Changing trends in stalwart industries 

As our business is oriented around lengthy holding periods, a central tenant to our deal evaluation process is whether or not we think we can own something for a long period of time. This framework certainly takes us away from some opportunities (i.e., high-growth tech companies with disruption risk) and toward others (i.e., steady-eddy service businesses), a trade-off with which we are generally comfortable.

That said, our reading this week reminded us that it’s not always easy to know which industries will be steady, and which will change drastically, as outlined in a recent CB Insights report which highlighted fascinating insights into how millennial preferences are forcing change in industries previously considered stalwarts.

Take, for instance, changes in consumption of products long-considered the pinnacle of steady, predictable demand: cereal, canned tuna, American cheese, and last but not least, the noble raisin. Sales in the $9 billion cereal industry have declined 17% over the last 10 years. Per capita consumption of canned tuna has declined 42% over the past three decades.  Sales in processed American cheese have declined steadily for the past four years. Finally, apparently only old people eat raisins, as that industry has seen an estimated 10% drop in demand over the past five years.

While there are many reasons for the changes in consumption patterns (more food choices in general, concerns of sugar consumption and the popularity of low-carb diets, preferences for “natural” options, a desire for more on-the-go / convenient options, etc.) it’s not as if the consumption has evaporated, it’s simply gone elsewhere. For instance, millennials are shunning Kraft Singles in favor of fancy, more “natural” cheeses, which has driven a 40% increase in cheese factories over the last two decades. While canned tuna is out, poke – which typically features a raw tuna option – has become exceptionally popular, and several newly established chains in the space have seen explosive growth (in 2018, popular poke chain Pokeworks saw sales increase 105%).

The smart companies are adapting, rather than holding onto the past: players in the raisin industry are offering no added sugar options, we can all now get Gouda on our burgers at McDonald’s, and since the majority of millennials apparently think of cereal as a snack, some brands are adjusting marketing away from “cereal as a complete breakfast” to “cereal as an appealing snack”.  CB Insights provides more insight:

“Industries are not being threatened by millennials themselves. The threat comes from younger, more adaptive brands that have zeroed in on millennial habits and preferences, and are actively leveraging those insights to unlock huge market potential. The message from millennials is clear: brands that prioritize convenience, personalization, and sustainability will thrive. Brands that continue to cling to outmoded ideas of consumer behavior will continue to struggle.”

For Chenmark, our reading this week was a good reminder that although we are buying companies we believe will experience steady demand, that doesn’t mean we can be complacent with changing consumer preferences. Rather, we must always seek to continuously tweak our offerings to keep pace with market changes, and thinking we are insulated by those because we are in a particular industry will only leave us with sour, (or in this case dry), grapes.