I spent the first half of my career in the dynamic, disruptive and often volatile telecom and renewable energies industries, where emerging technologies, new regulations and rapidly evolving consumer use kept product development moving apace. Enormous media and telecom companies are accustomed to reinventing themselves in a continuous cycle of innovation.
Here in the food industry, we seem to be running in place. The industry has lost its way on innovation and intimate relationships with customers, something on which it has long prided itself. As Dickey Fox, the mentor character in the movie Jerry Maguire might have said about the food industry, “To succeed, stay true to your customers.”
As consumers demand new flavors, healthier options and more control over how their food is made and delivered, true innovation is occurring among small, niche companies feverishly working to expand markets and scale operations. Meanwhile, the big brands are struggling for the hearts and minds of these consumers. Faced with falling revenues and severe budget cuts, embattled CPGs are innovating primarily by acquiring new brands. As R&D departments perform due diligence for their corporate venture arms, internal innovation cycles lengthen.
On the innovative edge, small- and medium-size food companies have few options for expanding distribution of new product lines. Co-manufacturers, who typically operate on a fully depreciated manufacturing base, have little incentive to accommodate the specialized ingredients and natural processes required for new food brands. Unable to scale up using costly chilled and frozen distribution channels, food innovators become Big Food acquisition targets. Once assimilated into established food companies, new food brands hoping for a growth platform quickly lose their innovative edge.
Valuations for new brand acquisitions are at all time highs. Meanwhile, the industry is scraping the barrel on operational efficiencies and prices don’t have much further to fall. Marketing spins won’t be able to improve sales much longer.
While consolidation in the industry is likely to continue in the next few months, Big Food seems poised to emerge from zero-based budgeting. Demands for clean, nutritious foods and supply chain transparency will only become louder. Ecommerce and convenience retail channels will grow exponentially, applying tremendous pressure for new and improved distribution channels. These market pressures cannot be ignored by CPGs. It will require disruptive innovation to deliver both what consumers want and what food companies need to succeed in a challenging environment in desperate need of a breakthrough. Innovation is the future of our business.