Small U.S. food manufacturers once toiled for decades to develop a critical mass of fans for their products. Now, an increasing number of privately-held players are going from garage to grocery store in fewer than five years thanks to an erosion of barriers to entry within the food industry.
The trend is visible everywhere from gluten-free and organic foods to more traditional fare, according to interviews with half a dozen startups, as well as retailers and industry consultants.
Contract manufacturers have made it easier for small companies to produce goods inexpensively, while the reach of digital advertising allows them to target consumers without big marketing budgets, industry experts said.
More mass-market retailers want niche brands that shoppers view as healthier to drive traffic in stores, particularly as they face rising competition from natural food and specialty chains like Whole Foods Market Inc.
“It’s never been easier in the history of food for a new organic company to get their products on shelves,” said Arjan Stephens, executive vice president of sales and marketing at Nature’s Path Foods. The privately-held organic breakfast cereal brand was founded in 1985 and took nearly two decades to gain traction with mainstream retailers.
In the ice cream business, for example, sales of some major U.S. brands have faltered. But one beneficiary is a little-known frozen dessert company called Arctic Zero.
The fat-free, lactose-free and gluten-free product originated out of a soft serve machine in a Temecula, California garage. Arctic Zero hit the retail big leagues in 2013 when it gained coveted space in the freezers of Kroger Co just three years after launch. It is now also available at Wal-Mart Stores Inc, Whole Foods and on Amazon.com Inc.
“Everyone has been looking for a ‘better for you’ alternative in ice cream," said Arctic Zero CEO Amit Pandhi. “There just hasn’t been any innovation until our brand came along."
Overall, small and midsize consumer goods companies have stolen $18 billion in U.S. sales, or 2 percentage points of share, away from large players since 2009, according to a March report by IRI and the Boston Consulting Group. In 2014 alone, they took 0.7 points of share from big manufacturers.
Last year's U.S. sales of snack bars help illustrate the trend. According to Euromonitor International, giant food companies General Mills Inc and Kellogg Co had market share declines of 0.3 points and 1.9 points, respectively, compared with 2013. The privately-held Clif Bar & Co gained 1 percentage point during the period, and another small rival, Kind LLC, increased its share by 2.1 points.
The pace of overall share gains is accelerating as small organic and natural food purveyors win more shelf space at mass-market stores.
“They’re able to really focus on a subset of consumers and subset of retailers, and win in those areas and use that as a platform to grow into mainstream areas,” said Dan Wald, a partner at Boston Consulting Group.
Talenti, a gelato maker that uses hormone-free milk and pure cane sugar, employed such a strategy shortly after beginning production in a 1,000 square foot factory in Dallas.
In 2007, when gelato was still a new concept in U.S. supermarkets, the company approached natural food and specialty stores like Sprouts Farmers Market Inc, Whole Foods and Fairway Group Holdings Corp. Once the frozen treat proved its success, Talenti pitched more mainstream chains like Publix Super Markets Inc and Kroger.
“It was really an exercise in discipline and retail mapping,” said Talenti CEO Steve Gill. “The worst thing we could do was put it into a retail format that was not yet ready for it and have it fail.” Unilever Plc bought Talenti last year for an undisclosed sum.
To be sure, getting on the shelves of a Target or Kroger isn’t easy, and competition for those spots is increasing. The number of companies exhibiting at Natural Products Expo West, a popular trade show where many food makers get noticed by buyers for retail chains, has increased 74 percent to 2,768 since 2005, according to New Hope Natural Media, the show’s organizers.
Major food companies are also waging a counter-offensive, dropping some artificial additives from their well-known brands, creating new products they say are healthier, and acquiring natural or organic food brands that have proven themselves.
General Mills bought organic food maker Annie’s Inc, best known for its bunny-shaped macaroni and cheese, for $820 million in October. Hershey bought Krave, an upscale jerky company, in March. It didn’t disclose the price.
“We are certainly seeing that there is a pronounced consumer trend toward health and wellness alternatives,” Mondelez International Inc CEO Irene Rosenfeld said in an interview last month. The maker of Oreo cookies and Cadbury chocolate acquired Enjoy Life, an allergen-free food company, earlier this year. “As the world’s largest snacking company, it is our desire to be meeting those needs.”
Hoops and Hurdles
For the small food players, that makes getting the right placement on shelves critical. Steve Hersh, co-founder of Utmost Brands Inc, started selling the company’s GuS Grown-Up Soda to retailers out of his Subaru in 2003. A year later, single bottles of GuS were lost among other options in the aisles of Stop & Shop Supermarket Company LLC, which eventually stopped offering the product.
GuS contains less sugar than the average soda and is marketed to adults. Retailers are now catching on to its appeal and giving it prime placement.
“Now you go to a Wegmans or Food Emporium, you’re going to see our four packs on a four-foot (wide) shelf, and you’re going to go, ‘oh, that’s a brand,’ rather than three little bottles in a sea of soda,” Hersh said.
Finding the right distributor can also help small players build scale. Months after GuS launched, Hersh was contacted by Big Geyser, a major beverage distributor in New York that helped get the soda into Whole Foods and Fairway.
Food makers may still have to jump through hoops to satisfy retailers. One hurdle is the fees that major stores charge food makers to gain shelf space, which can run into the hundreds of thousands of dollars.
Retailers may waive such fees depending on the number of options in the category and the ability of a novel brand to draw shoppers. But they may also make companies change the packaging of the product, a potentially costly move.
For instance, nutrition bar company Mediterra Inc received interest from Target Corp to join a trial run of new brands in its stores.
Target asked for the bars to be sold in a five pack that Mediterra didn’t offer. The company designed the new packs with the help of its contract manufacturer and produced them in about 45 days, said Paul Pruett, Mediterra’s CEO.
The trial at Target concluded in April, and the product is no longer on the shelves. It did, though, raise the brand’s profile, and the bars will be sold in about 400 Kroger stores later this year, Pruett said.
Small food makers do need to be aware of how demanding their often social-media savvy, health conscious consumers are, executives said.
For example, Arctic Zero recently received requests to put a seal on the product to show it hasn’t been opened. Arctic Zero is discussing the move, which could cost a few hundred thousand dollars, with its contract manufacturers, CEO Pandhi said.
(Reporting by Anjali Athavaley; Editing by Michele Gershberg and Martin Howell)