Venture capital firms poured over $1.1 billion last year into food and beverage startups.[1]  I recently moderated a panel at Shoptalk with two investors in the space, Lauren Jupiter from AccelFoods and Andrew Bridge from BrandProject, along with Marisa Bertha from 7-Eleven. We discussed the emerging trends and business models that are disrupting the industry.  Here are some of the key takeaways:

The old rules of CPG don’t work with younger shoppers. 

Millennial and Gen Z shoppers are looking for authentic brands that fit with their lifestyles, something they don’t see their “parents’ brands” delivering.  Some of the trends that are important to these younger shoppers include:

• What is the story behind the brand and its founders?  Younger shoppers shy away from the manufactured marketing of traditional CPG products.
• Younger shoppers want “real” ingredients and expect labels to be clear and easy to understand.
• Overall, younger shoppers are seeking out products that deliver health benefits in addition to flavor, such as plant-based proteins and foods with functional health benefits (pickle juice anyone?).
• The Internet has changed expectations not only online but also in the store. Increasingly, consumers want to be able to use their mobile phones to order ahead, pay, capture loyalty rewards, and more. When they do go into the store, they expect to find the item on the shelf.
• Younger consumers want on-the-go nutrition such as portable proteins, whether they be plant- or animal-based.  Retailers see the breakfast category as ripe for re-invention with new, portable offerings.

D2C is a powerful launching pad for new brands

Many food and beverage startups start out selling directly to consumers online.

• D2C brands are able to capture deep data on their consumers—unavailable in brick and mortar settings—which they can use to deliver a personalized consumer experience, refine product strategy, and build long-term loyalty.
• By selling directly, food and beverage brands can also experiment with new business models, in particular subscriptions (Blue Apron, Freshly, and NatureBox are examples of innovators in the space). In recently published research, we showed that subscriptions can provide a strong base of recurring revenue although churn rates are high and companies must deliver a superior end-to-end experience to succeed.
• Going direct to consumer first can dramatically enhance the chance of success when these brands expand into brick and mortar retail. For example, by analyzing customer data, these brands can determine which retailers are the best fit, identify the most likely SKUs to sell in-store, target the optimal geographies, and refine their messaging.

 “Always be in beta”

• Food and beverage startups need to be “culturally obsessed” with the consumer and continuously refine their products and experiences to meet consumer needs. E-commerce provides an immediate feedback loop that can allow startups quickly to course correct missteps or capitalize on opportunities.  To build loyalty and word of mouth, startups should also work closely with their most passionate and valuable customers, gathering feedback on existing products and testing new ideas.
• Established CPG companies need to take a page out of the startup playbook and look for ways to speed innovation. Despite heavy investments in customer insights, too many CPGs seems out of step with younger shoppers, leading to calcified product portfolios and slow to no growth.

The challenge isn’t getting on the shelf.  It’s staying there. 

Food retailers are looking to meet consumer demand by adding emerging brands, making it easier than ever for startup companies to get on the shelf.  However, with so many new brands to choose from, retailers are quick to pull products that don’t deliver quick sales or pull in new customers.

• Startup food and beverage brands need to focus on “smart growth.” It is better to start small when entering brick and mortar (say by focusing on a single retailer in a single geography) to manage the complexities of retail distribution.  Brands that expand too rapidly can run into crippling cash flow, manufacturing, or supply chain problems.
• Startup companies are often skilled at digital marketing, leveraging Facebook, Instagram, Google, and other media to create awareness and word of mouth. In-store requires a very different set of skills.  To standout, brands need to communicate their stories at the shelf via packaging, promotions, shelf-edge marketing, and the other tried and true tools of retail marketing.  They also need to tap digital shopper marketing, such as mobile, location-based offers to drive traffic to the store.

Retailers and CPGs need to focus on “strategic value above the check.”

• Retailers and CPGs need to more actively partner with startups to accelerate growth. While many established players have set up corporate venture arms to invest in relevant startups, these investments often don’t deliver significant value to the business (to say nothing of financial returns).  Retailers and CPGs should focus on helping their startup partners establish commercial success first before thinking about any potential equity investments.
• Retailers and CPGs need to develop clear strategies to take advantage of startup innovation. While corporate VCs or Silicon Valley offices can surface opportunities, startup innovation ultimately needs to be owned by the operating executives responsible for delivering results.
• CPGs in particular should explore acquiring startup food and beverage brands to refill their innovation pipelines and bring in new talent. For better or worse, it’s often easier for established players to buy new innovation than to develop it in house.

[1] Source: Pitchbook.