Better together: Why some food companies enter into partnerships
In an industry that seems to be dominated by M&A, these agreements — often between companies that would otherwise be competitors — bring benefits to all involved.
When Nikhil Arora and Alejandro Velez started Back to the Roots in 2009, they had a vision for an indoor agriculture company.
They sold grow-your-own mushroom kits, gardens in jars and herb gardens. Looking at the food system, they saw opportunity in other categories. And in 2015, the company expanded into a new area: cereal.
“We launched [all of our products] out of passion and curiosity, not really having a sense of category,” Arora told Food Dive.
The cereal line has been successful, bringing a new organic breakfast option to consumers — as well as to more than a million public school children, including those in New York City. Last year, the brand was the No. 2 driver of growth in the cereal category at Whole Foods, Arora said.
Meanwhile, the indoor farming line of products is taking off. It's a trendy idea, and Arora said it's now a $1 billion category. Back to the Roots is launching an indoor gardening line at Home Depot. They're helping Target and Lowe's build out their indoor gardening sections, and gardening products are launching at Costco and Whole Foods.
"We had these two lines of business, and both ultimately go toward the same mission, but we've been thinking how do we best accelerate, best achieve that mission of getting these values, this brand, into every home and every classroom," Arora said.
Moving the cereal business forward requires a lot of time, effort and capital. And opportunities are presenting themselves everywhere in the indoor farming business. Arora did what made the most sense: Find a partner with similar values to run the cereal portion of the business.
“Technically, we were competitors. We're both on the shelf and we're both trying to reach the consumer. But realizing and stepping back, there’s a much bigger challenge and opportunity if we’re doing this together, so I think it's turned into a kind of unique collaboration.”
CEO and co-founder, Back to the Roots
Now Nature’s Path, the largest organic cereal company in the U.S., runs the ingredient sourcing, distribution, manufacturing and supply chain aspects of Back to the Roots cereal. Items such as Back to the Roots Biodynamic Cinnamon Flakes still belong to Back to the Roots. Recipes and packages won’t be changed without Back to the Roots approval. But, Arora said, those products now will benefit from the category expertise of a longtime leader.
“Technically, we were competitors. We're both on the shelf and we're both trying to reach the consumer,” Arora said. “But realizing and stepping back, there’s a much bigger challenge and opportunity if we’re doing this together, so I think it's turned into a kind of unique collaboration.”
The Back to the Roots partnership with Nature’s Path is just one example of food companies working together. In an industry that seems to be dominated by M&A, these partnerships tend to fly below the radar. Partnerships are somewhat rare in today's food business, showing an alternative to the kind of cutthroat competition elsewhere in the food and beverage industry. Many of these partnerships are formed between entities that would otherwise be competitors.
Andrew Apfelberg, a corporate and finance partner with Los Angeles law firm Greenberg Glusker, told Food Dive that partnerships may be precursors to acquisitions, but are sometimes what they seem on their face: Agreements between companies that want to work together.
“It’s a shift from viewing everyone as competition and instead viewing everyone as colleagues,” he said.
Three recent partnerships have demonstrated this shift. The products are different — organic cereal, a reduced-sugar sweetener and a plant-based egg substitute — but the agreements show a deep understanding of the way their segments of the industry work and could point the way toward similar collaborations between other companies in the future.
Getting back to the roots
Back to the Roots was founded on the idea of radical transparency, Arora said. The entire organic movement also follows that ideal — and collaboration is just further extending it.
“As much as there’s competition, so to speak, in this industry, we're still 1% of the total food market," he said. "The opportunity and the challenges are so great that are ahead of us, I think the power of collaboration is going to make that dent in the food system faster.”
Nature’s Path was the first cereal brand to get organic certification, and Arora said Back to the Roots has long admired and respected that company’s work. Earlier this year at Natural Products Expo West, Arora said the two companies sat down to discuss what they have in common and how they could work together.
A partnership was the best option because both brands can still maintain their identities, but they also can benefit from one another, Arora said. While Back to the Roots is helped by Nature’s Path’s experience and size, Nature’s Path is utilizing Back to the Roots’ contacts with public schools to get its cereals in front of more children.
