Emerging brands seek to fill the new product void

During the past six months, retailers and major food manufacturers have focused on keeping supermarket stores well stocked by trimming SKUs to make room on the shelves for their top-selling, core items.

Such a reaction to the current market, however, could be short sighted, observed Tom Vierhile, vice president of strategic insights, North America, Innova Market Insights.

“You really cannot cut your way to prosperity,” he said. “ ‘Big food’ may undoubtedly achieve some efficiencies that can help improve profit margins as a result of COVID-19-forced changes, but growth must be achieved over the long term and much of that growth is likely to come from new products. The good news for smaller companies is that this pruning process may make things easier for companies that survive this mess since large food companies’ focus on big sales and big brands will likely leave more breathing space in the market.”

Linsey Herman, vice president, product development for Factory LLC, suggested that COVID-19 pumped new life into some traditional brands, especially familiar standbys, as consumers sought predictability while hunkering down.

The Bethlehem, Pa.-based firm invests in and helps scale up high-potential food, beverage and pet food brands that have achieved more than $2 million in sales along with proof of consumer and retailer traction.

“The pandemic gave familiar brands oxygen, but it did not make them more relevant. As COVID-19 recedes, they will, too,” Ms. Herman explained. “Over the past decade, consumers have shown a genuine attraction for new, different and better-for-you foods and beverages. Optimizing health and wellness through food is a trend, not a fad, and we think the pandemic will only heighten interest in better-for-you and wellness brands, as consumers seek to fortify their bodies against whatever comes next.”

In addition, the fundamental drift toward shopping online and direct-to-consumer should not be underestimated. Ms. Herman noted it created another opportunity that can best be seized by more agile, innovative companies.

“That’s good news for new brands, who are struggling right now to get attention from retailers,” she said. “It isn’t a wholesale power shift, but it is a change and an opportunity for entrepreneurs who are skillful in leveraging social media digital marketing.”

Steffen Weck, president, Food Business Consulting, predicted the loss of smaller brands offering undifferentiated products will open opportunities from incubators that have been vetted to withstand unanticipated swings in the market.

“There is a new emergence with this massive loading of store shelves from brands that were just lingering out there and not creating any true interest,” he said. “As we start to open up again, we’re going to see this amazing entrepreneurial revitalization. Hopefully, this next wave capitalizes on some of the previous mistakes that some brands made and allows new brands to be more prepared for future growth.”

Jessica Cristadoro, Mr. Weck’s business partner, preaches patience for burgeoning brands and urges entrepreneurs to take advantage of the lull in new products to better position themselves before their next launch.

“Marketwise, we’re seeing ‘Let’s prepare for post-COVID,’ ” she said. “There’s not a lot of ‘Let’s hop in this market right this minute.’ Rather, it’s about ‘Let’s get all of our ducks in a row and when things rebound, we’re ready to go.’ ”

That’s exactly what HighKey is doing to leverage its established position both online and more recently in brick and mortar.

"If you have just a good product, you will not succeed. You need a lot more behind it than that.”

Jessica Cristadoro, Food Business Consulting

“If anything, we have only accelerated our new product pipeline work,” Joe Ens, co-chief executive officer, HighKey, an Orlando, Fla.-based cookie, snack and food company. “If you think of our business model, once we roll out something on dotcom, we can bring that across to our traditional retailers.”

HighKey, he added, can go to market quickly with new products because of its direct-to-consumer and e-commerce model. If others slow down on innovation, that just makes it easier for the company to expand its presence in the overall market.

‘The biggest challenge is creating new products with relevant differentiation,” Ms. Herman said. “Factory is a multidisciplinary team of industry veterans who work with entrepreneurs to develop innovative brands and strategies underpinned by market research and consumer insight. We are creating a culture that meshes big company resources and experience with passionate, risk-taking entrepreneurism.”

She said any products, especially in the baked goods category, are launched because of feedback from friends and neighbors who encourage them to launch a company.

“Very few achieve any scale, because building a brand and a business is really hard and scaling a brand that is solely differentiated by its taste is nearly impossible,” Ms. Herman said. “It is very difficult to stand out online and almost impossible to gain retail placement. Even finding an affordable co-manufacturer is a monumental challenge. The good ones barely have the capacity or time to fill current orders, let alone take on fledgling businesses that may have trouble moving minimum order quantities.”

Prior to the pandemic, many incubators could launch a new product with minimal investment.

“You could throw it in your car, drive it around, demo it, set up a table at a farmer’s market, go to a trade show, and get it into people’s hands personally,” Ms. Herman explained. “Now, you don’t have that option. The sell-in is longer, harder and more expensive. Sampling is more diffuse; you can’t be where the consumer is. A lot of businesses simply don’t have the capital to sustain themselves during this time.”

That’s why Mr. Weck divides startups into incubators and more established accelerators that have an emerging brand with critical mass and actual sales. The former may need a shared-use kitchen and assistance with the fundamentals for developing a business.

“An accelerator has already done its proof of concept and selling its products at a local Whole Foods and needs a higher level of expertise,” Mr. Weck said. “The company has graduated in some ways to the next level. The business is not a part-time hobby or someone who does jams and jellies in their garage and needs a more legitimate place to produce.”

Working with accelerator brands, Ms. Cristadoro added, means selecting startups that are stakeholders in their companies and providing dedicated resources to boost their presence in the market and attract additional financing to take the business to another level.

“We determine what the right mix of services are and the funding and vetting of the client ahead of time to ensure when the accelerated brands get to the finish line and people want to invest in them for the long run,” she said. “It’s not about throwing cash at a product concept. It’s about education and pulling everything together, including the brand and the company, and ensuring that the products and their ingredients are value-added and novel. If you have just a good product, you will not succeed. You need a lot more behind it than that.”

With $250 million in investible capital, Ms. Herman noted, Factory acquires meaningful equity stakes in smaller brands and collaborates with founders to innovate and scale them more rapidly than most could do on their own.

“Factory’s ideal entrepreneurs are passionate about their brands, driven to succeed, and knowledgeable about important aspects of their business, particularly making a great product,” she said. “We want them to focus on what they do best, and we partner with them to do the rest.”

Ideally, she added, the firm requires at least a senior member of a partner company, and the whole founding team, to work at its 40,000-square-foot facility in Bethlehem to be part of our collaborative, innovative community.

“It’s like college,” Ms. Herman said. “You’re in residence for four years, learning and growing, but instead of earning a diploma, you hopefully ‘graduate’ with a successful exit.”

This article is an excerpt from the September 2020 issue of Baking & Snack. To read the entire feature on incubators, click here.