The Geometry of Pandemic Dividends: A Panoramic View of Food Company Growth

When 2020 became the 'lost year' for most industries, the food business experienced a rare boom. For ordinary consumers and public health, this year was undoubtedly difficult, but the packaged food and beverage (CPG) industry delivered an impressive performance.

Stacey Haas, a partner at McKinsey & Company, noted that the overall sales of the CPG food and beverage industry grew by 12% in 2020, achieving unprecedented expansion. Food Dive's analysis of financial reports from U.S.-listed food companies also showed that some companies saw year-over-year sales increases of up to 38% in a single quarter.

The food industry has traditionally been viewed as a defensive investment, but in recent years, listed companies have generally faced pressure in terms of sales growth and profit margin improvement. Due to shifting consumer preferences, coupled with emerging trend brands and private labels continuously eroding the market share of major brands, many companies have fallen into a state of low growth or even stagnation for years.

However, the outbreak of the COVID-19 pandemic led to the closure of offices, restaurant dining rooms, cinemas, cafes, and schools. Consumers trapped at home rediscovered the value of the kitchen. Uncertain about how long they would stay home and how severe the pandemic would be, supermarket shelves were once stripped bare.

Randy Burt, managing director at AlixPartners, believes that the shutdown of the food-away-from-home channel had a huge impact on CPG sales. Over the past 30 years, consumer spending on dining out has continued to rise, while the share flowing to supermarket CPG brands has declined. As a large number of commercial venues quickly closed, Burt pointed out that massive sales growth was transferred to food and beverage brands.

Nicholas Fereday, executive director of food and consumer trends at Rabobank, cited statistics from the U.S. Department of Agriculture to support this view: in 2020, 55% of all consumer spending on food was for eating at home, an increase of 7 percentage points from 2019.

Facing drastic changes in consumer behavior, food and beverage companies not only stood at the starting point of potential prosperity but also faced the urgent need to quickly adapt to the new industry landscape.

'In the first 10 weeks after the outbreak, we saw the equivalent of 10 years of progress... whether it was the overall shift from physical stores to online,' said Anand Raghuraman, retail industry expert and consultant. 'I think these companies had to adapt very, very quickly, and ultimately they did.'

New strategies: from innovation-driven to efficiency reflection

Raghuraman pointed out that in early 2020, the main means for food companies to cope with sluggish growth was to bet on trendy ingredients and emerging brands. Many companies did so bymaking acquisitions、launching new brandsorexpanding product linesto cater to consumer trends such as plant-based, healthier, and clean label.

'The rules of the game at that time were indeed product innovation and category expansion, which was a playbook most companies were familiar with,' Raghuraman said.

At the same time, companies were also improving profits through zero-based budgeting, reducing the number of suppliers, and compressing operating costs as much as possible—measures once seen as key means of saving expenses.

When the threat of the pandemic loomed, consumers flocked to supermarkets, and shelves were quickly emptied. While this brought immediate sales growth for many manufacturers, restocking became a challenge. Companies needed considerable time to adapt to the new normal: higher demand (which remained high even after the initial hoarding phase due to the closure of many restaurant dining rooms), and the practical challenge of adjusting manufacturing, suppliers, and supply chains to meet demand while ensuring personnel safety.

'The excessive focus on efficiency to offset slow growth actually put these companies at a great disadvantage,' Raghuraman said. 'Many empty shelves can be attributed to... an excessive focus on costs. If not for the pandemic, this approach would have been appreciated by investors.'

Burt pointed out that many trends food companies began investing in before the pandemic did not change—they just accelerated. For example, functional nutrition had already become an increasingly important category before the pandemic, providing products that nourish the body and improve health. Manufacturers were also working to meet the growing demand for foods that improve the gut microbiome. And when COVID-19 swept the globe, consumersturned to such products more quickly。

E-commerce was also an emerging area for food shopping before the pandemic, but it had struggled to achieve widespread adoption. Burt said that in 2020 alone, grocery e-commerce jumped to a level that was originally predicted to take three to five years to reach. According tostatistics from Brick Meets Click and Mercatus, from March 2020 to February 2021, consumers spent $64.4 billion on online grocery shopping. The two organizations found thatover 69.7 million peoplefrequently used online grocery shopping services in January.

