Disruption, innovation, creativity go hand-in-hand with food and beverage startups. Disruptive products and product categories have shaken major manufacturers' hold on the industry and startups are capturing a larger market share.
But major manufacturers can capitalize on advantages like capital and robust distribution while mimicking the characteristics of startups that drive innovative tendencies — and ensure further growth.
How major manufacturers can approach innovation
1. Adopt a startup mentality.
Thinking small — in structure rather than ideas — is a good place for larger companies to start.
"The key component is to remove some of the oversight large companies have over their new product development," said Eric Penicka, research analyst at Euromonitor International. "This would be beneficial in allowing for ‘out there’ ideas to make it beyond the drawing board, potentially giving large manufacturers the ability to reclaim the title of innovative."
2. Pursue strategic acquisitions.
"So a lot more (innovations) are coming from smaller manufacturers, and as they reach critical mass, the major manufacturers can help with that distribution angle, and they acquire it and take it from that point forward," said Brian Reed, principal of market structure at IRI Worldwide.
3. Create an innovation division or incubator.
An innovation division or incubator can "run independently and tolerate much greater risk (failure) thresholds," said Rich Razgaitis, cofounder and CEO of FloWater. "It’s difficult to successfully do this in a big company given that the nature of the highest risk-takers often don’t thrive in larger company environments."
Facilitating risk adoption within a specific division is one way a large manufacturer can concentrate innovation in one area that is unencumbered by typical corporate responsibilities.
4. Form a corporate development team.
Large companies may use a corporate development team to invest in emerging companies, such as General Mills’ 301 Inc. or Campbell’s Acre Venture Partners. This team could "take a stake in the successful outcome (and potentially a downstream acquisition), but they allow these smaller companies run independently on their own free of what can often be bigger company encumbrances," said Razgaitis.
301 Inc. has already invested in companies like better-for-you snacks producer Rhythm Foods, cottage cheese product maker Good Culture, and most recently, RTD soup startup Tio Gazpacho. These companies align with fast-growing trends and enable General Mills to have a hand in the establishment of those trends in the mainstream market.
Do smaller companies always set the trends?
"Small brands set the trends, because they often come from people who are connected to communities or niche segments of society," said Ilana Orlofsky, marketing coordinator at Imbibe. "They are more accurately able to address a consumer need. Oftentimes the most authentic products are created this way, and major manufacturers pay attention, especially if consumers are responding positively."
Disruption is not just about startups being better organized and motivated to produce innovation. It's also about the barriers large manufacturers face in bringing innovations to market.
"It's tougher for a major manufacturer to incubate something," said Reed. "They're set up to be a broad distribution network, and things have to hit a certain amount of velocity before they'll fit into their network. And for these ideas, to nurture them, it's more difficult for them, because the criteria for success there is much higher than it is for a smaller manufacturer who's just trying to make a buck."
An explanation? Innovation vs. operational efficiency
In a 2012 Harvard Business Review article, VP of Sapphire Ventures Maxwell Wessel argued that larger companies don't tend to innovate — or innovate in any disruptive capacity — because they weren't designed to do so.
In a company's infancy, Wessel said, it is primed for innovation and disrupting the marketplace's status quo, and that goes for food as well as any industry. The definition of success for a startup is reflected in how well it solves a problem or brings something new to the table. Simply identifying this solution will ultimately lead to revenue growth and profitability.
But as the company achieves initial growth and progresses through a typical corporate life cycle, that goal changes. The closer a manufacturer is to corporate maturity, the more important profitability becomes, especially in the eyes of shareholders of the growing business.
"Larger companies are more likely to continue servicing their current client base," said Razgaitis. "They've already fulfilled an existing need and tend to be comfortable staying within those confines."
The company already found the solution; that's what helped it grow. Now the goal is to continue producing that solution but in a more efficient manner. Company executives deliver the earnings numbers shareholders want, and the larger company is considered successful.
It's not that larger companies can't create good ideas or identify the next big trend. It's that when it comes down to it, the larger company is geared for profitability if it intends to survive.
But that shouldn't preclude major manufacturers from approaching innovation. Corporate advantages can position a relatively unsuccessful product from a large company ahead of an otherwise successful product from a startup.
"Innovative and impactful in sales terms are not equal," said Penicka. "From this standpoint, more oftentimes than not, even a not very successful new product from a major company will have greater sales than some of the most innovative and exciting new products from startups."
Major manufacturers aren't excluded from the innovation club, but they may have to make internal adjustments to reflect the traits of startups that prime them for innovation.
"Truly innovative and disruptive products are just as likely to be conceptualized by large companies, however the greater number of barriers to realization alone makes them less likely to earn the reputation of innovators," said Penicka.