To say Campbell’s Soup (NYSE: CPB) had a poor quarter would be an understatement. After posting a surprising loss of $393 million, shares of the company fell more than 10% as investors digested the report. The stock is down 30% year to date, mostly due to management lowering its guidance to a 5%-6% year-over-year adjusted earnings per share decrease. That’s worse than earlier projections of a 1% to 3% decline because of falling market share and President Donald Trump’s steel and aluminum tariffs.
In response, Campbell’s CEO Denise Morrison stepped down effective immediately after leading the company to four years of annual sales decreases in its U.S. soup business. While it’s easy to blame Morrison for the poor quarter, and unfortunate considering Morrison was one of the few women leading a Fortune 500 company, a change needed to be made.
However, it’s likely even the best CEO wouldn’t have led the company better during their tenure because Campbell’s problems were decades in the making. Older brands have been defined in the minds of new shoppers and it’s unlikely to be reversed.
Legacy brands aren’t big with Millennials
Branding cuts both ways, although negative effects are often ignored. For decades Campbell’s was defined by baby boomers and older Generation X shoppers as having cheap and easy-to-prepare meals. The trade-off was the perception Campbell’s products lacked high-quality ingredients and were unhealthy, particularly in respect to sodium content.
Both quality ingredients and health perception are of key interest to millennials, which is now the largest demographical cohort. Unfortunately, this applies to the majority of the consumer packaged foods industry, as Campbell’s and other legacy brands have underlying baggage that will make it hard for them to compete with newer upstarts.
The logical response for these legacy brands is to acquire fresh and healthy millennial-friendly brands to offset weakness in their core brands. This was the rationale for Morrison’s purchase of Bolthouse Farms for $1.55 billion in 2012. However, Campbell’s Fresh division vastly underperfomed this quarter, prompting a $619 million impairment charge.
E-commerce will continue to hurt brands
Brand cachet will further be eroded by a continued shift to e-commerce. Although online shopping may feel ubiquitous, approximately 10% of all retail sales are online with online grocery shopping and delivery still in the infancy states. Unlike retail stores and grocers where cash-rich legacy brands can pay more for shelf placement and floor-space marketing, e-commerce searches often revolve around the lowest price. The result is a devaluation of brands.
Already you can see grocery stores taking aggressive action to grow their online grocery footprints. Amazon.com‘s purchase of Whole Foods is finally taking shape with the company recently announcing a 10% discount for Amazon Prime members at the grocery store in certain areas. Additionally, Walmart is spending large sums to win grocery market share on its eponymous site and on its Jet.com website. Finally, pure play grocer Kroger recently announced a partnership with Ocala, the British-based online grocery company, which will allow Kroger to quickly scale its digital operations.
E-commerce is going vertical
But wait — it gets worse for consumer foods brands. Not only are e-commerce giants attempting to build out their grocery operations, they are also on the forefront of bringing millennial-friendly brands to market, going vertical to profit throughout the entire production chain.
A recent SunTrust analyst said Amazon’s host of private labels — including food brands Happy Belly, Wickedly Prime, and Whole Foods’ Everyday 365 — will grow to $25 billion in revenue. Not to be outdone, last year Walmart launched its Uniquely J line via Jet.com. Look for these private labels to steal market share away from traditional food companies.
Look for this trend to continue — poor performance from legacy brands as e-commerce continues to erode brand cachet and the push to newer millennial-friendly brands will weigh on results. Unfortunately, Campbell’s Soup is merely the canary in the coal mine for brand-heavy food and consumable companies.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jamal Carnette, CFA owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.