Change of Direction for New Food Strategies

After over 45 years in actively managing and consulting with food companies of all types, I have decided to step back and rethink the future direction of New Food Strategies. Part of this process is based on a desire to have more time to spend with family and grandchildren living nearby, along with the ability to fully enjoy life here in Colorado.

I would still like to be very active in the food industry, but with reduced travel and limited day to day operating  support. The major change I will be making is that New Food Strategies will no longer do traditional consulting but will focus on the following activities.

  • Advisory/Board of Directors Positions
  • Creating a small group of knowledgeable food investors for early-stage opportunities
  • Working with local Colorado food companies on specific growth-related projects
  • Newsletter and other publications with a focus on long term trends and public policy in the food industry
  • Making available recommendations for subject matter experts I have worked with over the years to small food companies that would benefit

These are exciting times in the Food Industry. As the effect of the pandemic unwinds in the coming months, new opportunities will abound in the changed landscape of the industry. 

Another major change for the industry is already apparent in the nearly 50% of the country that is comprised of the millennial and Z generations. This group has decidedly different interests when it comes to specific food products and the environmental issues raised by the current food production system.

A thanks to all of you whom I have met over the first 45 years of my food career. I look forward to continuing our relationship as the firm embarks on this new direction.

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.

Building a Sales and Operation Planning Tool (S&OP)

An S&OP planning process is critical to the success of a fast-growing food company of any size. This process helps in the efficient scheduling of production, ordering of raw materials, making staffing schedules, efficient storage and freight and budgeting and cash flow planning.

SALES PROJECTION:  This is probably one of the most difficult tasks in a high growth food company.  Matching sales demand with production capacity is often complex. Demand is very unpredictable in most high growth situations while production scheduling needs clarity and predictability at least for a period as long as the lead time for major/perishable raw materials. The sales projection should include three time periods and be updated monthly or even weekly depending on how quickly a sales forecast is changing.

  • Four weeks firm for production planning and ordering of raw materials
  • Nine additional weeks for long lead time items and demand spikes caused by adding new accounts and/or heavy promotional activity
  • An additional 13 to 29 weeks for capacity planning, assuming six months for equipment additions and longer if new building needs to take place

PRODUCTION SCHEDULE:  For maximum efficiency, a production schedule should be firm for at least a week (two weeks firm is preferable) and planning out at least 30 days total. Lead time and inventory levels for raw materials along with a solid Bill of Materials incorporating planned waste and yield calculations are critical in planning a production schedule that adjusts to allergen and other production constraints. Long production runs, eliminating change orders as much as possible is the desired result in production planning. Along with production and raw material planning and staffing plan for each production run can be created using crew size standards established for each product type.

STORAGE/SHIPPING:  Using a combination of the production schedule and the required delivery date, a shipping schedule can be created for finished product. As a rule, finished product for frozen food should be delivered to the customer in less than two weeks to maximize shelf life and product performance.  While other items with longer shelf lives can be held longer but at a cost, adequate planning in this area should maximize product freshness while at all times controlling inventory and storage costs.

BUDGET AND CASH FLOW:  A solid S&OP process should provide enough information to create a budget and a cash flow projection. These should be updated and rolled forward at least quarterly. Cash is the lifeblood of any company but especially a fast growing one. Working capital needs can grow substantially or even generate positive cash, depending on the timing of collections and expenses. Getting a firm knowledge of costs and expenses and their timing will be the end result of this process. Getting visibility to cash needs far enough in advance to adjust to them, can save an entrepreneur many a sleepless night.

Planning for 2021

About this time of year food companies of all sizes begin to put their business plan together for the following year. This year the planning environment is as unclear as I can ever remember it being.  Pandemic, recession, political and international issues all contribute to a high level of uncertainty.

Most experts believe it will be late next year at the earliest where the economy and consumer behavior normalize to a significant degree. Our political situation will not be resolved by the upcoming election.  Either way you will end up with about 1/3 of the population angry about the outcome with some potentially resorting to violence. While the country is sorting out these difficult issues the population still needs to eat. With that in mind I suggest the following be considered as elements of your plan for next year.

  • FIRM THE FOUNDATION:  This is a process to evaluate everything you are doing to make sure you are focused only on elements of the business that make sense in the long run. Looking at each SKU for both its profitability and complexity is very important in uncertain times. A zero-based budgeting exercise validating every dollar spent, not just rolling forward a previous year’s number, can also be very helpful.
  • RE-EVALUATE YOUR SALES AND MARKETING STRATEGY:  2020 will have a fundamental effect on the food industry for the next number of years. Some opportunities open while others may close. Will food at home stay strong? What will the foodservice of the future look like? What new trends are emerging? Get out and talk to your customers, suppliers, equipment manufacturers etc. Emerging trends show up here before showing up in sales data often months down the road.
  • DEVELOP MULTIPLE/FLEXIBLE PLANS AND BUDGET:  Start this process by using the most conservative sales budget with the highest likelihood of achieving and build the base operating budget around it. Then develop sales and expense incremental add on budgets for various increased sales scenarios. This process will help you stay positive in the base budget and also better control what you can spend on growth.
  • RETHINK YOUR SALES AND MARKETING EXECUTION:  2021 may not see the return of the trade show. How you compensate for that in your lead generation process is critical. Automated sales funnels using e-mail and social media is one tool that may help. Also, evaluate sales channels that you have not been in before – both traditional and non-traditional, for new opportunities. E-Commerce would be a good place to start.

These are just a few of the areas you may want to include in your planning process for 2021. The best approach is to start with a clean slate in all areas of the business and ask if this is something we need to do for next year and beyond. It is often said that in chaos there is great opportunity. If planned properly 2021 can be a year of opportunity for you too.

Politics and Food – Post COVID-19

The rapid changes in food consumption brought on by the COVID-19 pandemic are in the process of being sorted out. The food supply system had to contend with massive shifts in demand along with many additional protocols for safe food from farm to fork. In periods of high change, it often creates an opportunity to re-evaluate an entire system to see if other changes are needed. I believe the food system at this moment is no exception.

Since WWII, the main focus of our food system has been to supply the greatest amount of ever cheaper food to the greatest number of people. I would suggest that we declare that objective accomplished and move on to another prime objective that I believe will be desperately needed in the coming years. Simply stated, I believe the primary objective of our food system should be “To ensure that all American citizens have access to affordable food and nutrition to help their physical development in childhood and overall health as adults. The larger goal being to give all American Citizens a fair shot at accomplishing their life’s objectives as adults”.

I would hope the majority of Americans can support this general principle. However, even with that level of support there will be a number of very thorny issues that would need to be resolved to accomplish this. Among them are:

  • What actually is a base level of nutrition required to give an individual the best health and energy over a lifetime.
  • Should healthy food just be made available to everyone or should it be mandated in certain cases.
  • How would the current players in the food system best support this objective.
  • What role will recent innovations in food such as lab grown meat play in the new food system.
  • To what extent will supplements also play a role in a healthy diet and support system.
  • Would a refocusing of health care plans to more of a wellness approach help in the transition.

These are just a few of the difficult issues to be addressed. But the rewards of moving the food system in this direction would be great. If we accomplish this shift it has been estimated that we could decrease our health care expenditures by one-third overall or nearly one trillion dollars a year. This obviously is a significant amount, but it does not include the increases in productivity from a workforce with fewer sick days and greater mental engagement on the job.

There are many other changes that will arise post COVID-19 within many of our institutions, but I believe a rethinking of our food supply should be high on that list.

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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The Future of Food Co-Packing

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.

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