reassures the smaller, values-driven players their distinctive culture will not get lost inside the bigger parent. But whether such a strategy can be replicated by the likes of General Mills is open to question. Transplantation has proved to be an escape route from the deathbed for many. But tissue rejection can be a problem.