A Balancing Act: Why incubator success is far from a sure thing
Many manufacturers have venture capital arms to help startups — and think outside of the box
Editor's note: This "A Balancing Act" story is part of 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.
Despite touting its new incubator program three years ago, Coca-Cola's ambitious plan quickly fizzled. After spending millions of dollars investing in small startups to help stoke growth at the 125-year old beverage maker, the soda giant quietly ended the venture in 2016.
The decision by food companies like Coca-Cola, General Mills and Chobani to venture into the risky and often unpredictable world of venture capitalism reflects how far they are willing to go to find new sources of revenue amid changing consumer tastes and lagging sales in their own operations.
"There’s no way to tell what the (return on investment) was on product sales, talent acquisition fees, man-hours or what the ROI was at the beginning of the two and half years,” Babs Ryan, a principal at ThoughtWorks Retail, told Food Dive in an email. "Perhaps Coca-Cola ... found the new ventures weren’t competitive."
The company’s website still has information about the program and what it was designed to do as if it was still up and running. Coca-Cola did not return calls seeking more information about its incubator program.
A need for incubators
Capgemini, a consulting firm, estimated 38% of the top 200 companies have innovation labs with varying degrees of success. With the benefits from mergers and acquisitions quickly waning and company-owned innovation labs slow to produce, food companies have turned to incubator programs. Ryan said the food industry has been the laggard.
“If there are any new business opportunities out there, chances are that some entrepreneur is likely already in that space. These smaller companies are able to innovate and pivot faster than big food companies, and they have a lot of intuition and empathy when it comes to their consumer.”
Vice president and general manager of 301 INC.
More than a decade ago, A.G. Lafley, then Procter & Gamble’s CEO, told employees the company's goal was to source at least 50% of innovations from outside the company. P&G gave around 50 employees the “position” of finding ideas from external creators. The consumer products giant has drawn praise for its willingness to look outside its own walls for inspiration.
Ryan said what's driving the use of incubators is the inability of big companies to keep pace with rapidly changing consumer habits and trends, their struggle to attract the right talent, and their failure to respond to competitive threats in the marketplace.
John Haugen, vice president and general manager of 301 INC, the business development and venture unit of food giant General Mills, said the industry is experiencing a time of rapid change and the barriers for new entrepreneurs to enter are low — making it easier for small startups to enter the field. 301 INC, which began in 2015, has been aggressive, investing in probiotic-startup Farmhouse Culture; Rhythm Superfoods, known for its kale, beet and broccoli chips, and D’s Naturals, a maker of low sugar plant-based No Cow protein bars and low-sugar, protein-infused nut butters.
“If there are any new business opportunities out there, chances are that some entrepreneur is likely already in that space,” he told Food Dive by email. “These smaller companies are able to innovate and pivot faster than big food companies, and they have a lot of intuition and empathy when it comes to their consumer.”
The reason some startups are successful is because they are able to think and react more quickly than a larger manufacturer, Haugen said. Many entrepreneurs are developing new products for a family member or a friend, which builds an emotional connection. They don’t get bogged down with numbers, and instead are able to focus their attention on knowing and quickly responding to what people like.
“We’ve learned that it’s more effective to team with external partners on business incubation, rather than try to build our own,” Haugen said. “It takes a lot of time to effectively incubate a new business. And frankly, companies like General Mills may not have the patience to stick with internal innovations for five to seven years before they achieve the level of scale to become a sustaining business.”
Chobani gives back to small startups
The success of each incubator is measured differently, but food analysts agree that one benchmark is achieving the goals set at the beginning. While incubators may provide a relatively inexpensive platform for bringing a product to market that will impress consumers, the end goal is typically boosting shareholder value, profitability, revenue growth or market share.
Incubators have not only been embraced by big businesses, but by smaller players cognizant of the challenges that startup businesses face.
In March, Chobani graduated the first members from its Chobani Food Incubator — Banza, CHOPS Snacks, Cissé Cocoa Co, JAR Goods, Kettle & Fire, and MISFIT Juicery.
Hamdi Ulukaya, Chobani’s founder and CEO, launched the program to mentor and support food entrepreneurs who wanted to challenge the industry to think outside the box, and help young businesses just starting out.
“This was born out of our founder’s vision to pay it forward,” Jackie Miller, Chobani Food’s incubator director, told Food Dive. “(Our founder) remembers and recognizes how difficult it is for food entrepreneurs to get started and navigate the unique challenges that they face. He wanted to help the little guys, like Chobani once was, to grow in scale and take on the big guys.”
The program launched in October with a $25,000 investment into each company. Early stage food and beverage startups were chosen if they aligned with Chobani’s "DNNA" values—delicious, nutritious, natural and affordable. Chobani did not take equity stakes in the companies, but instead offered mentoring and advice from its entire C-suite through workshops and meetings. Overall, the six startups received insight from 130 mentors and experts from Chobani and other companies.
“It’s an investment that we make in each company and it’s all about supporting them," Miller said.
The financial help and free advice worked. Miller said growth in distribution at each company surged about 60% since Chobani got involved. Together, the companies posted total sales of more than $3 million in 2017 as of March 20.
General Mills gets involved
General Mills, the maker of Progresso soup, Pillsbury dough, Yoplait yogurt and Cheerios, has developed a diverse roster of brands throughout its 151-year history. But like many large food manufacturers, the business is facing a change in consumer tastes and has struggled to keep pace with more nimble upstarts. Now keeping up means investing in those same up-and-coming businesses.
“We provide investment resources and our 150 years of expertise in the food industry from operations to marketing support,” Haugen said. “And in return, we learn about powerful trends in the food space that we hope to take advantage of.”
Similar to Chobani, 301 INC offers hands-on involvement from experienced operators, as well as access to functional food experts throughout the entire General Mills organization.
Certainly some entrepreneurs will be hesitant to work with larger companies. The concern is that their vision will be compromised or altered if they give away some or all of their independence.
“I think our work with a brand like Annie’s (which we acquired in 2014) may help address this, as we’ve stayed very true to their mission,” Haugen said. “Larabar and Epic (other recent acquisitions) would be other examples. We think of it as playing a key role in ultimately scaling the entrepreneur’s vision.”
General Mills also is very careful not to divert too much attention from managing the dozens of brands already in its existing portfolio. It makes sure it doesn't overextend itself by getting involved in too many startups where it can't be as responsive as it needs to be; or going too far and over-managing those that it's involved with.
“If you are taking investment from 301, you are getting an active, engaged support model; we are partners in mission, strategic and financial goals,” Haugen said. “We are constantly working to achieve the right balance of support and focus on the things that will have the biggest impact. This is more art than science.”
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.
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