A Recipe for Growth in Packaged Foods

Follow the lead of upmarket entrepreneurs; break away from legacy behaviors.

By Harvey Hartman and James Richardson of The Hartman Group

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The situation is even more perplexing when large companies buy emerging brands in these growth categories but fail to develop them.

  • Follow the lead of upmarket entrepreneurs. Entrepreneurs have created fast-growing premium segments across the grocery store, because they have higher risk tolerance, are closer to unmet consumer desires at the edges of the market and display far more nimble, scrappy go-to-market strategies to steal share. Natural Products Expo West 2014 broke all records in terms of scale; everyone wants in on the premium food and beverage market. Midmarket grocery chains have staff scouring the country for cool new brands to bring into their stores.

What these small players intuitively understand is that we no longer need to worry about economical calorie supply. The future is about making trends in food based on desire, play and possibility made possible by unprecedented affluence at the upper end of the market.

After five years of focusing almost exclusively on pricing down to boost value perceptions among the disadvantaged end of the market, food executives are just beginning to sense that the upmarket entrepreneurs may have a point: Why not upsell consumers who want to be upsold?

Restructure to allow for upmarket innovation and investments. The majority of packaged food and beverage product launches are low-risk, mainstream extensions not generating more than temporary share grabs. They do not succeed, because they offer little of interest, even to a brand’s heavy buyers. The last decade of top first-year launches in food produced few sustainable businesses, despite their eight-figure runs out of the gate.

This is because, to obtain large first-year success, you must pander to established mass-market preferences with distribution and brand as your primary weapons. The problem is that these mass-market preferences are the same ones your competitor targets, and the demand curve behind them has flattened in food culture (i.e., too many products chasing the same traditional flavors/textures/benefits).

The most successful long-term lines of new business in food in the past 20 years have come from early-stage companies birthed upmarket. However, unless you have a track record of investing in upmarket brands or own legacy brands (e.g., Cheerios) with substantial upmarket consumer purchasing, it can be difficult to tap into this lucrative area.

Investing in upmarket acquisitions and innovations generally requires a separate entity to incent the pursuit of multiple small bets, long-term wins and a different set of consumer demand assumptions than the base.

  • Let go of legacy brand bias. Few companies are becoming brand-agnostic enough to “let go” of yesterday’s cash cows and focus a portion of their base profit dollars on investing in huge upside opportunities. The dispassionate gaze of the blended fund manager is one that senior management should adopt rather than the overenthusiasm of today’s brand evangelists. If a brand won’t respond to sensible investments but is otherwise stable, stop overinvesting in it.
  • Permit new revenue and margin models for upmarket launches. The dominant revenue models of today’s packaged food companies are not suited to launching, or investing in, the new growth engines (e.g., fast growth, lower initial gross margins). Why? Upmarket product design often involves lower initial gross margins, with profit scaling as the business grows and costs come down on non-traditional ingredients that are essential to differentiation.

The value in upmarket growth engines like these is that, if done well, the profit stream is continuously growing along an S curve of 10 to 15 years (before flattening out) with less marketing investment than required to generate low-single-digit growth in larger cash cow brands.

  • Build new supply chains. Tapping into evolving food preferences upmarket cannot avoid radical supply chain issues. Some of the biggest hurdles are getting organizations to aggressively pursue economical sources of super-premium ingredients that often drive the growth of new categories (e.g., hummus, non-GMO).
  • Invest in separate consumer demand analytics from base consumer insights. Traditional consumer insights organizations are oriented to defense, not offense: studying core users and brand-switching behavior or identifying slivers of market share to grab for small, often unsuccessful, line extensions.

Years of training reinforce assumptions and habits that will not help drive strategic upmarket investments, a process where default, mass-market assumptions about consumer behavior are unhelpful and misleading.

The key is to develop a talent for studying the edges of the consumer base, the consumers who are most dissatisfied with your current products. These non-customers have underserved needs your organization will not see by studying legacy brand heavy users. Deep, niche ethnography and nuanced analysis of the less measured channels are key components that are systematically underutilized.

Not all of this advice is easy to implement without a strong CEO insisting that the upmarket opportunity be prioritized along with stabilizing the base. Leadership at the top is the most critical tool for catching up with rapid shifts in American food culture.

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