During Conagra Brands' most recent earnings call, President and CEO Sean Connolly drew an analogy between current consumer behavior and the period of the 2007-09 Great Recession.

More than a decade ago, many consumers reduced leisure spending due to tighter finances. Connolly noted that packaged food (CPG) sales rose as dining out declined. But even after that 18-month recession ended, sales remained at the same level—he believes this was likely because consumers had formed new habits.

Although the economic conditions triggered by the COVID-19 pandemic are not exactly the same as back then, Connolly said consumer behavior might follow a similar trajectory.

"Psychology experts assert that a new behavior takes an average of 66 days to become a habit," Connolly said on the earnings call in early April. "As we all know, we have been in the COVID-19 pandemic for nearly 400 days. Consumers have adapted to eating at home and have formed new habits that we expect will persist long after the current situation ends. Early data supports our hypothesis."

Connolly said retail data from states that reopened restaurant dining rooms and other on-site food venues earlier and on a larger scale showed that sales growth for Conagra products remained stable.

"So, even as people begin to go out more frequently, they are still choosing to eat at home," he said.

As the United States emerges from the shadow of the pandemic, this is exactly what large CPG companies are hoping for: the continuation of consumer habits and preferences established in March of last year. They want consumers to remember the comfort, nutrition, taste, and convenience of big food brands. Many hope that the appeal of dining out will not make them forget the joy of preparing and enjoying meals at home.

Of course, although most companies saw strong sales during the pandemic, food manufacturers have not been sitting back and watching profits roll in. They have been actively transforming their entire business structures—from procurement and supply chains to consumer data and R&D—to serve post-pandemic consumers. Nick Fereday, Executive Director of Food and Consumer Trends at Rabobank, said that whether momentum can be maintained as pandemic-related restrictions ease depends on the CPG companies themselves.

"This is an opportunity these companies could miss," Fereday said. "Before the pandemic, the growth rate they aspired to was around 1%. Now, it could be much more than that... No one is going to say 'we achieved these gains because we became a different company.' But they will indeed say 'look, we have transformed a lot of the work we do.' So I think success or failure lies with them."

Companies have taken very different approaches on the path of transformation, all hoping to tap into the needs of future consumers. Analysts point out that the growth rates driven by stockpiling and prolonged time at home over the past year are highly unlikely to be repeated, but achieving a respectable growth rate better than the near-stagnant levels before the pandemic is possible. How successful they ultimately become remains to be seen.

Making smart investments

The pandemic brought many new, sometimes unexpected expenses to food companies, forcing them to use funds to keep shelves stocked and adapt to the new normal.

Some companies had to clear obstacles and switch suppliers to ensure a stable source of ingredients, as shortages, outbreaks, and transportation slowdowns threatened supply. Some—especially in the meat industry—invested hundreds of millions of dollars to ensure the health and safety of plant workers while keeping them safe.

But there have also been investments in other business areas. E-commerce took off rapidly, with consumers ordering food from grocery stores, third-party shopping services, and brands' own direct-to-consumer (DTC) websites. Randy Burt, Managing Director at AlixPartners, said the shift of consumers to e-commerce has changed the grocery shopping journey of the average household.

"The traditional notion that the mother is the sole shopper and the only one who needs to be influenced requires a lot of updating," Burt said. "I think companies that have figured this out and done it well, especially from a digital perspective, will have a lasting advantage coming out of the pandemic."

Kellogg has invested heavily in building analytical capabilities. At the virtual Consumer Analyst Group of New York meeting in February, Chief Growth Officer Monica McGurk walked through the company's data initiatives one by one, whose importance was highlighted by consumer behavior during the pandemic. The company's "Kellogg's Family Rewards" loyalty program, launched in 2012, allows it to access shopper data. McGurk said another data platform the company uses adds contextual data about where and when purchases are made, which can be used to better understand consumers. The long digital footprint left by e-commerce and social media activities provides more data for targeted promotions and products. Machine learning applications help streamline e-commerce, enhance supply data for retailers, and precisely reach target consumers.

"These applications are just the tip of the iceberg of how machine learning and artificial intelligence are changing our marketing strategies," McGurk said in the presentation. "...What we can do today was unimaginable five years ago, and the possibilities are endless. These capabilities give us the confidence to lock in and consolidate many of the gains we achieved during the pandemic."

