Earlier this year, going into the new decade the market’s potential for new food startups were very good and lots of entrepreneurs were thinking about launching their new food startup. On the other hand, there were wholesalers and retailers looking for new products and investors who were financing such startups. However, the beginning of Covid-19 pandemic has changed these all. In this article of Niorise we will talk about 5 norms for US Food startups in the Covid-19 world.
It’s not far-fetched to say that the pandemic has affected the disruptor. Luckily, the entrepreneurs are adjusting. In fact, being agile and able to adapt is a basic requirement for being an entrepreneur. If you cannot turn on a dime, the dime will turn on you. However, this does not mean that it is easy to adjust, especially at a time when uncertainty is its key factor.
The massive percentage of sales gains of the legacy brands – the originally disrupted ones – has taken the sector by great shock since March. Didn’t we all believe that canned soup and veggies were practically dead? Not really. Since March, they have been flying off the grocery store shelves.
Frozen-Food legacy brands, which many experts relegated to the trash bin of sector history only a few years earlier, have been leading the pack in terms of total sales category expansion since March, with an amazing year-over-year double-digit revenue growth for months, as per IRI. Even if the growth rate is reduced, this expansion will keep going.
The start-up ecosystem is alive and well amid Big Food’s revival and its legacy brands – and many are adjusting to the obstacles and opportunities posed by the so-called ‘new standard.’ Actually, much of what is happening is creating a new sense of joy among start-ups, despite the confusion caused by Covid-19. There is also a new pragmatism arising in areas such as marketing, sales, distribution and fundraising about where and how money can be spent. This is a very welcome sign. Most of this is pre-coronavirus adjustment and change.
There are five main areas that must be part of a new Start-up Roadmap as they explore the new normal.
The New Online Ecosystem
Covid-19 has stripped away the crucial face-to – face communication and engagement among start-ups and the investors they rely on – consultants, suppliers, category managers, stakeholders and others. It’s been a significant and major setback to the start-up ecosystem – but they are adjusting perfectly.
For instance, innovative groups such as the Startup CPG accelerator group and Foodboro, a food and beverage community, are producing online resources in regards to providing their in-person instructional and networking events moved online. Startup CPG and Foodboro are both continuing to work on useful ways of helping start-ups, such as alternative solutions to in-store sampling, a basic tool in the advertising toolkit that has been halted by the Covid-19 grocers for decades. Acting on such mutual problems is a significant contribution that these groups can make since it is challenging for individual start-ups to create and finance their own projects.
These groups also bring investors to their online ecosystems, which would be a precious asset for start-ups. Entrepreneurs should be engaged with any of these communities and collaborate with them just to assist reshaping the new normal. This, among many other things, helps to remove several of the uncertainties caused by the pandemic in the start-up ecosystem.
The New Approach to Fundraising
The increasing presence of venture capital funds and other investors has been one of the cornerstones of the start-up ecosystem in the last decade. Not so long ago, most CPG start-ups were self-funded and venture capital companies could not see any kind of an advantage in investing in them. This is old news. Today, outside investment is a typical feature in the start-up ecosystem.
However, in the new normal, stakeholders are interested in fewer start-ups and looking more closely at those they are considering. As an instance, in July, a seasoned CPG venture capitalist told me that many investors were looking at as many as 250 businesses before they made an investment.
The same VC said that the current standard allows start-ups to do much more than just submit a pitch letter with a portfolio to potential investors. Present sales momentum, the VC suggests. For example, giving stakeholders some clear statistical details about how a start-up company improved its online revenue over a given length of time by implementing a digital marketing strategy – pre-campaign sales vs post-campaign sales – is the type of proof that investors like to see before deciding on making an investment.
It’s all about the success and excitement of the new mainstream. The same is true in brick-and – mortar retail accounts. It’s no longer safe enough to mention in a deck how many company accounts there are and how many pending authorizations the company has. Rather, the new normal needs proof-of-performance – traction – to drive the investor’s long list of prospective investment candidates up.
Bootstrapping and the current frugality
It may come as news to people who have only been engaged in the CPG sector for the past decade or so, but a fairly new concept is the participation of venture capital in the packaged food industry. Fundraising is much more new. Prior to this, most, if not all, food start ups had been financed by founders, family and friends and, when hoping to expand from early to later stage, by a very limited number of private investors.