Arora called the deal very close to a traditional licensing agreement, where both entities share in the profits and are incentivized by the other’s success.
But Arora said the chemistry between leadership at Back to the Roots and Nature’s Path is really what made the partnership possible.
“This brand is everything to us. It's personal. It’s our baby. Since we graduated from college, we’ve been devoting our entire life to it. It's not just a product. It's a part of us, almost,” Arora said. “That connection had to feel so right to be able to trust someone to take this and grow it in a deep way. ... Any other partner, I don't know that we could have this confidence.”
The partnership has an end date, so Back to the Roots always has the option to take back the helm of the cereal business. As for now, Arora said the partnership is priority.
“It’s a shift from viewing everyone as competition and instead viewing everyone as colleagues.”
Corporate and finance partner, Greenberg Glusker
Through the partnership, no jobs are being lost or shifted. Arora said Back to the Roots has a “super lean team,” and everyone works on both urban and indoor farming and cereal. The partnership frees up the company’s people, both in terms of time and opportunity, to think of new indoor farming ideas. Additionally, the cereals are all made by contract manufacturers, so no factory jobs are being lost.
Arora said he is excited for how this partnership can help Back to the Roots meet its cereal scaling challenges — and help both companies realize a larger goal: having organic cereal available to one in five school children in the U.S. by 2020.
“You can make an impact faster by finding partners,” Arora said.
The power of chocolate
Partnerships aren't limited to CPG products. Ingredient companies also have been able to tap into larger partners to broaden their reach.
After Israeli company DouxMatok successfully developed a product that sweetens like sugar — but uses 40% less of the ingredient — co-founder and CEO Eran Baniel went to different sugar manufacturers around the world to show it off.
Baniel told Food Dive the goal was to start a partnership in which a big sugar company also could make DouxMatok’s product — an improvement that really could belong to the whole food system — since it is so close to regular sugar. But instead of being welcomed, he found himself shown the door.
“They were slow to pick up the extended hand,” he said. “Usually things got stuck at the non-confidential agreement. The powerful sugar guys trying to ... own as much as possible.”
DouxMatok pursued another strategy. The company worked to woo food manufacturers. After all, with sugar as an ingredient that manufacturers everywhere are trying to cut down on, many CPG products should want to reformulate.
The strategy worked, with a leading European confectioner using DouxMatok's sweetener to reformulate a chocolate bar — keeping the taste and texture perfectly intact. The company wanted to use more of the product, but Baniel said DouxMatok was a small startup and only made a few kilos of sweetener per month itself.
The confectioner set up a meeting between Baniel and its leading sugar supplier, European sugar titan Südzucker. Baniel reasoned that the confectioner is a major client of Südzucker, so sugar company CEO Wolfgang Heer would "listen to [the confectioner] very carefully."
“He said, 'Wolfgang, here's the guy. This is the technology. Now you make sure you can make this sugar for me as fast as possible,' " Baniel said. "From there on, everything went very fast. ... In a sense, this whole marriage came through the good services, the interest and the needs of an industry that uses high quantities of sugar.”
The marriage Baniel speaks of is an agreement for the Germany-based sugar company to begin manufacturing DouxMatok for commercial clients. The sweetener will be available in Europe at the end of 2019. In August, Baniel told Food Dive that a similar agreement in the U.S. is pending and potentially will be announced soon.
Working with an existing refiner was always key, Baniel said. The sugar business has long been represented by the strong connection from farmers who grow sugar beets or sugar cane and refineries. He said he does not want to break that link. At the end of the day, he said, sugar refineries sell sugar — and the DouxMatok sweetener is 99.75% the same makeup as regular sugar.
"In a sense, this whole marriage came through the good services, the interest, and the needs of an industry that uses high quantities of sugar."
“It’s an old, traditional industry that can do wonders once you introduce innovation to them,” Baniel said.