Retail industry expert and consultant Anand Raghuraman said such investments are likely to pay off handsomely in the future. Companies that put effort into customer acquisition and brand building are more likely to retain those consumers in the future. He also noted that more real-time consumer data can make a huge difference.

"I think the winners will be able to integrate it into their DNA at a faster pace," Raghuraman said. "That more flexible, more agile mindset, not over-analyzing everything, not doing endless consumer research... I think this will actually have a net positive impact on many of these companies."

Stacey Haas, a partner at McKinsey & Company, also agrees that for companies that have invested in data collection, this new era of data can be a source of lasting success.

"We will see many companies move more toward brand revitalization, data-driven marketing, and more personalized consumer targeting," Haas said. "Success in this area, as well as innovation, I think will determine whether CPG companies can hold on to the volume they have gained."

Who wins against the challengers?

Years ago in a previous job, AlixPartners' Burt was a co-author of the white paper "Is Big Food in Trouble?", which marked the beginning of a trend that has largely continued to this day. Big food brands are losing out to smaller, trendier, more agile challenger brands that precisely target consumer needs.

This trend continued almost unhindered—until the pandemic brought it to a sudden halt. Many consumers seeking well-known and reassuring brands bypassed challenger brands. McKinsey's Haas said that before the pandemic, the largest share of growth in the CPG food space went to challenger brands and private labels. But looking at the past year, big brands captured about 40% of the growth, while challenger brands fell to about 30%.

Burt said this reversal in growth patterns is likely to put large companies on the offensive in the future.

"I think Big Food has regained some ground there, and they will fight hard to keep it," Burt said. "As you know,... for these large food companies, very small shifts in share matter a lot because the market is... such a mature market."

Burt explained that the strength of these smaller brands lies in their ability to redefine how a category is perceived—from salty snacks to dried fruit to jerky. They added more conscious sourcing, a commitment to transparency, and healthier ingredients. These are traits that big food has been slow to adopt, and they are exactly why challenger brands have succeeded.

The need to compete with challengers has set the innovation and M&A strategies for several large food companies in recent years. Almost every major company has an innovation or venture capital arm, or runs incubator or accelerator programs, allowing it to invest in startups with solid business plans or in trendy areas. Through these programs, Big Food can partner with these smaller companies, pouring money and expertise into them—and potentially paving the way for acquisitions.

Acquiring challenger brands was one of Big Food's classic pre-pandemic business moves. But over the past year, this pace has noticeably slowed. Mars, Incorporated's full acquisition of Kind's North American business, Mondelez's acquisition of Hu, and Danone's acquisition of Follow Your Heart were among the highlights—and Mars and Mondelez had previously held minority stakes in these companies. Raghuraman said the acquisition spree is likely to restart in the coming months.

"I do think this will continue to be a way for them to seek growth where possible—that is, the 'make or buy' question, and buying is cheaper than trying internally," Raghuraman said. "These companies have also historically not rewarded innovation, right? ... The metrics are not aligned with it."

Although private labels are not typically seen as challengers, analysts predict they will also perform well after the pandemic. According to NielsenIQ data, 2020 was the first time in a decade that branded product growth outpaced private labels. McKinsey's Haas said that because grocery retailers had to deal with unprecedented safety and supply issues throughout the pandemic, they did not have much opportunity to promote or improve private label products.

But NielsenIQ also found that between September and December, the proportion of consumers who had newly become price-sensitive doubled, and private labels are poised to resume growth. With Amazon and Target launching new on-trend private label lines, and consumers potentially shifting back to value-oriented purchasing as the pandemic eases, private labels are likely to begin recovering their previous growth rates.

Meeting the needs of post-pandemic consumers

More than a year of the global pandemic has affected consumers' perspectives and what they want from food and beverages. According to the International Food Information Council (IFIC), last summer, 85% of consumers said the pandemic had changed their eating habits, causing them to cook, eat, shop, and think about food differently.

Consumers said they are paying more attention to products that support health and are seeking food and beverages containing natural immune-boosting ingredients. Foods with a health halo—including everything under the plant-based umbrella—saw unprecedented sales growth. Baking remained popular as consumers developed the habit of making things at home.

These consumer sentiments have also led to sales declines in some categories perceived as unhealthy. The typical example of this decline is the soda category, which consumers had already been drifting away from before the pandemic. Over the past year, its sales fell sharply—both because dining out and leisure consumption largely came to a halt, and because health-conscious consumers may have thought twice about their beverage choices.

