Editor’s note: This “A Balancing Act” story is the 17th in a series for Food Dive, where experts examine trends uncovered in earnings reports and discuss strategies that impact the balance sheet. Previous articles in this series can be found here.
In today’s food industry, legacy status is no longer indicative of category success. Growing consumer preference for hyper-local and environmentally and ethically conscious products, with short, transparent supply chains has created an environment where emerging brands can grow into fierce competitors.
Rather than try to beat these small, nimble companies, many major brands are choosing to buy them. As a result, nearly every big food company has launched a venture capital arm, giving legacy brands an opportunity to snag up-and-coming players before they become too big of a threat, or a competitor gobbles them up first.
Zach Grannis, institutional business manager at CircleUp, said that small brands boast an authenticity that consumers are hungry for, and that Big Food struggles to deliver. This, he said, has pushed major food brands to outsource their R&D through M&A and venture capital.
“That [authenticity] is very hard to replicate in-house as a large CPG company,” Grannis told Food Dive. “It comes down to those small emerging brands having an ‘it factor’ that relates to whatever they’re selling, having an authentic reason for being, and being able to deliver what the consumer is looking for.”
“It comes down to those small emerging brands having an ‘it factor’ that relates to whatever they’re selling, having an authentic reason for being and being able to deliver what the consumer is looking for.”
Institutional business manager, CircleUp
Last week, Campbell’s partnered with Foodworks, a Brooklyn-based incubator, to search for upstart food companies with "it factors" that “deliver against the Campbell’s brand purpose: Real food that matters for life’s moments,” according to a company release.
Six companies competed “Shark Tank” style at the event, pitching their business plans to a judges panel including Campbell’s VP of Innovation Mik Paul and president of Pepperidge Farm Carlos Abrams-Rivera. Ultimately, Campbell’s selected Red Velvet NYC, a gourmet DIY baking kit, as the winner, granting the company $10,000 toward their Foodworks membership. Watermelon Road, a natural, clean snacks company that makes fruit and vegetable jerky, and Better Almond Butter, an organic sprouted almond spread, came in second and third place, respectively. Each won $5,000 toward their membership.
"We believe that supporting the next wave of food entrepreneurs is critical to cultivate the future of real food,” Emily Waldorf, vice president of corporate strategy at Campbell Soup Company, said. “Working with Foodworks is an opportunity for Campbell to empower industry disruptors, have a window into entrepreneurs and their thinking, and apply it to the way we approach innovation.”
While most big food companies don’t literally mimic “Shark Tank” in their quest to capture the best up-and-coming brands, Campbell’s Real Food Innovation Challenge reflects a new M&A strategy that some analysts predict will become the future of the food business. So why are small brand acquisitions becoming a trend now? And how will this tactic shape industry competition?
Safer waters yield emerging growth
Grannis said that small companies are now a viable target for Big Food because favorable changes in distribution, marketing and consumer personalization have improved their survival rates.
“Small and emerging brands have a shot at winning today because they are able to build an audience for the first time in a much more cost efficient manner,” he said. “On the distribution front, that amounts to the internet effectively democratizing all shelf space.”
Grannis said that changes in the retail space have also helped get startups to market. Grocery stores like Whole Foods, for example, are shifting their business models to make room for trendy, unique merchandise that keeps loyal shoppers engaged and lures new consumers to the store — reducing traditional cost structures.
“On the marketing front, [this change] is mostly the result of social media, specifically, and being able to target a niche audience in the beginning to launch a product, get feedback and get the types of data [small brands] potentially couldn’t acquire... without that medium to interact with [their] customers,” he said.
“I’m not buying how my grandparents or parents bought — from six legacy brands that offer a variety of commodity goods — I’m looking for a specific product that addresses a specific need."
Institutional business manager, CircleUp
These movements stem from a “generational change of [consumers] wanting products to address specific needs either around health and wellness, specific diets, lifestyles or just products that provide a [specific] value proposition,” Grannis said.
“I’m not buying how my grandparents or parents bought — from six legacy brands that offer a variety of commodity goods — I’m looking for a specific product that addresses a specific need,” he said.
These changing appetites are costing Big Food dearly, Bahige El-Rayes, principal in retail practice at A.T. Kearney, told Food Dive in an email.
“Over the last five years, the top 25 food companies collectively have lost billions in market share to fresh and minimally processed food categories, most often run by small and midcap firms,” he wrote.
El-Rayes said this gap has widened as Big Food focuses on line extension and improved efficiency while consumer interest shifts to smaller batch, custom products.
“Over time, the effects of this share loss have been realized, and Big Food is now trying to respond,” El-Rayes said. “Many big food companies have established these VC arms as [a] path to reach innovation and find opportunities for growth.”
“Over time, the effects of this share loss have been realized, and Big Food is now trying to respond. Many big food companies have established these VC arms as [a] path to reach innovation and find opportunities for growth.”
Principal in retail practice, A.T. Kearney
This strategy, El-Rayes said, is often more lucrative than reformulating existing products or attempting to build a startup-like brand from the ground up — especially as consumer distrust of big corporate players grows.
“Purchasing these businesses is a viable approach, and is therefore becoming very competitive, as many big food companies are starving for growth,” he said.
Who VCs target and why
When asked what “it factors” Big Food VC arms look for in potential acquisitions, both El-Rayes and Grannis said that viable startups need to deliver on one or more major consumer trends.
