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Small Food and Beverage Companies Face New Obstacles and an Opportunity

By Bob Goldin, Pentallect and John Geocaris, New Food Strategies

For the past five years, small and micro-sized food and beverage companies[1] have grown 2.5 times faster than larger companies[2].  They have effectively capitalized on key consumer trends (such as simple and natural ingredients, better-for-you products, and snacking) and tapped into growing nontraditional channels, including online.  As a result, these companies have gained valuable market share (especially in retail) and attracted attention from strategic and financial investors willing to pay lofty multiples for rapid growth in a stable but painfully slow growth industry.  In addition, a number of large food and beverage companies like General Mills and Kraft Heinz created their own incubation arms to support the development of “upstart”/emerging companies.

As we all are painfully aware, the pandemic has had a massive impact on the food industry.  Due to stay at home and unit closure mandates, the foodservice industry has experienced a dramatic decline. We expect the recovery to be protracted and certain segments like independent restaurants, lodging and recreation are extremely unlikely to return to pre-pandemic volume levels for at least five years. While necessary, reopening mandates will exacerbate the “pain” the industry is suffering as they will limit on-premise capacity and add significant costs.

In contrast, retail has been booming as consumers shift a huge portion of their food and beverage expenditures (somewhat out of necessity) to at-home expenditures, and we project that retail will continue to benefit from the slow recovery of foodservice. The new market conditions will accelerate retailers’ initiatives to enhance their omnichannel effectiveness to meet consumer demands.

Given the fundamental shift in demand patterns coupled with what is almost certainly going to be an extended period of economic hardship, small companies will face many unexpected challenges that will limit their growth  rates  at least for the foreseeable future.  Among these challenges are the following:

  • In these troubled times, consumers will almost surely increase their reliance on “tried and true” brands and be less willing to experiment.
  • Generally speaking, emerging company products are premium priced, and we foresee a significant migration to value tiers in a recessionary environment.
  • Data suggest that consumer priorities are changing, with safety and security becoming far more important in the value equation.  Arguably, this may minimize the appeal of many niche products/brands that are premised on other attributes such as sustainability, “fresh and natural” and the like.
  • Major retailers and distributors are solidifying their market positions and will “double down” on their private label development initiatives, which have been successful prior to the recent public health crisis.
  • As industry margin pressures intensify, participants will aggressively focus on structural cost reductions, with SKU rationalization a likely priority.  Therefore, “slots”/shelf-space for relatively low volume SKUs will be reduced, to the detriment of many specialty/niche products.
  • As early stage companies are often unprofitable, they rely on outside investment to fund their growth. While capital is available, we anticipate a shift in investor sentiment toward other more promising opportunities, including small food companies that are both profitable and have a demonstrated growth strategy.  This could limit the ability of most unprofitable, high growth micro sized food companies to raise needed funds.

While we believe that truly innovative small companies will continue to flourish, to do so will require even greater differentiation, an optimized supply chain, alignment with “winning” segments/customers, an intense consumer focus, and a business plan designed to reach profitability as quickly as possible.

A new, post Covid-19 growth strategy for emerging brands may contain some of the following elements:

  • An initial regional expansion strategy focused opportunistically on all channels with the dual objective of the proof of concept in the targeted channel along with generating sufficient volume to become immediately profitable.  An example would be taking on a large foodservice customer to build volume and attain breakeven operations while simultaneously exploring retail sales as the long-range targeted focus of the company.
  • Manage the company for the long term without a “Liquidity Event” focus
  • Knowledge of production costs in great detail and how they change with volume.  This will be true whether the product is co-packed or self-manufactured and will help in understanding when the emerging company will attain a breakeven.
  • When a firm foundation of volume/profitability is reached, a new growth strategy can be created, focusing on the long-term channel(s) for the product with outside capital if desired. This would be part of a deliberate strategy maintaining profitability along with growth.

The need for emerging food and beverage companies to prioritize profitability vs. top-line growth represents a “sea change”. This path will enable these firms to establish sustainable positions and desirable outcomes.

Bob Goldin is a Partner and Co-founder of Pentallect Inc., a food industry advisory firm and a longtime friend and fellow foodie.

John Geocaris is President of New Food Strategies, an emerging business advisory firm, and an Associate of Pentallect.

[1] We are defining a small company as having sales of $25 – 100 million and a micro company as having sales less than $25 million

[2] Source:  IRI and Boston Consulting Group’s 2019 CPG Growth Leaders report

Food in a Post COVID-19 World

The word that best describes the current foodscape is chaotic. The stay home orders caused by the coronavirus pandemic has locked down over 2/3 of the population and closed a similar number of restaurants and foodservice operations. Before the pandemic about 40% of all food was consumed on site in restaurants. Most of this 40% is now, almost overnight, being reallocated to grocery, home delivery, and increased restaurant take out from those remaining open.

So, on one hand the restaurant and hospitality industry are suffering job losses in the millions, while grocery brands and their manufacturers have seen 50% + surges in demand. They have had to increase production while keeping their workforce healthy, in a poorly defined, regulatory environment.

There has been a constant drumbeat of daily stories on the coronavirus. People in the food industry are almost exclusively focused on day-to-day operations, with demand changing constantly. I thought it may be helpful at this time, to speculate on the longer-range effect of the coronavirus on the food industry. This can help all of us to begin to think about the next growth strategy for our firms and investments.

The following are some longer-term trends based on my own observations and articles I have read recently.

  • E-commerce food sales have increased about 5-fold to 25% of total grocery sales. This number will not go all the way back to 5% but should fall to 15% to 20% post COVID-19. Older customers who were not comfortable with e-commerce were forced to learn, and are becoming increasingly reliant on it.
  • The biggest data players in the market; Amazon, Wal-Mart and Instacart, will become more dominant as the shoppers increase and the amount of data these players gather increases. Their knowledge of shopping behavior will give them a much larger competitive advantage than ever.
  • Food retailers that do not have access to that level of data will have to shift their point of difference to store experience, to the individual shopper. The competitive battle will be between analytics versus positive emotions. Any retailer that is not good at either may find themselves acquired, or out of business.
  • Specialty, and better-for-you food will continue to grow as the underlying trends are very strong. However, you will see a shift to “frugal-better-for-you” retailers such as Sprouts, Trader Joe’s and even Aldi, as consumers will be more stretched financially than before the pandemic.
  • Status food and beverages such as wine, gourmet brands, and unique restaurants should have solid sales trends. People are status seekers in general, when financially strapped they cannot afford new houses or fancy cars, but food and beverage is an affordable way to differentiate yourself from the crowd.
  • Independent restaurants will take the biggest hit from the pandemic. Some estimates are as much as 30% of restaurants will never reopen. Many are owned by families where the younger generation has moved on to other occupations and the founders are near retirement. These restaurants will not survive.
  • Food supply chains will diversify and become much more local. Having a significant reliance of ingredients and packaging from China and other far-away countries will be reconsidered. Most food consumed in the US can be easily supplied by Canada, the US. and Mexico.
  • Food security and future pandemic response planning will significantly affect food safety regulations for a number of years to come.

Whenever there is a massive short-term change, new opportunities quickly emerge as the new normal becomes clearer. Those of us struggling with managing the day to day in this environment may be well served by beginning to think about what is next, and how you can adjust, and perhaps thrive under the new normal.

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