Venture capital in CPG is also not going anywhere. It has become an integrated component of the start-up ecosystem. But how it tends to work is shifting, and food startups have to adapt. In the new normal, shareholders are now breaking out their microscopes and magnifying glasses while reviewing start-up presentation lists.
All in all, it is a welcome thing because, clearly, the funding requirements had gotten way too streamlined. The huge increase in venture capital has generated the concept that one should create a business, raise loads of cash, and exit quickly. Unlike most of the technology industry in which this method could perhaps work, the CPG sector is much more traditional and conservative. Creating a company and brand requires a lot of time and commitment. Standing on the shelf isn’t that complicated. Yet remaining on the shelves and in the memory of customers is a challenging task.
Start-ups should welcome a new frugality within their strategy. This doesn’t mean cutting spending on advertising, promotions and developing talent. Analyze everything. Adopt a high-impact, low-cost approach. If you have venture-capital funds, treat it as your own private savings account.
Entrepreneurs can still follow the bootstrapping method, even if as a metaphor. For instance, entrepreneurs should ask themselves whether they still need investor capital before selling. When finding support, they can also worry about how quickly they actually need to expand – and how they must grow more organically. Time and persistence remain crucial in developing a CPG business.
The new way of developing a CPG brand
For food startups, developing a new brand has historically gone something like this: launching the product at small grocery stores and other small locations such as farmers ‘ markets; expanding into regional chains; joining those with semi-national and major supermarket chains. Start-ups must turn this conventional model a little on their heads in the new normal: launch the product online, then switch into local grocery stores and regional chains; then semi-national and national chains.
For certain start-up companies, they can concentrate online only because, right now, the difficulties of bricks-and – mortar retail are too much for many companies to cope with. The rise of online CPG purchases also increases the likelihood of a start-up can develop a digitally-native business than it was even a year earlier.
Online CPG retail sector is booming, both direct-to-customer and on websites such as amazon and others. But viewing online in a very careful manner, matching the advantages and costs, is crucial. Direct-to-customer may be the only way to go solely with those brands, eliminating third-party retail marketplaces. For others, the path ahead is a combination of both.
One thing is for sure, the current standard has boosted online CPG revenues-and this will continue to be that way in the near future. As such, for many of these food startups online would be part of the digital sales process.
The new paradigm on physical retail
Ever since March, supermarket retailing has turned on its back. The trend in retail industry had been to broaden varieties especially in the segments of specialty, fresh, organic, clean-label and better-for-you. Most food startups at CPG fell into those categories.
But that changed in April when pantry-loading started leading to major revenue increases of traditional brands in several categories. That remains today, but to a smaller extent.
Because of this new retail fact, buyers have decelerated new item approvals considerably, notably in the categories listed above. To most start-ups, this had been a blow to the momentum.
In addition, supermarket stores are reviewing their range of items. New strategies include decreasing the overall assortment of items, increasing and reducing pairs in many categories and concentrating more on online retailing.
The opening of new item approval began in mid-June, which is a positive indication for entrepreneurs. However, in the new normal it’s already greatly diminished. In comparison, supermarket product administrators are far more actively reviewing new products than ever. For instance –, mere line extensions won’t likely make the cut. Instead, manufacturers are searching for products that meet client desires, are not copycats to other brands, and give value to both the seller and the consumers, regardless to segment.
Start-ups have to consider and adjust to new world of physical retailing. To do so, requires more closely matching items (before presentation) to the style and customer base of a specific store. It also requires an understanding that the behavior of consumers shopping for foodstuffs has shifted. Quite importantly, there have been regular visits to the grocery store from once or twice a week to once every two weeks and more.
Discovery and binge buying has been significantly diminished – two major wins for smaller brands. Brands have to connect through social media platforms and other digital and non-digital ways to customers outside of the store area. Consumers can think less about the products under-store in the current physical retail world than they did before.
The new normal is dynamic, and unpredictable. Food Startups must monitor the environment on a daily basis and be able to pivot when appropriate. Being quick, nimble, lean and mean is more important than ever today.