DouxMatok is mainly integrating with Südzucker on the manufacturing side of the business, Baniel said. The partnership is similar to a joint venture, but DouxMatok owns no physical assets of Südzucker — and DouxMatok has its own unit in Südzucker factories.
Baniel said making DouxMatok's sweetener requires a somewhat complex scientific procedure — one he is confident Südzucker can replicate in its facilities. The Israeli sweetener company has been working with Südzucker client recipes to reformulate products and make new ones, providing new avenues to sell the sweetener, which Baniel said is the best marketing of all.
Baniel said it makes sense to have a partnership in place to mass produce DouxMatok's sweetener. Its importance was reaffirmed after the deal was finalized and he discovered stories about his small ingredients company on the front page of London newspapers. Working with large manufacturers helps DouxMatok get the kind of scale it needs to make the difference that Baniel knows the food and beverage industry is waiting for.
“Already in the market, on the shelf, there’s quite a number of better-for-you ... products that are low in sugar, but that struggle to find their consumers,” Baniel said. He explained that many of these items, which target children, aren’t sweet enough for them.
“... We see a lot of interest in DouxMatok to replace the sugar that’s already been reduced in better-for-you products with the hope that those will become sweeter, and kids and parents will be happy to buy those,” he said.
Hatching a partnership
There also are companies that want to make partnerships their normal way of doing business.
JUST CEO Josh Tetrick has a passion to use the plant kingdom to create good tasting, affordable, sustainable and healthy food. And while he started his company focusing on creating condiments and dressings, he had his eye on disrupting another category altogether: eggs.
All over the world, Tetrick told Food Dive that people eat eggs as a form of protein. And when JUST cracked the secret to making a vegan egg substitute — a protein from the mung bean — Tetrick sought a partnership in the industry.
“The egg industry to me is the canary in the coal mine of a better food system because they ... are a group of entities that have been in the food system many, many decades, so [they are] very, very traditional," Tetrick said.
As he learned, egg companies have vital knowledge about food safety and scaling products, and they have rational leaders who are interested in selling food in a safer way to more people. "I've found them to be particularly embracing of what we're talking about," he said,
In July, JUST — formerly known as Hampton Creek — announced a manufacturing and distribution partnership with Italy-based Eurovo — which Tetrick hopes will advance the egg industry in general. Eurovo is the continent’s largest producer of packaged, pasteurized and dried eggs. It will manufacture and distribute JUST Egg using existing facilities.
Tetrick told Food Dive the intent of the partnership wasn’t money — although the deal is very similar to a licensing agreement. JUST gets a portion of profits. Instead, the company was looking for an operational partner that can make, distribute and scale the product in the European market.
"We could do it, but if we really want to have an exponential impact, let's partner with the largest, the most innovative egg companies and egg processors in the world and have them take their manufacturing prowess, their distribution expertise, their knowledge of the European consumer in this example, and have them let it rip — and really build something exciting and meaningful."
"We could do it, but if we really want to have an exponential impact, let's partner with the largest, the most innovative egg companies and egg processors in the world and have them take their manufacturing prowess, their distribution expertise, their knowledge of the European consumer in this example, and have them let it rip — and really build something exciting and meaningful," Tetrick told Food Dive when the partnership was announced.
Tetrick said he hopes his company’s innovations can be shared and produced through other partnerships, some of which he said are pending and could be announced soon. He said he’s found that many food companies are “incredibly open” to partnerships with a company that could be considered a competitor. It makes sense for those manufacturers to also make JUST’s products — and profit. Tetrick said he sees JUST's role in the food business as figuring out how to make these improved products, perfecting the techniques and enabling larger manufacturers to scale them.
And though food companies may have once been battling endlessly for market share, Tetrick said he thinks partnerships like the JUST-Eurovo tie up may show a change in attitude.
"I think as folks engage in it a little more, away from just the quick headline, ... the interest is figuring out a way to build a better company, figuring out a way to sell more protein to more consumers, figuring out a way to sell more product to more consumers," Tetrick said. "And I think through that pragmatic lens, you'll find perceptions changing in the U.S."
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