Food is a special industry. While controlled by a few global giants, it is almost universal: all countries without exception have a more or less extensive industrial range of production as well as original, local brands. The competition is thus played on several levels, between local and multinational actors, as well as between giants. It is also made more complex due to a competition between retailer’s and original brands and original. The giants are therefore developing very active strategies to maintain or develop their market share. In this context, there is a great temptation to abandon the competitive maelstrom of generalist offering and seek differentiation through innovative business models. Three recent strategies bear witness to this ... strategies which also reveal the difficulty of the exercise. They were implemented by Danone and Nestlé, and closely observed by their major competitors Mondelez, Unilever, Pepsico...
Throughout the 20th Century, the food industry was marked by a race for critical mass, the growth of the giants corresponding with the progressive integration of world markets, as well as the maturation of their home economies. Relying on the urbanization and early wealth of developed countries, they quickly spread out in the rest of the world, either through the acquisition of brands or by relying on the global success of some emblematic products.
This movement is not complete, but the economies of scale thus allowed are increasingly modest in an industry whose technical foundations date back to the 19th Century and which, for the largest part of its production, no longer experiences any major technological developments.
The mainstream’s maelstrom
Moreover, the informal constitution of the global oligopoly made of a dozen of giants and the persistence of small, still independent local brands, or of highly specialized global producers (like the Italian group Ferrero) maintains a strong pressure on prices. The giants cannot take advantage of a dominant position which is often challenged, sometimes by their own distributors: the latter, by developing their own brands, cause them drop back a notch in the supply chain and, on some minimally processed products (flour) or difficult to differentiate (cornflakes), be locked into the commodity trap.
Part of the answer lies in relying on the most valued brands, and to exploit their potential through brand stretching. Milka, in the 1980s, left the world of chocolate bars to invade other shelves: biscuits, snack bars, pods, and even milk specialties. The Swiss brand, acquired by Kraft Food (today Mondelez International), benefits from its strong identity, as well as brand awareness and penetration rates in European markets.
But this strategy of relying on the strongest brands is practiced by all the players, and it is more or less a zero sum game: whatever the inventiveness of the marketing services, they cannot change the number of linear meters devoted to such or such product range in a standard supermarket.
The emergence of the organic market over the past twenty years has certainly produced some surprises, as the growth of this segment with higher margins has not benefited all giants. The latter, although generalists, nonetheless cultivate a segment of specialization, and all segments do not lend themselves to this organic conversion. We have not yet seen, for example, organic whiskey. But for those whose lines of specialization are the most welcoming to an organic label, the giants have advanced neck and neck, and none really made the difference. In fresh products, for example, Nestlé and Danone have started with equal success ... but none of them passed the other.
In this context, a first strategic response is external growth, and the conquest of new markets either by using global brands (for example, Oreo cookies by Mondelez) or by purchasing local brands.
A second, a more interesting answer is to look for strong differentiation. Just as startups, in their early stages, quite often employ a “strategic pivot,” giants can launch radically new ways of doing business, redefining processes, targets, and ultimately their own identity. Not so easy to operate, as one can guess.
Three strategic moves
From a generalist, or “mainstream,” market position focused on the middle and working classes of developed countries and their counterparts in developing countries, what directions are possible?
The base of the pyramidThe bolder strategy is the bottom of the pyramid strategy developed by Danone in Bangladesh and Senegal: targeting the poorest consumers in barely emerging countries, which represents a double move, both social and geographical: the company is very far from its comfort zone, and from the start, corporate communication makes it clear that we are dealing with “experiments,” not engaging the essential business but opening doors on unexplored worlds. The two most prominent of these experiments, analyzed by Bénédicte Faivre-Tavignot (HEC Paris) for our review, are Grameen Danone in Bangladesh and Lemateki Senegal.
Grameen Danone Food Limited (GFDL) is a joint venture between Danone and Grameen Group based on a social business model. Note the innovative character of this industrial alliance between a company and an NGO, which has resulted in bold innovations in products and manufacturing methods. The first product is the GDFL shokti doi, a recipe developed to meet the taste and nutritional needs of children (a yogurt covers 30% of their daily requirement of vitamin A, iron, zinc and iodine). The product is first distributed in rural areas by shokti ladies, the street vendors receiving a fixed salary and a commission on each sale.
Lemateki is a social business which aims to improve the nutrition of school children in Senegal. At the R&D level, radically new products are designed, such as “pouch,” a kind of a berlingot composed of local cereals and a little of milk, stored at room temperature, thanks to the invention of an innovative and frugal process, with very little energy consumption.
These experiments go through a phase of unlearning. They potentially open up a strong and early position in expanding markets. A commercial bet, in short, coupled with an industrial one.
LuxurySecond strategy, radical upgrading – not just an upmarket move but an incursion into the world of luxury. Nestlé best embodies it, with its Nespresso, which is today a reference. In addition to pulling up a global brand, Nestlé, already associated with quality products, the Nespresso operation has become a business in itself, with still vigorous growth as its internationalization is far from over. The multinational does not disclose its revenues, but some figures show the extent of the experience: at the end of 2015, Nespresso was employing 10,500 people worldwide, from 90 different nationalities, with a network of 440 stores worldwide in 63 countries. Its original markets are Switzerland and France. Its capsules’ business model is inspired by the well-known Gillette razors: the machine (the razor) is inexpensive (almost free in certain offers) but the company catches up on capsules sales (razor blades).
The “club” concept developed at the start (more than 25 years ago) suggested a niche business, with a large margin but limited turnover. It opened on luxurious boutiques and the construction of an extremely neat image with the famous advertisements with George Clooney. But success helping, Nespresso has become a mainstream product in its oldest markets: in Switzerland, 25% of households have a Nespresso machine. The brand also targeted the corporate world, seduced by the luxury markers ... and the simplicity of use of the machines.