Although consumers are expected to change habits as pandemic-related restrictions ease, McKinsey's Haas said they are unlikely to forget the health preferences they developed over the past 14 months.

"I think the determining factor is how much these companies have innovated during this period in areas that are likely to sustain growth, rather than just counting on the return of on-premise consumption," Haas said.

Although Coca-Cola suffered some of the steepest sales declines during the pandemic, the company is working during this period to better anticipate and meet consumers' future needs. This process began in 2018, when CEO James Quincey announced the company would eliminate "zombie brands"—beverages in the portfolio that had not seen growth in three years. The strategy was implemented in the U.S. during the pandemic, with Odwalla juices and Tab soda being completely discontinued and Zico coconut water being divested. In a call with investors in February, Quincey said the company had cut its number of "master brands" in half from 400 to 200.

Alongside these cuts, Coca-Cola has also moved into some trendier areas through new products and investments. During the pandemic, the company acquired a controlling stake in BodyArmor, a premium sports drink and hydration company. It launched "Coca-Cola with Coffee," a natural combination given the company's $5.1 billion acquisition of the European coffee chain Costa Coffee in 2019. It is also entering the alcoholic beverage space with Topo Chico hard seltzer. In a presentation at the virtual Consumer Analyst Group of New York meeting in February, Quincey promised to make big bets on large-scale innovation this year that could bring transformative change.

Quincey said on the February earnings call that Coca-Cola has also invested heavily in targeted marketing, e-commerce, and smoother distribution. It has also strengthened its sustainability positioning by introducing new bottles made from 100% recycled plastic. He said these initiatives have already greatly helped the company win in the coming years.

"We are confident in successfully navigating the dynamic market environment in 2021 and achieving our goals," he told investors. "We will emerge stronger with more consumers, higher share, greater system economies, and greater stakeholder impact."

Retail analyst Raghuraman said smart diversification is crucial, noting that the post-pandemic period is truly a make-or-break moment for manufacturers that seem stuck in a single product area. Although the pandemic increased at-home consumption of many categories, such as cereal and snacks, consumption levels may fall back. In the coming years, these companies' ability to diversify through acquisitions and incubators will be key.

"For shareholders and employees, permanent zero growth or 0.1% growth is not an exciting state," he said.

Controlling prices

As companies devise their best strategies to meet post-pandemic consumer needs, they also face a familiar cyclical growth headwind: rising prices. In recent earnings reports, all large publicly traded food companies have warned that prices could rise as inflation and commodity and supply chain costs continue to pressure.

With growth potentially slowing and consumers possibly seeking value-oriented choices in the coming months, the timing of rising manufacturer costs is not ideal.

B&G Foods, which owns the frozen and canned vegetable brand Green Giant, has been under commodity price and supply pressure for months. Despite increased demand for its products and sales up 18.5% year over year, the company had to artificially slow Green Giant sales in the most recent quarter to meet high demand. Interim President and CEO David Wenner said on a call with investors in March that if sales were allowed to continue meeting demand, canned and frozen vegetables would run out of stock.

"It would be crazy to sell limited inventory as quickly as possible at lower prices, because then you would have no inventory and nothing to sell until late summer," Wenner said on the call.

Conagra Executive Vice President and CFO David Marberger discussed the difficulties posed by the economic environment on the earnings call earlier this month. Inflation rose 3.9% in the quarter—higher than the company's expectation of 3.5%. Material, manufacturing, and transportation costs all increased. Marberger said Conagra is working to keep prices down, but historically, consumers have accepted price increases when they are broad and industry-wide.

And broad price increases are likely. Last month, the UN Food and Agriculture Organization's food price index was at its highest level since June 2014. Vegetable oil, meat, and dairy prices have all risen steadily. These prices are based on commodity supply and demand, and conditions over the past year have challenged both. Additionally, according to a World Bank blog post, a weaker U.S. dollar has also pushed up food prices.

AlixPartners' Burt said that in the coming months, food companies will be able to sustain more growth than in the years before the pandemic. He has been advising clients to diversify their supply chains as a potential cost-saving measure—a complete departure from the pre-pandemic strategy of viewing single-source contracts as a good way to save money. He believes higher logistics costs will eventually come down. But companies' future growth will also be threatened by the prices consumers have to pay for products.

"Input costs could continue to pressure margins throughout the year," Burt said. "That's what we're seeing with rising commodity costs, and ultimately that will obviously be reflected in manufacturers' overall costs, some of which may be passed on to consumers."