How challenger brands can move up the food chain

PropercornBThe food and drink category is ripe for disruption. For those budding challenger brands out there, here is the recipe for start-up success, writes Jon Goldstone, global managing partner at The Brandgym. [This is written from a UK perspective but offers universal insights and advice. Ed]

I recently spoke at a business school and asked for a show of hands among the undergraduates. Who sees themselves moving into a corporate role and who fancies starting something up?

A good 80% of the group indicated that they plan to start something up. Of course, this wasn’t a surprise. Start-ups are everywhere. Big companies such as Unilever and Nestlé have launched start-up accelerators, the media is full of start-up stories, and schools, colleges and universities are promoting this way of working as an attractive career choice.

In food and drink, start-ups are having an increasingly disruptive influence on what was once a very stable status quo of suppliers and retailers. In most food and drink categories, there is a challenger that is driving category growth, beating up the once-dominant brand and breaking all of the category marketing conventions.

Think Fever-Tree in drinks mixers, Propercorn in popcorn, Pip & Nut in peanut butter and a myriad of craft beer brands.

So what are the conditions that have led to these successes? It’s happening because of three big market disruptions: a channel shift away from traditional supermarkets, a media shift away from traditional media and a consumer shift away from brands that are perceived as being processed or artificial.

This has created an environment where there is spare manufacturing capacity; unmet consumer needs; retailers desperate to try something new; and new, low-cost digital media choices.

In other words, the barriers to entry are lower than ever before. In these circumstances, funding becomes easier to access and the virtuous circle of start-up growth continues.

However, it’s not that easy or we would all be doing it. For every Fever-Tree, there are dozens of start-up food and drink brands that fail.

So what are the secrets to success? From my experience, I think there are five:

Choose a big category with an obvious source of business

Peanut butter is a good example. The category is surprisingly large, the incumbent brand (Sun-Pat) is largely dormant, the consumer sees nuts as being an important part of a healthy, natural diet and the retailer wants to jazz up the category. Bingo! 

Ensure that product quality is sensational

Shortcuts are easy, especially when working with third-party suppliers and in a hurry. It is very tempting to take “off the shelf” solutions that are often no better than the current own-brand offering.

The quality of Propercorn’s product is fantastic and makes the incumbent, Butterkist, look very ordinary.

Make the proposition distinctive

So many start-up brands are starting to look like they use the same design agency and are conforming to a new “Food 2.0” convention.

The real successes do their own thing and are inspired by a founder’s story and vision that are authentic and compelling.

While Innocent is an ancient example, think of how it built its brand: the “Should we give up our day jobs?”, a percentage of profits going to good causes and the bobble-hat bottles. All distinctive assets and all true to the founder’s vision.

Outsmart the competition

While the dominant brand in the category is figuring out how to manage “digital conversion”, own digital channels and make the competition appear slow and anachronistic.

A great example is the tea category. Almost all of the category growth is being driven by brands such as Clipper, Pukka and Teapigs, which invest in smart digital marketing – a sharp contrast to the campaigns from PG Tips and Tetley.

Make the financials work from the start

So many food and drink start-ups think that they will only start making money when they achieve scale but the definition of scale is often ambiguous and, even when defined, often not achieved.

It is possible to make money from the start. A great product and distinctive proposition should allow you to command a significant price premium. Then it’s important to keep the supply chain very simple and keep overheads and marketing expenditure low.

Finally, it’s critical to negotiate trade margins as competitively as possible – once they are set, they are unlikely to ever come down.

There is no denying that the world of food and drink is changing just as quickly as most other industry sectors. Wherever you stand, it is critical to understand the shifts and respond to them. The only certainty in this period of rapid change is that those who stand still will lose.

Fever Tree MixersThe story of Fever-Tree

Fever-Tree brand of upmarket mixers was founded in 2005 by Charles Rolls and Tim Warrillow. It is now available in 58 markets and grew by 69% in the first half of 2016.

An outsourced production model and premium pricing allow Fever-Tree to operate at about 55% gross margin, well ahead of the food and drink average. This high margin and strong cash generation, combined with high growth potential, has appealed to investors.

Fever-Tree went public on the AIM stock market two years ago; the share price has grown 650% since flotation. At today’s share price, the company is valued at £1.1bn and has a remarkable price/earnings ratio of 63.8.