Last week, Nutrition Business Journal and the Sterling-Rice Group released The Natural Products Industry Forecast 2013 (“NEXT”). NEXT examines the macro trends and forces that are having the greatest impact on the natural, organic and functional food and beverage space today and will have the greatest impact in the future. The report details seven macro trends shaping the natural food and beverage category and we will take a closer look at three that are particularly salient for investors in early-stage food and beverage companies:
- Food Villains: Consumers are increasingly viewing food not as a way to be healthy, but as something that can potentially make them sick. Ingredients like gluten, milk, eggs, peanuts, etc. each provide a different group of consumers a reason to not purchase a food product. Why should you care: products that combat food villains and still taste great provide strong investment opportunities. For example, as we pointed out in an earlier blog post sales of gluten free foods are expected to grow from $4.8 billion in 2009 to $8 billion by 2013, even though only 3.1 million Americans actually suffer from Celiac disease (condition where gluten intake causes abdominal pain). A great gluten free success story is Udi’s, which made its name selling gluten free breads, and grew from $4.3 million of sales in 2009 to $60.9 million for the twelve months ended March 2012. Two weeks ago, Smart Balance, Inc. announced it was acquiring Udi’s for $125 million (Smart Balance Acquires Udi’s). Small companies like Udi’s are often the ones best positioned to take advantage of new “food villains” as they are viewed by consumers as being more authentic than their counterparts from major CPGs. While capitalizing on food villains can be lucrative, it is critical for investors to separate real food villains, that is, those where the food villains’ effects are backed by science, from fad food villains (Atkins diet anyone?).
- Brands on a Mission: There is a broken trust between consumers and food companies. For years, food companies have made often suspect nutritional claims, which, while not always illegal, can be misleading. Take “all-natural”. Consumers have filed lawsuits against CPG stalwarts like ConAgra, Kashi and Snapple over (plaintiffs allege) misleading 100% natural or all-natural product claims. Why should you care: Food companies that connect with consumers’ hearts and minds AND deliver on lofty nutritional promises AND taste great are the ones who will win on the shelves during the next decade. Perhaps the best example of a company like this is Greek yogurt manufacturer Chobani. Chobani started with nothing but a SBA loan and a 100-year old factory in 2007, and grew from zero to $700 million in sales by 2011 (The $700 Million Yogurt Startup). Today, Chobani holds 47% share of the Greek yogurt category (Who’s Winning the Greek Yogurt Revolution?) while multi-billion CPG companies like Kraft (abandoned its efforts in the Greek yogurt category) and General Mills have struggled mightily. So how has Chobani continued to stay on top in the face of companies with massive advertising budgets nipping at its heals? By staying authentic and connecting with consumers. Check out this Chobani video: Chobani: Our Real Love Story Video. When a company can personally answer every Facebook post and make great-tasting and nutritious products, they develop a passionate consumer base that all the Super Bowl ads in the world cannot replicate.
- “Wholegrarian” Revolution: Increasingly, consumers are seeking out whole-food based nutrition and the nutrient-dense rewards these products hold, while avoiding overly processed foods and beverages. Why should you care: Because the companies and categories on the front end of the Wholegrarian Revolution are attracting interest from strategic buyers much earlier than other companies. Take coconut water for example. The beverage made from young, green coconuts, is high in potassium and other vitamins, low in calories and naturally sweet. Over the last year, the market for this beverage has doubled in the U.S. and Europe (Coconut water craze more than just a fad, claims analyst) and both Coke and Pepsi have made strategic investments in coconut water brands (Coke buying ZICO and Pepsi Bottling Group investing in O.N.E.). Major food and beverage companies are incremental innovators; they rarely make revolutionary leaps because failure on an international scale is expensive. Thus, the companies experimenting with whole foods are the early-stage ones, and success breeds interest from strategics and lofty exit multiples.