November Talking Points: Get 'em while they're hot!
In this fall edition of Talking Points, we discuss the following four points:
1. Get ‘em while they’re hot!—A spate of recent acquisitions indicate there is no let-up in M&A activity.
2. Emerging companies: the view from established players—further insights from Rabobank’s survey of emerging brands.
3. All things organic—It might not be the route to feeding the planet, but…
4. Readership survey 2017—We have two questions for you for our end-of-year survey.
1. Get ‘em while they’re hot!
A spate of recent acquisitions reminds us that companies are still looking to pick up emerging brands to help shift the center of gravity of their portfolios to be more on trend. Ultimately, they also need these brands to drive top-line growth, which remains stubbornly flat. We draw out some conclusions from recent acquisitions:
The snack bar platform
At times, walking around trade shows such as the Fancy Food Show or Natural Food Expo, it feels like we have already hit ‘peak’ snack bar. How many more me-too products can the market take? Nevertheless, according to Euromonitor, the U.S. snack bar market continues to grow, averaging 6 percent annual sales growth since 2012 and having a market size of about USD 7 billion in retail sales. Over the past decade, snack bars have become an established platform for the on-the-go time-starved crowd who are looking for a better-for-you option than what can be found in the candy aisle. These trends show no signs of waning, with the snack bars providing a constant source of innovation around ingredients, flavors, and branding to continue to try entice consumers and disrupt the market. Adidas, for example, recently partnered with Juice Press to make a snack bar with the main ingredients being dates, walnuts, and cold-brewed coffee. Kellogg’s purchasing the protein snack bar company RXBAR for USD 600 million in October is a good recent example of an established company betting on these trends. RXBAR, in addition to being the fastest growing nutrition brand in the U.S., attracted the attention of Kellogg’s in part through using a novel protein source (egg whites) and differentiated branding: the ‘no BS’ on the label doesn’t stand for ‘no balance sheet’ (the company is less than three years old) but for ‘no bullshit’—a swipe at other food products that falsely claim to have clean labels and be all-natural. (On the kid’s line, ‘no BS’ stands for ‘no bad stuff’, by the way.) For Kellogg’s, the Chicago-based bar company will prove a good test case on how well it has learnt the lessons from past acquisitions such as Kashi, where the company might have been a bit too controlling to the detriment of both parties.
RTE popcorn: it’s all about being ‘better for you’
Recent acquisitions in the ready-to-eat (RTE) market also talk to the experiences of the snack bar market and attempts by established players to modernize their portfolios. Although the popcorn market is over a century old, RTE popcorn is a relatively new market and aspires to mirror the success of the snack bar market and not crash and burn like other fads that died after a few years of gravity-defying growth. Both ConAgra and Eagle Foods have put bets on RTE popcorn with their respective purchases of Angie's Artisan Treats, the maker of Angie's Boomchickapop from TPG private equity for USD 250 million, and Popcorn Indiana. Compared to potato chips, the bellwether of the salty snacks category, which according to IRI have averaged growth of less than 1 percent per year since 2014, RTE popcorn has exploded by 17 percent per year over the same period. For ConAgra and Eagle Foods, the expectation is that better-for-you snacking options with fewer calories and less sugar, salt, and fat will continue to crowd out their potato chip competitors.
Plant-based foods: more than meat alternatives
In perhaps the most forward-looking of recent acquisitions, Nestlé bought the Californian-based company Sweet Earth in September, known for its chilled and frozen breakfast and entrée meals using its plant-based proteins branded as ‘Harmless Ham’ and ‘Benevolent Bacon’. This is part of Nestlé’s meals strategy to build out its plant-based food options, as well as draw a younger audience to the frozen food aisle, to appeal primarily to the growing ranks of flexitarians: consumers who eat meat but are no longer looking for it at every meal. Nestlé has plant-based meal solutions in Europe, but this is their first move into the U.S. market. Growing consumer interest driven by a number of different reasons (from ethics and health to sustainability) has led to a growing interest from food companies to provide relevant brands that offer up plant-based solutions while trying to avoid the ‘meat alternative’ labeling. Other recent examples include Unilever buying Sir Kensington’s and more recently Maple Leaf purchasing Lightlife Foods back in February.
The limits to brand-stretching
Perhaps the over-arching conclusion of these transactions is that they highlight the limits of trying to stretch existing brands into new categories. Kellogg’s is already established in snack bars (think Kashi, Special K, etc.), as is ConAgra in popcorn (Act II, Jiffy Pop, and Orville Redenbacher’s), but neither have been as successful as hoped for. Certainly, ConAgra’s brands have failed to transition from microwaveable into RTE popcorn. Rather than over-reaching with existing brands, companies are buying into the authenticity and hipness of these smaller players.
2) Emerging companies: the view from established players
In July’s edition of Talking Points, we summarized some of the findings from Rabobank’s Moonshot project led by Eline Boot, Martine Jansen, and Sarah Pinner on the constraints faced by emerging companies in the U.S., where access to capital and supply chain issues were flagged as the biggest challenges to new companies. As part of this research, the team also interviewed 12 established (i.e. large) food companies, particularly around the question, ‘What value do you seek in innovation?’ According to the team, there were four main responses:
a) Increasing interest in external innovation
Although not a surprise, the survey helps confirm the transition away from internally focused R&D towards recognizing that the most disruptive innovations and the best ideas are coming from emerging companies. In today’s climate of zero-based budgeting, it is easier to buy into the next scalable big thing than have to pay for a standing army of food technologists.
b) Innovation beyond our ken
More surprisingly, virtually all of the corporate interviewees said that when it comes to new products, channels and/or technologies, companies didn’t necessarily have to fit within the company’s core business. This openness to look beyond what they do today is clearly a reflection of the times and recognition of the need to change.
c) We need a filter
Many corporates have challenges with vetting and filtering very-early-stage companies. Several companies, presumably those without their own corporate VC funds, found the whole vetting process very time consuming, with some lacking the infrastructure to do this on their own.
d) Learning to speak ‘start-up’
For the companies interviewed, there was no clear understanding on how best to engage with the startups but recognized it is not just a case of simply acquiring them. Most companies indicated they would prefer to use a toolkit of options ranging from mentoring, piloting a test product, providing production capacity all the way through to M&A. There was also recognition that they had a lot to learn from emerging companies too. It is precisely for these reasons that Rabobank set up its Foodbytes! and Terra innovation platforms.