“Big food companies are looking for business that can offer disruptive innovation, provide new lines of growth and attract a new consumer set,” El-Rayes said. “Big Food can provide the distribution muscle and scaling capability.”
Grannis said that these strategies acquire trendy upstarts for one of two reasons: to build out a category they don’t currently have a holding in, or to revive a stagnant category that is losing market share.
“Big food companies are looking for business that can offer disruptive innovation, provide new lines of growth and attract a new consumer set. Big Food can provide the distribution muscle and scaling capability.”
Principal in retail practice, A.T. Kearney
The former strategy is a “small way of placing a bet, so to speak, that an emerging brand may become big someday … in a category that’s just not significant enough for them to currently have a big brand,” he said.
Grannis pointed to Hershey’s $250 million acquisition of Krave in 2015 as an example of this strategy. By bringing the trendy, gourmet meat snack into its portfolio, the chocolate giant was able to cater to growing consumer desire for better-for-you protein-rich snacks and drive sales growth.
Grannis described the latter tactic as a “hedge against declining performance in an existing holding and backing the next up-and-comer that may eventually replace it in their product portfolio."
Both Grannis and El-Rayes pointed to General Mills’ $280 million acquisition of Annie’s Homegrown as a hyper-successful example of this move.
Lou Biscotti, partner and head of the food and beverage practice at Mazars, said that another key attribute VCs look for is scalability.
"They have to be able to take a product and scale it up to these higher volume levels...and get it in retail channels all across the U.S.," he said.
Biscotti also said that though this trend has been slow to develop, it highlights a major change in how Big Food views both competition and potential assets.
"Ten years ago, the big food companies wouldn't even look at an acquisition unless the sales volume was $100 million or more," he said. "Now, they're dipping down into companies that have as low as $10 million in volume because they realize they have to dig into this innovative trend that's occurring with these small companies to be able to be competitive today. Cost-cutting isn't enough anymore. ...The only way they can generate revenue and new profitability is new product sales."
Risks and rewards
General Mills' coveted success with Annie's Homegrown doesn't come easy, Grannis said.
Big food companies need to be hyper-aware of an upstart acquisition's ingredients, sourcing, supply chain and other attributes that could be visible to the consumer. When bringing a trendy company into a legacy brand's portfolio, the amount of difficulty that can be expected depends on how savvy the brand's consumer base is and how much research they do before they buying products.
"There's a fear from consumers that the ingredients or the channel strategy is going to change in a way that potentially suppresses what that brand was winning in the first place," Grannis said.
El-Rayes affirmed the importance of minimizing changes made to acquired brands.
"These companies also need to watch out to ensure that they maintain the integrity of the brand— many firms have done this by maintaining the original management team and not integrating it with the larger company's structure and culture," he said.
Biscotti also cautioned big food companies against doing away with an emerging brand's leadership team as soon as it is acquired.
"When the strategic company [eliminates existing management] and feels that it has enough resources at all levels of that company to be able to cover all the bases without any disruption... I find that a little bit disturbing," he said. "That attitude of, 'We don't need anybody's help, we know how to do this' is part of the problem that's caused declining sales, because they haven't opened their eyes to the trends and accommodated for that."
Grannis said it's important to strike a balance and leverage the strengths of both the big food brand and the small acquisition in order to make a lucrative change.
“You want to preserve the reason that the brand is able to succeed as an independent small emerging company, but you also want to be able to provide the leverage that the brand gets by being under the halo of a large, very efficient successful, big company," he said.
The future of VC competition
Despite the success of similar M&A moves like Campbell's addition of Bolthouse Farms and PepsiCo's play for KeVita, Grannis said that it will take years for competition to reach the point where companies are vying for the same coveted startup brand a la "Shark Tank."
"I don't believe the market is so hyper-efficient that every single investor has seen every single deal today," he said. "We haven't seen a lot of situations where [companies are] bidding against each other at this stage."
Grannis said that the diversity of M&A and other business objectives between major food companies results in very different goals from one strategic to the next, which has kept competition from converging. So long as brands continue to invest based on real unit economics, category data and product performance, there will be limited overlap in desired acquisitions, he said.
However, Grannis also said that as big food companies continue to build out their portfolios in order to meet changing consumer demand, competition could heat up.
"We envision the large CPG conglomerates in the space … having a larger brand portfolio going forward because of this personalization of the consumer trend. …You need to have more brands to address the same amount of consumers in 2025 than you did in 1980," he said.
"You need to have more brands to address the same amount of consumers in 2025 than you did in 1980."
Institutional business manager, CircleUp
El-Rayes also cautioned that even though many brands view M&A as a type of cure-all to reinvigorate their companies, these acquisitions are much more likely to fail than succeed.
"To truly generate value, [food and beverage] giants need to be able to spot trends early, enter into partnerships and invest in earlier funding rounds with the risk of unproven business models and concepts," he said.
Still, Biscotti said that this trend shows that major food brands are becoming more aware of their shortcomings in today's industry environment — an awareness they'll need to survive.
"Too many brands are still driven by the old school mentality that 'We're the big guys, we've been around a long time and our brands are not vulnerable,' when in fact they are very vulnerable right now," he said. "M&A is going to continue at a feverish pace. ...The term today is 'buy or be eaten.' "
The "A Balancing Act" series is brought to you by BMO Harris Bank, a leader in commercial banking. To learn more about their Food & Beverage expertise, visit their website here. BMO Harris Bank has no influence over Food Dive's coverage.