Based on current trends, it appears that the major effects of the Pandemic should be dramatically reduced by late summer 2021. The current vaccines are highly effective in preventing deaths and serious illness for all known virus variants. Vaccinations for all who want them should be completed by July as supply chains continue to ramp up production. Finally, vaccine producers are already working on booster shots for the current vaccines for the fall to address any new variants that may emerge.
All schools should be able to resume 100% face-to-face learning in the fall along with a full schedule of sports. Movie theatres, restaurants and other activities dramatically curtailed during the pandemic will return with few if any restrictions.
Will everything return to a pre-pandemic normal then? Perhaps, but there is one variable that is hard to predict and that is us. Meaning to what effect has the experience of the Pandemic changed future consumer behavior in the food industry?
Will we be more cautious regarding congregating in large crowds or will the desire to reconnect with each other drive our behavior? How much of our food buying behavior will remain online? Will we ever see a real handheld menu again? These and many other questions will be answered as we emerge from the Pandemic’s grip.
It is possible to get an early glimpse into what these permanent long-term effects may be. The US is a lagging indicator as to how mass vaccination will affect consumer behavior. There are a number of European countries and Israel that had very high infection levels and are now leading the US in the level of vaccination. I would suggest tracking these countries’ food industries as they reach an effective level of mass vaccinations a few months earlier than the US. It may be a good indicator of what our food industry will look like as it emerges from the Pandemic.
2021 should be a year of full recovery from the COVID-19 Pandemic. What the food industry will look like as we emerge from the Pandemic’s effects is not fully known, but we can certainly keep an eye on these early indicators.
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.
Subscribe to our Monthly Newsletter Today! Receive the latest information, thoughts and insights into a new food industry that’s healthy for consumers, employees, and the world.
I have been involved in food co-packing since the late 1980’s. During this time, I have seen food co-packing evolve from primarily low-cost producers of products developed by other companies, to full blown R&D and marketing companies, that have the capability for large volume co-packing.
This change has occurred in a number of phases. In the early 1990’s some co-packers moved away from the purely low-cost production models, to a more R&D focused strategy by customizing products for large end users. These included CPG companies, grocery private label and custom products that were created for mid and large size restaurant chains.
This strategy worked well for a number of firms in several product categories until the great recession in 2008. For several years after that, new product launches were severely curtailed and existing products were searching for the lowest cost producer.
As the economy improved, the food market began undergoing massive change. New, better-for-you products were emerging everywhere. These firms generally used co-packers and were looking for ones with great R&D capabilities. A number of co-packers jumped on this trend, but some bumps in the road quickly materialized. Many new products were launched, but very few were successful. This left the co-packer with little to show for their product development.
If the initial co-packer lacked the scale to meet increasing price pressure after the first contract period, the products that succeeded often moved to different low-cost producers. The more innovative co-packers began taking equity interests and/or success fees for new projects. This allowed them to beef up their production to quickly scale successful items.
As the food customer demanded more variety in better-for-you products and the share of the market grew, large food producers jumped in with a flurry of new product introductions. Along with this heightened new product activity, product life-cycles were dramatically shortened and competitive reaction to a successful product launch was almost instantaneous.
Based on these accelerating trends, what capabilities should the co-packer of the future have? I’ve listed a few of these capabilities below:
R&D capabilities on par with the large food companies before they gutted them for cost savings
The ability to rapidly roll out multiple new product launches on a small scale to see which ones stick and which ones fail
The ability to rapidly scale the successful launches to full national roll outs at competitive pricing
Create strategic partnerships with interesting startup companies. This offers both companies their R&D capabilities and access to subject matter experts in marketing, logistics and other critical activities.
So, the next generation of co-packers will need to think like a startup, R&D like a large company and scale up the successful items quickly. And all while carefully maintaining manufacturing flexibility and controlled Capex spending, to account for the shortened product life-cycles. This is certainly a tall order, but there are already some next generation co-packers out there, with more to come.
For an industry that only grows overall at 1 to 2 % annually, there is a lot of change transpiring. It surely does keep things interesting.
Everyone in the food industry is aware of some of the big multiples paid for early stage branded food companies over the last few years. Exit valuations as high as 6- or 7-time sales have been seen. This has caused a large number of entrepreneurs and funders to create companies searching for these exit valuations. I have noticed some recent developments that will make these high-priced exits more and more difficult. They are as follows:
Big food companies struggle when managing a portfolio of mid-size specialty brands rather than billion dollar plus brands. Even when a specialty and better for you company grows significantly, it often will not attain the volumes required by big food company infrastructures to efficiently manage.