We close this section in noting we got some great readership responses from the July article:
? “Of the 92 percent who think capital is their most pressing need, only a small proportion are ready for it now and need to take a harder look at fundamentals first, such as the brand, differentiation, and evidence of traction.”
? “The capital issue may be even more pronounced in agriculture because the venture scene is even smaller.”
? “Areas related to supply chain that can cripple a great idea include capacity/demand planning, sourcing, quality, and product consistency.”
? “There is much less bank access than there used to be. The big banks have moved away (from small loans).”
3) Organic supply—struggling to catch up
At this year’s Expo West, Kashi dedicated their whole booth to highlight that despite the rapid growth in demand for organic foods in the U.S., less than 1 percent of U.S. farmland (around 900 million acres in total) is organic. The company also used their booth to showcase its transitional certification program aimed at helping farmers convert (literally, a mind-set shift is required) to organic. A number of reasons have been suggested to explain U.S. farmer reluctance to growing organic foods. These include scepticism surrounding the durability of this consumer trend and perceived high costs (dollars and manpower) of growing organics. These costs, which are caused by certification and the need to convert land—there is a three-year lag for conventional farmland to transition to organic—are particularly unattractive when conventional crops are highly profitable, though that is less the case right now. Organic prices may be higher, but the three-year transition remains a big stumbling block.
The market is growing fast. According to the USDA’s 2016 certified organic survey released in September, sales of organic agricultural production rose by 23 percent to USD 6.2 billion, with the number of certified organic farms rising by 11 percent to about 14,200. This translated into a 15 percent increase in certified acres to about 5 million, but still just 0.56 percent of the 900 million. Breaking it out, it is interesting to see how livestock and poultry is a major driver. Total sales for livestock and poultry products was USD 2.2 billion, mainly as a result of milk and egg sales. According to the Organic Trade Association, sales of organic products at retail rose by 9 percent in 2016 to reach USD 47 billion, approaching about 4 to 5 percent of total food sales in the U.S.
Despite these impressive growth rates, as consumers demand more organic, supply has struggled to keep up in some areas. Here are four insights, drawing on research from my colleagues Elena Saputo and Roland Fumasi on the U.S. organic market for grains and fruits & vegetables respectively:
a) The need for greater domestic supply of organic grains
As demand for organic meat and bakery products is on the rise, cracks have started to appear in the domestic supply chain of corn, soybeans and, to a lesser extent, wheat. In recent years, imports of organic corn and soybeans have surged (both are in the top five organic imports) as organic animal feed producers are unable to find sufficient supply on the domestic market. With the current consumer focus on supply chain traceability and locally sourced products, and with the USDA recently revoking the license of two Turkish organic grain exporters for violating organic certification rules, pressure on creating additional domestic supply of organic grains is rising.
b) Transition costs not transport costs are the issue in grains
? Transport constraint. As many animal feed producers will tell you, part of the reason organic grains are being imported are transport costs. It is cheaper to ship corn and soybeans across oceans than to truck them across the U.S.
? Transitioning to organic. The true issue of supply lagging demand lies further upstream: the farmer transition to organic. Unless a farmer has fallow land at their disposal, they need to go through a three-year conversion period before being eligible for organic certification.
? Cost pressure increases risks of transition. During the transition, farmers have to increase spending on things like equipment and labor, while faced with lower yields, as a result of the change in farming practices, which they have to sell at conventional prices.
? Knowledge gap. As the organic sector itself is still developing, a currently underdeveloped knowledge-sharing network on successful organic farming practices has made some farmers less confident that they would be able to successfully get through the transition period.
c) Organic fruit & vegetable demand growth continues
Rising consumer and retailer demand for organic produce will continue to cause the domestic production to expand in both the short and long term. The higher retailer prices (the organic price premium) appear sufficient to continue to stimulate production and offset both organic yield risk and higher production costs (relative to conventional crops) including the three-year transition period.
d) The organic premium is key
In fruits and vegetables, the organic premium relative to conventional produce can be substantial. At its worst, it is over 40 percent for grapes and strawberries, but it can be more than double for honeydew, carrots, and eggplants. Most importantly, the organic premium is expected to continue for most produce, but naturally given the variety of produce (from apples and avocados through to kale, tomatoes, and watermelons) a lot varies by market. But the key message, and a valuable insight for the grain industry as well as for food CPG companies playing in the organic space, is that there must be an adequate premium to offset that risk—and that premium must be expected to continue.
4) Readership survey 2017
We are very excited to kick off our third annual ‘We didn’t see that coming’ survey. As in previous years we want to know:
1) In the world of food, what surprised you the most over the last twelve months?
And like last year we have a second question for you:
2) What food innovation do you think presents the biggest commercial opportunity over the next five years?
(We know there is a lot of cool stuff out there, but will any of them deliver in terms of making a buck?)
As always, we welcome comments from anyone in the industry (in confidence, anonymity guaranteed). Everyone has a voice and opinion and we have been honored in the past by the number of respondents from small emerging brands to CEOs of large corporations to everyone in between. Please email me at [email protected] or text +1 347 215 4158.