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Post Pandemic Planning

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. 

An Opportunity to Rethink the USDA

An interesting thing happened in the midst of the COVID-19 pandemic this year. For over 30 years medical experts have been trying to broaden TeleMed activities across the US. This has been hampered by a variety of vested interests hanging on to the status quo. Doctors, insurance companies and hospitals all lined up against it saying it would never work. Then COVID-19 hit. In a matter of weeks TeleMed was the primary vehicle for all medical appointments across the US.

Has this change gone perfectly? No, and that was not to be expected. However, it has gone well enough that the medical community sees great promise for it to continue for regular medical checkups and especially in expanding medical access for rural and poor communities. What does this have to do with the USDA? It can be said in many ways, that the USDA has become just as sclerotic and incapable of adequately fulfilling its mission, as has the medical community and many other long standing US institutions both public and private.

First, consider the mission of the USDA as it has evolved over time. The USDA was first established by Abraham Lincoln and was focused solely on the promotion and research into the growing US Food Industry. In the late 19th century, regulation of food safety in the meat industry was added to the mission. This was the era of Upton Sinclair and abuses within the privately run and lightly regulated meat industry, which were so egregious that they required immediate action. However, additional responsibility set up an internal conflict between working with the food industry to promote it, while simultaneously regulating it.

When first looking at re-creating a governmental agency for the 21st century, the first question one should ask is what should their mission be. To answer this question, one should think about what should be done primarily by the private sector, the government or in partnership. And making sure an agency role is as conflict free as possible.

When the mission is clearly focused the next question that should be asked is how the mission should be executed. I would wager that if appropriately focused, an updated mission for the USDA would not require 100,000 employees and 4500 offices. Computer systems built in the mid-20th century, physical offices in the era of “work from home” and tasks/responsibilities built up over the years that no longer are relevant, all contribute to this inefficiency.

To me the USDA would be best served by splitting off the Food Safety part of its responsibility(FSIS) and merge it with the Food Safety part of the FDA in a single food safety regulatory agency. This would eliminate inherent conflicts of interest, while allowing the FDA to focus 100% on medical implements and drugs. Then the USDA can go back to its original mandate of basic food industry research into needs such as nutrition and sustainability, along with promoting the overall health and competitiveness of both large and small industry firms and farms.

For years everyone involved in the industry says this is too complicated and has too many political obstacles. I would argue that if like TeleMed we had no choice, a complete rethinking and restructuring of the agency could be accomplished in less than a year. This is good because with a food industry extracting from nature far more than it puts back, along with producing food of limited nutritional benefit while simultaneously denying healthy food choices to a large percentage of the population, it could be said that we are nearly out of time already.

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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Are The Days Of The High Multiple Exits Coming To An End?

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

From Our Newsletter: Leading a Fast-Growing Food Company

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.

Here are a couple of key concepts that may help: Continue reading