The traditional product development no longer works. Large food companies used to bring a new product to market by developing a new product internally over a number of years with millions of dollars invested in market research and product testing. This strategy does not work in the high change, short product life cycles in today’s market.
It isn’t paying off. To compete in this new marketplace, large food companies began acquiring early stage growth companies for very high valuations putting most of their financial and organizational resources behind a couple of big bets. This strategy has actually paid off in only a few instances and misses are very expensive.
Today, the more sophisticated large food enterprises are developing the same fast fail methods that the start ups have been using for years. They work closely with an increasing array of sophisticated co-packers that can both develop and scale new products rapidly. A company can often bring 10 to 15 new items to market in this way for the same cost and far faster, without having to buy an early stage company.
The ones that do not gain traction, they kill early. The ones that look successful they rapidly expand with the co-packer. They do not want to build their own production capacity as a successful new food item generates many copiers in a very short period of time, making an acceptable return on new production capacity problematic.
You may still see some very high valuations for companies like the Impossible Burger. But these will increasingly be companies that develop entire new markets with very heavy R&D and start up production costs often in the 9 figures before the first dollar of revenue. Think lab-grown meat as future new market segment for environmentally sound and clean label real meat. The development cost for this project may approach a billion dollars before reaching the market.
So, where does this leave a startup food company in today’s market?
Is your goal to significantly grow a start up food company over a short period of time? To never make money and hope for sufficient funding and a high value exit? I would caution against it.
Do you want to build a food company for the long haul with distinctive products in multiple channels, including both retail and food service? Is your goal to reach breakeven as quickly as possible while financing your growth with a mix of internally generated funds and traditional bank lending? Then I would say let’s get started.
In this environment, a traditional PE firm can develop a very profitable strategy around hitting 6-8 out of ten doubles rather than 1 out of 10 home runs. Family offices with their longer investment horizon and flexible financing structures should thrive. This would leave the search for the next unicorn with the increasingly heavy front-end investments to the true venture capital firms that are structured on big risk big reward strategies.
A final note. Whenever I would discuss future trends with my late father, Angelo, he often ended the conversation with the same phrase “It could be and then again….maybe not”. Always something to keep in mind when predicting the future.
John Geocaris Managing Director New Food Strategies
According to a recent Nielsen study and a report from Progressive Grocer, consumers are beginning to choose higher quality and cost meats over more inexpensive, lower quality products.
2018 data shows an increase in year-over-year dollar sales of 3.1% paired with a decrease in volume of 1.5% It seems consumers are paying more for less in the meat department. What are consumers getting for their extra cash? An increase in fresh meat sales, paired with an increase in sales of meat alternatives. Much of the spike in alternative meat sales is coming from the frozen section.
The growth in the fresh meat section was driven by marked gains in chicken sales, with beef becoming less popular across the board. Organic meat sales gained a healthy 5.8%, while offering a $1.18/lb. premium over conventional products, on average.
These figures align with broader consumer trends, showing a gradual transition towards more sustainable and organic products. The growth of alternative meats in particular is primed to accelerate, as formulas are perfected and brand names like Beyond Meat and Impossible become household names.
Supermarkets that offer full service meat departments are seeing benefits from their investments. The majority of groceries polled feature a professional butcher and offer full-service, often to-order meat products. Specialty cuts that come with a friendly word of advice on preparation and cooking help consumers try new dishes.
The combination of greater reliance on butchers and fresh meat products, and frozen meat alternatives seems to be coming into style. Perhaps consumers see a trade off of frozen convenience for something better for the planet and their own health. Contrast this trend with inexpensive products like ground beef becoming less popular.
The improved sales in alternative meats warrant close examination. Some grocers are responding by actually stocking “fresh” alternative meats like the Beyond Burger in the meat service case. Non-animal protein power is expanding throughout the outer aisles as well as the frozen section. Savvy marketers, grocery buyers, and CPG innovators would do well to keep an eye on this trend and make their alternative meat move soon.
For more insights, news and analysis from New Food Strategies, subscribe to our monthly newsletter.
