Food companies cut offerings to make it through recession

MILWAUKEE -- If you want to see how the nation's foodmakers are weathering the recession, the proof is in the pudding.

Kraft Foods Inc., the nation's largest food maker, will no longer sell Handi-Snacks pudding to retail customers. At the same time, it's pushing new flavors of its more lucrative Jell-O pudding.

Food companies from Sara Lee Food Corp. to H.J. Heinz Co. are trimming their offerings to focus marketing on their higher-margin, best-selling brands and retain consumers, who are trading down in the recession.

Those top brands are more likely to hold their own, and getting rid of lesser-performing brands helps companies showcase products as retailers cut inventory. Heinz aims to remove two items for each one it introduces. Sara Lee hopes to cut its offerings 8 percent this fiscal year.

It's all shaping up to mean fewer choices for consumers. But will they mind?

Probably not, analysts say, noting that if these products had a big following companies would keep them around.

The nation's grocery shelves could stand some trimming, said Mark Gottfredson, head of the global Performance Improvement practice at consulting firm Bain & Company. Much as the housing and technology industries experienced growth bubbles, grocery store shelves have been bursting with products in the past 10 years, he said. They're straining with about 50 percent more products than 10 years ago, including new formulas, flavors and sizes of existing lines, he said.

The trend of cutting SKUs -- or stock-keeping units, the unique identity each product carries -- has caught on the past few years. It accelerated last year, Gottfredson said, as companies located their most profitable brands.

Some companies are just selling lines: J.M. Smucker Co. now owns the former Procter & Gamble Co. brands of Folgers coffee, Jif peanut butter and Crisco shortening.

But Heinz, maker of sauces and its namesake ketchup, considers product cuts a key strategy to trim costs and improve performance, said Scott O'Hara, executive vice president for Europe, who oversees the company's global supply chain. The Pittsburgh-based company hopes to cut between 15 percent and 20 percent of its SKUs within three years, on top of a 50 percent cut from 2002 to 2006.

Excess sizes, types and flavors of products increase the cost of everything from marketing and production to sales, O'Hara said. And, during the recession, it's particularly important to conserve cash.

"The more we can simplify, while clearly meeting our customers' needs, the better off we are and the more cost we can drive out of business," he said.

Cutting products was key to snack maker Lance Inc.'s turnaround plan, said CEO David Singer. About three years ago, the Charlotte, N.C.-based company doubled its offerings by buying a fellow snack maker with about 400 products. But it now offers about 350 in all, and Singer said the strategy has paid off. Lance's fiscal 2008 sales were $852.5 million, up nearly 12 percent from the previous year.

"That helped us become less complex," he said. "That's one of the things in the turnaround you do, is you try to get your business to be a lot less complex."

It's not easy to choose which products to cut, said Gottfredson, who advises companies making these decisions. It can take a year if heavy consumer research is involved.

"You have to be very thoughtful. You've got to be really good at the customer research," he said. "If you do it well, it will drive your sales."

Most profit for many companies is concentrated in a small number of brands anyway. It's not uncommon, he said, for 20 percent of a company's products to account for 80 percent of its profitability.

Now vanishing are items that companies already have pulled away from as they limit precious marketing dollars, said Christopher Shanahan, a research analyst with Frost & Sullivan.

"There's not going to be a lot of support for a lot of the product line extensions in the last five years that are not really doing that well," he said.

Sometimes, cuts spur customers to rally, as Hydrox fans did online after Kellogg Co. discontinued the cookies in 2003; the company brought them back temporarily last year. But when MillerCoors announced last fall that it won't make Zima anymore, citing weakness in the "malternative" segment, there was no backlash.

The phase-out of Handi-Snacks puddings and Kool-Aid gels -- a gelatin product modeled after Kool-Aid drink mix -- started in December after domestic revenue from the two lines had fallen by a third since 2005, according to company spokeswoman Renee Zahery. Both lines will be available on a smaller scale in Canada and in food service outlets in the U.S.

The lines Kraft is cutting are not "major businesses," CEO Irene Rosenfeld said recently.

"We're going to put our efforts behind Jell-O," she said. "Although you take a temporary hit in volume, you'll see the profitability of a number of franchises."

Indeed, when products are removed, sales volume drops. Kraft, the Northfield, Ill.-based maker of Velveeta and Oreo cookies, said this month that sales unit volume fell 5.2 percent for the three months ending in December as consumers reacted to price increases and retailers cut inventory. Within that, eliminating product lines hurt volume by 1.5 percent.

The company has been cutting more than pudding. Kraft eliminated a line of about a dozen varieties of South Beach Living frozen entrees in the fall.

That has left people like Jason Gourley, of Omaha, Neb., scrambling. Gourley, 31, who got used to eating three or four of the entrees each week over the past year, has noticed the stock dwindling in stores. Now, he's buying up what he can, including two orange beef dishes this week.

Gourley, who doesn't like other frozen entrees, isn't sure what he'll have for lunch once the South Beach entrees vanish. Probably sandwiches or wraps.

"It's kind of sad because it was so nice and easy," said Gourley, a network administrator. "Now I have to put more preparation into my lunches."