In total, what was initially a shy incursion in the high-end field has become one of the pillars of the company.
HealthThird strategy, also a step aside, the development of products slipping from quality to health. In the emerging nutraceuticals industry, startups are leading the race but multinationals are also key players. With Nestlé, Danone is in the forefront, for reasons that are not anecdotal: a century ago, the company took off with the introduction in France of yoghurt, presented as an almost medicinal product (as, two centuries earlier, chocolate - originally sold by apothecaries).
“Good for health” products have long been a strong element of food marketing. But the advent of nutraceuticals goes much further. We are not any longer talking of quality food that has good effects on health, or a factor of well-being: products are designed, labeled and sold as a solution to real healthcare issues.
The industrial and commercial development of nutraceuticals is the subject of intense competition. The food industry is led to acquire skills that it has not possessed so far, and they do so either through acquisitions or by creating institutions allowing them to dialogue with the academic world. Nestlé created the Institute of Health Sciences by acquiring several companies specialized in medical research. The Nestlé Health Sciences division is presented by the group as “a new industry on the edge of traditional food and the pharmaceutical industry through the development of customized solutions and scientific training of a new approach in the prevention and management of diseases.” Nestlé aims to develop innovative nutritional solutions in three specific areas: medical care in relation to aging, intensive care and surgery, and pediatric care.
A lighter variant of these health concerns is “cosmetofood,” very popular in Asia, which consists in developing products such as beverages, yogurts or confectionery that are good for the skin, complexion, etc.
An impossible reinvention?
The main issue today lies in the limits of these strategies. Certainly, it would be premature to pretend to be able to provide accurate conclusions, especially with regard to nutraceuticals and the “base of the pyramid” strategies, which are still in their infancy.
But we can already point out their limits.
The most obvious are those of the radical upgrading strategy. By approaching the world of luxury, Nestlé is exposed to a problem as old as this industry: imitation and copycats. As soon as we leave the industrialized craftsmanship, which remains the heart of the luxury industry, to enter the manufacturing world, imitators step into the arena.
The Nespresso case is illustrative in this respect. Knowing that the capsule technology is easy to imitate and impossible to protect durably, the chosen “Gillette” business model leads Nespresso to pay for its competitors, offering machines that will be used with others’ capsules. At the end of 2015, nearly 190 different brands were already producing capsules compatible with its system, and the movement is expanding. Among them, significantly cheaper retailer’s brands with a fairly close quality, or niche brands playing the very high-end, on which Nespresso cannot line up because the industrial volumes no longer match those of a company of its size. Nespresso thus is facing the risk of being stuck in the middle. Its growth continues, of course, and the experience remains a success. But the essential part of the strategy today is to grow internationally ... and here we find the previous development stage of food industry giants, whose proven limits had precisely led them to such side steps.
The success of Nespresso, on the other hand, is not exportable in all segments of the food industry. Nestlé, a generalist player, is not going to migrate all its activities towards this model, whose margins – initially very high – tend to melt down when competition increases.
The other two strategies mentioned in this article, which are very different from each other, in appearance, face the same obstacle: health.
The bottom of the pyramid strategy is often associated with social issues, with a view to social innovation. Not surprisingly, in the case of Danone's activities, the health argument is often put forward. The question is not whether or not to keep the promise of improving customer’s health. It is that activities at very low developing cost are associated with low techs and local partnerships with players whose quality standards are not at the highest international standards, and often with a form of low cost economy, all of which expose the concerned products to a higher rate of health hazards. Danone experienced this by experiencing, in some of its operations in Asia, sanitary scandals (justified or not). When venturing into co-production, aimed at reducing production costs, this type of risk is reinforced. And the consequences are potentially very expensive, with a possibility of damaging the global brand reputation in return.
The experiments conducted by Danone at the bottom of the pyramid are inconclusive for the moment. It is not surprising since it is a long term project whose success can be assessed only after ten to twenty years. But the scaling-up that will accompany development will not eliminate the risk, and will even increase the number of accidents ... except when standardizing the production processes and widening their access, thus coming back to the food industry usual standards… and competitors.
The nutraceuticals strategy is also confronted with the health issue, but the obstacle is of different nature. If nutraceuticals producers really want to prove their difference, they not only need to compete with any quality products, but also with drugs and medicines, that is to say: with trades, industrial processes, standards, regulations, development time cycles, market placing, and durability of very restrictive patents, aspects defining very precisely the field game of other giants, namely the pharmaceutical industry. It is not certain that they will remain unresponsive, either by mobilizing regulatory weapons, by cutting access to some distribution channels (pharmacies) or just through occupying the field, with a more obvious legitimacy.
It is likely that the nutraceuticals industry will have a bright future. But this future is not written yet, and this emerging business is not a virgin land in which it would be easy to take positions and keep them. Its territory (including distribution channels) is still undefined, and first explorers will not remain alone for long. Finally, one should note the vagueness of some concepts: nutraceuticals are at the crossroads of three dimensions: wellbeing (which also has to do with luxury), health (which involves clinical tests and technical perfection), and the organic field (which goes in the opposite direction). It is not easy to reconcile the sometimes contradictory demands of these three worlds.
The dream of all leaders is to find a “blue ocean” strategy: exploring or creating unknown markets, without any competition. Each of the experiments explored in this article participates in this dream. But in such a competitive industry as food industry, is the dream possible? Nestlé’s and Danone’s steps aside are fascinating indeed, and the development of these three strategic initiatives will undoubtedly be exciting. But we can doubt that such initiatives will radically change the destiny of these giants, who seem to be condemned to keep (or come back to, when their successful reorientations will have paved the way to copycats and followers) a position of generalist player within an oligopoly.