At New Food Strategies we focus on food companies that are
growing rapidly, from early stage to mid-size. We offer experience and knowledge
in managing a high growth food company at this important moment of expansion. A brand in a sales range of roughly $1M in
annualized sales, which is primed to grow to well over $100M, is at pivotal
moment. This is where a company
transitions from a highly flexible entrepreneurial one, to a sustainable,
Companies entering this stage have a product that has been
accepted in the market, a marketing plan geared for rapid growth, and funding
to support it. However, there is often
not sufficient attention paid to the most critical element of all, which is
building and staffing the organization in a way that can effectively manage a
company through a challenging scale up process.
When New Food Strategies works with companies entering this stage of growth, we have them focus on three primary areas of organizational development. These are People, Process and Planning.
When bringing people into a high growth food company there are a number of critical characteristics that will allow them not only to survive but actually thrive in a high change, high stress environment. Some of these characteristics are as follows:
Someone who is challenged by rapid change and the fast pace of decision making
An individual that can be both highly collaborative and independent when the situation calls for one or the other
Someone who has a good idea as to how to build out the structure of their department for the long run, while fighting fires in the short run
The ability to function at a high level without a lot of structure and process in a very hands on manner
One way to screen for these behaviors is to designate current employees who are successful in a high change environment and use them to screen job applicants for the cultural attributes desired. They often can pick up on those individuals who say that want a high change environment but really do not understand what it requires to be successful in such a company.
The amount of change and keeping up with both internal and external demands in a high growth food company makes highly detailed operating processes both difficult, and in some cases counter-productive. However, this does not mean that everyone goes off in their own direction with no way to coordinate their activities. It is critical to develop a regular structure around the internal communications of the company. In its early high growth stage, Dell had a weekly video conference for all senior managers at the same time each week. No excuses were accepted for missing it. At this call, each manager was asked the three same questions each week. They were:
What is new? Where are you stuck? and How can we help?
A manager in a high growth company in almost every case has a job too big for them to do on their own. They need to coordinate internal and external resources to make sure tasks they are responsible for occur on time. Regular communication with their team members is critical to keeping the rapid pace controlled to a reasonable extent. In these situations, trying to cover up the fact that you are falling short of a target is the worst thing you can do. Needing help from time to time is expected and raising your hand to ask for it is encouraged.
In a high growth food company the planning cycle is highly compressed. Looking out more that 18 to 24 months is not a very valuable exercise in most cases. It is necessary to have a general picture of where the company is headed long term, but the execution plan is often no more than 12 months. 90 day, rather than annual objectives, make more sense in this environment, with a new set of objectives being created on a quarterly basis. 12-month financial budgets do make sense here, but they must be updated on at least a bi-annual basis, if not quarterly.
Building a food company from an early stage to a mid-size company requires skills that are not generally found in the average person. The ability to deal with ambiguity, while at the same time making decisions with limited information or resources is as much an art as a science. There is not a check list you can pull out and follow to ensure success. However, by hiring the right people, maintaining a regular communication structure and planning often and for short time frames will give you a great chance for success.
These three keys, People, Process, and Planning, can set you on the right track for rapid growth in the food industry. Subscribe to our newsletter or contact John directly for more tips on growth in the food business.
Being the leader of a fast-growing food company is truly a unique experience. Nothing really prepares you for the pace of decision making in an uncertain environment. I learned this lesson myself in running a food company that saw 30% year over year growth for 25 years.
When to be flexible and when to build structure? Do I hire executive talent or good executors? Do I make my products myself or use a co-packer? These are among the many questions that need to be answered as a leader of a fast-growing food company. The main challenge is not only that these questions are difficult to answer, but that the answers are also changing constantly.
Often a Founder of an early stage food company gets so focused on raising money they lose sight of what they need to do to efficiently manage the funds an investor is putting in the company. You have convinced an investor in the value of your product, management team, and marketing plan. Now you need to hit your growth objectives with the funds provided.
There are a few simple tools that will keep you on track towards increasing your company valuation before an exit or the next round of funding without running out of money. They include: Continue reading →
Developing an effective Sales Strategy to grow your company from its early stage $1,000,000 annual sales level to $10-25,000,000 and beyond is not an easy task. As you grow you will greatly expand the number of competitors while simultaneously entering new markets and channels of distribution that often have conflicting requirements. You will also be building out a sales and marketing function within your own company as the requirements in this area quickly outgrow your ability to manage them. Continue reading →
A member of a prominent family who has bought and sold many companies over the years once told me that there are only two times that you should sell a business. The first is when you are not really trying, and someone comes to you with an offer to good to refuse. The second Continue reading →