Haas said that in early 2020, more systems centered on predictive technology—such as using data analytics to improve manufacturing efficiency and optimize consumer experience—were entering companies' future plans. Some companies had originally planned to make incremental changes early last year, gradually venturing into these areas. The pandemic created an opportunity to explore more deeply. Haas said that companies ready to advance these upgrades found that their investments paid off.

'Supply chain and manufacturing have always been huge drivers of performance, and I think it's fair to say that before the pandemic this was a lower-attention area—compared to companies focusing more on the commercial side, driving growth through innovation or marketing,' Haas said.

The pandemic also revitalized some categories that had been somewhat lackluster. Burt said that canned food had previously been mediocre in terms of growth and innovation, and manufacturers had been looking for ways to reinvigorate brands that were household names but viewed by many consumers as outdated and over-processed.

'What brought them back was that suddenly people wanted to stock up on food, and this demand lasted for a long time... People needed highly shelf-stable food that also tasted good,' Burt said. Consumers quickly discovered the innovations manufacturers had been making to improve products over the years.

In the food and beverage industry, a key to success is getting consumers to actually taste the product. Burt pointed out that this increased opportunity for trial helps ensure product success in the coming years.

As supermarket shelves were emptied, and homebound consumers craved something new, the trial rate for new products rose significantly. Haas said that during the pandemic, nearly 40% of consumers tried new brands. Many also returned to familiar and trusted 'comfort brands,' even if they had not purchased them frequently before.

'Getting trial is one of the hardest things, right? And they've gotten that trial,' Haas said. 'So now it's up to them, whether through product renovation or innovation, to truly create a sense of value for consumers so they keep coming back.'

Growth arrives: the big companies' comeback

Comparing sales of many companies during the peak of the pandemic with those from a year earlierline charts, the results are quite striking. Most charts show two parallel curves, with sales during the pandemic roughly and consistently higher than before. Companies with diversified brand portfolios, such as Kraft Heinz and Campbell Soup, seemed to experience the same seasonal ups and downs—just at a higher overall sales level.

Haas said that across the CPG industry, the pandemic brought a significant return of growth to 'Big Food.' Previously, the largest manufacturers could capture only about 30% or less of the total growth in their categories, with the rest flowing to challenger brands and private labels. Since the pandemic began, about 40% of growth has gone to 'Big Food.' Challenger brands were hit hard by supply chain issues early in the pandemic but had recovered by early June 2020, regaining a 30% share of growth. Haas noted that private labels are still growing, but at a slower pace than before.

Leaders of 'Big Food' were grateful for the growth brought by the pandemic. In early 2020, General Mills had forecast sales growth of 1% to 2% for the fiscal year, a significant improvement from the previous year. CEO Jeff Harmening said at the virtual Consumer Analyst Group of New York (CAGNY) conference in February that a year later, the company actually achieved 8% organic net sales growth, with double-digit growth in adjusted operating profit and diluted earnings per share.

Mondelez also achieved growth across the board, with Executive Vice President and CFO Luca Zaramella revealing at the same virtual conference that 80% of its products maintained or increased market share in the previous year.

Conagra President and CEO Sean Connolly said in his CAGNY speech that total retail sales during the pandemic increased by more than 18%. 'The pandemic not only accelerated sales but also accelerated the acquisition of new consumers,' Connolly said. 'Since the outbreak in mid-March 2020, we have gained new consumer increments equivalent to what we expected in four and a half years.'

At CAGNY, Kellogg CEO Steve Cahillane listed many achievements over the past year: increased household penetration, sustained growth momentum, maintaining production and ensuring employee health during difficult times, increasing shareholder dividends, and accelerating stock buybacks. But all of this was rooted in the pandemic—and that also made the cost of success high.

'2020 was a unique year, and hopefully it will never repeat itself,' Cahillane said.