The specialty foods section is red-hot. Just how hot? In this guest post by Thilo Henkes of L.E.K. Consulting, we delve into just how much an impact this can have on the packaging industry, and what you can do to take advantage of it.
In its recent research, L.E.K. Consulting found that over 80% of consumers regularly purchase at least one type of specialty food product (including those labeled "all-natural," "enhanced" or "alternative"), while some two-thirds are willing to pay upwards of 18% more on average for these items.
Guest post by Thilo Henkes, Managing Director and Partner with L.E.K. Consulting.
The expansion of the specialty food segment reflects a growing desire among consumers to embrace a healthier lifestyle, and includes not only longtime purchasers of specialty products but also “casual” shoppers drawn to brands like Kind Bar, Annie’s, Chobani and others that have successfully crossed from specialty retail into the grocery mainstream.
As consumers become increasingly engaged with healthy living, demand for innovative specialty food products is expected to continue its upward trajectory.
This puts the onus on the packaging industry to provide containers that are distinctive in design yet rugged enough to withstand special filling processes, as well as equipped with air-tight closures to prolong shelf life. Accordingly, packaging companies must act swiftly in order to capitalize on this burgeoning market.
Expert Interview: Thilo Henkes on How Packagers Can Keep Pace With the Increased Demand for Specialty Packaging
Specialty Goes Mainstream
Specialty products run the gamut from organic foods to vitamins, herbs and other supplements
Fast-growing categories include snacks (such as Kettle Spicy Thai potato chips and Archer Farms Greek-inspired potato chips), "foods with pieces" (beverages and soups containing bits of fruit, vegetables or juice pulp) as well as "ethical" products made without preservatives, microbe-killing acids or GMOs.
In the past, unique, hard-to-find products, including those sourced from smaller manufacturers, were primarily available through specialty retailers such as Trader Joe’s and Whole Foods.
With specialty foods gaining greater acceptance, the segment has since evolved and now spans different regions, demographics and income levels. Along the way, mainstream grocers have responded by increasing specialty shelf space.
The Rise of Tier 2 Brands
Conditions have been particularly ripe for small to medium regional and private-label Tier 2 brands, many of whom have gained market share at the expense of their larger national or global Tier 1 counterparts.
One of the more notable “crossover” stories is gluten-free food maker Udi's, which made its conventional grocery debut in 2010, on its way to becoming one of the fastest-growing packaged-food brands in recent times (the company was subsequently purchased by Smart Balance Inc. in 2012 for $125M).
This isn’t just a fad. The trend has widened, and has become much more sustainable.
Even as they achieve scale, however, brands like Udi’s have sought to maintain their specialty appeal. Frequent rollouts of innovative products and packaging are necessary for brands to continually distinguish themselves among the pack of existing alternative and up-and-coming copycat products.
Impact of Fragmentation
Growing demand for specialty food products is part of a broader shift that is impacting a variety of consumer categories. We’re seeing increased brand and SKU fragmentation as a result.
This, in turn, has led to a greater number of products vying for shelf space. As such, the ability to convey product freshness as well as sustain consumer interest through differentiated packaging has become a key consideration for brands seeking a competitive edge.
Given that packaging accounts for only a fraction of total production costs, (around 5%, according to L.E.K.) it’s no surprise that Tier 2 and private-label brands in particular are using packaging to more directly compete with Tier 1 companies.
Brands see the value of packaging, and are spending more on their packaging in order to differentiate themselves on an increasingly crowded shelf.
Special Packaging for Specialty Foods
Preservative-free specialty foods require proper packaging in order to maintain freshness. As a result, specialty food manufacturers seek containers that not only are visually appealing but also capable of enhancing shelf stability.
This has compelled packaging converters to devise newer, more durable products that can address this need for improved product vitality. L.E.K. has identified a number of innovative packaging concepts and technologies that have outperformed the market. These include:
Aseptic packaging. Designed to keep oxygen out of products like organic baby foods as well as low-acid dairy products and soups/sauces, aseptic packaging includes both rigid and flexible containers (including those with hermetic seals/liners) that are rugged enough to withstand the aseptic-filling process.
Controlled atmosphere packaging (CAP). Typically used for storing fruit and vegetables, controlled atmosphere packaging limits the amount of oxygen inside the container, thereby helping to prolong freshness. Retailers are increasingly using CAP technology not only for extending shelf life (upwards of 400%, according to L.E.K.), but also to prevent shoppers from bruising unprotected produce. Over the near term CAP growth is expected to exceed traditional packaging, rising an estimated 4% annually on a volume basis.
Retort packaging. In addition to protecting against moisture, retort packages comprised of high-barrier, multilayered films allow products such as soups, ethnic foods and ready-to-eat meals to be heated within the container itself. Retort packaging growth is likely to outpace the overall pouch market through the end of the decade, according to L.E.K.
Wide-mouth containers. The ongoing popularity of "foods-with-pieces" as well as bulk specialty food items has fueled demand for wide-mouth containers, which have eclipsed narrow-neck containers with smaller “pourable” openings.
Further Packaging Innovation Expected
With demand for health-and-wellness goods and services on the rise, opportunity abounds for packaging firms that can provide distinctive and durable containers as required by specialty food brands. Looking ahead, Henkes sees a number of factors supporting packaging demand growth, including:
Ongoing consumer segmentation. As brand owners introduce new product variations and SKUs in order to address the needs of specific consumer segments, the rise in brand and SKU fragmentation has in turn led to increased competition on the shelf, and therefore a greater focus on packaging as a means of differentiating brands.
Evolving consumer/channel needs. Changing demands of both consumer and channel (e.g., grocery store) has driven packaging innovation/differentiation (such as aseptic baby food containers over traditional glass jars), a trend that is likely to continue going forward.
Packaging innovation is expected to remain an integral part of building specialty brand acceptance and boosting market share. This not only points to a wealth of opportunity for CPG firms, but also underscores the potential for attractive growth in the packaging sector.