11 April 2018

Supermarket sweep: The new food upstarts

A new generation of young and hungry food and drink founders are taking over and transforming the supermarket shelf.

In her mid-twenties, Cassandra Stavrou started behaving a little strangely. She quit her job, moved back to her family home in north London and, one afternoon in 2009, conducted an experiment with a cement mixer.

She lined it with steel, filled it with a few kilograms of corn kernels and some handfuls of seasoning. Then, as the machine was slowly spinning, misted its contents with rapeseed oil squirted from a spray gun for painting cars.

She hadn’t lost her mind. In fact, she had figured out a way to evenly coat popcorn with flavouring, inspired by, of all things, Top Gear.

‘It was totally ridiculous, but it worked,’ she says. ‘If you look at what we do today, it’s the same principle but in a shiny factory.’

Nine years, 47 hires, a partnership with London Fashion Week and a £7m funding round later, Stavrou and her co-founder Ryan Kohn’s popcorn company, Propercorn, is turning over £12m annually from its canal-side office in Islington, London. Its eight flavours of brightly packaged popcorn – from peanut butter and almond to Worcester sauce and sun-dried tomato – are stocked in 11 countries and on-shelf in all of the UK’s major grocery retailers. Three million bags sell per month.

Has there ever been a more exciting time for food and drink? A home-grown brand achieving such market prominence would have been difficult to imagine a decade ago. But today the average supermarket in the UK is packed with upstart brands refashioning, overhauling or even inventing food and drink categories.

There are no longer just one or two varieties of ketchup, but dozens. There are beetroot ketchups and habanero chilli ketchups, maple chipotle ketchups and agave syrup-sweetened ketchups. Some stores don’t stock any Heinz at all anymore. Popcorn has become a rival to crisps. Date and nut bars have edged into chocolate’s territory. Coconut water has snapped up some of orange juice’s shelf space. Halo Top, an LA-based ice-cream company founded five years ago, has knocked Ben and Jerry’s – once upon a time a disruptor itself – off the best-seller spot in the US.

This is indicative of a wider shift in consumers’ and retailers’ shopping habits. Supermarket buyers’ appetites for what’s novel or in vogue are growing: 88% of new products arriving on-shelf in the US from 2013 to 2017 came from small- to medium-sized companies. European stores are showing a similar trend.

Facing sluggish revenue growth, multinational food brands are increasingly looking to innovative startups too. Over the past five years in the UK alone, Ella’s Kitchen baby food, Pukka teas and Bear Nibbles have sold to conglomerates for millions, while food groups such as Kellogg’s, Mars and Kraft Heinz have launched incubator programmes or set up venture funds, desperate to somehow engineer successful new sub-brands.

If Unilever’s 6,000-strong research and development team can’t come up with the next big thing, it will wait for someone else to – then buy it. The £34.3bn Netherlands-based company has acquired 12 brands in the past two years alone.

But countless small brands fail every year; nine of every 10 that launch in the US fail within three years, and many for relatively insignificant reasons. One young food startup spent its final few pennies printing 50,000 labels with the wrong bar codes, according to an industry expert. But get it right and there’s growing potential for a lucrative sale – or even, some are starting to think, a stock market float.

Welcome to the great supermarket shake-up.

The foundation myth 

Between upstart founder of a three-year-old peanut butter company and the CEO of a multinational food group with a £400m annual turnover, there should be only one winner. And yet there are some things money and power can’t buy.

Last year Pippa Murray, the rosy-cheeked 29-year-old ‘chief squirrel’ and founder of Pip and Nut, saw her total sales more than double (with annual turnover surpassing £6m); meanwhile James Skidmore, the 50-year-old CEO at Hain Daniels, the conglomerate that owns Sun Pat among others, saw sales of peanut butter significantly drop off.

Murray’s main advantage? Like many founders of new food startups, she has recognised the importance of a good foundation story, and used her own to leverage her brand.

Since starting her company in 2013 with a £10,000 startup loan, she has told her foundation story countless times in newspapers and women’s magazines, at conferences and panel discussions, at in-store tastings and festivals. She is a well known face in small business.

A marathon runner who wanted a healthy, high-protein snack post-workout, she developed her first products with a blender in her kitchen, while working as a theatre producer at London’s Science Museum, sold them at a market stall, and landed her first listing at Selfridges in January 2015.

Consumers buy Pip and Nut’s products not only because they taste good; they are also buying into Murray herself – something Skidmore and Hain simply cannot replicate.

‘Consumers are turning away from multinationals. They want to see a founder’s face on the brand,’ says Jason Gibb, founder of Bread and Jam, a conference for small food and drinks businesses, and Food Hub, a large online support group for food founders. ‘Having a good story is fundamental.’

If we use a brand’s Instagram follower count as a measure of its story-telling skill, Pip and Nut is streaks ahead of other young food businesses, with 93,000 followers to even Propercorn’s 44,000. Sun Pat has 753.

Shelf life

Telling these stories on a shelf isn’t easy. New brands have a very small canvas on which to explain what they are, what their product is and why someone should buy it. Most brands will also need to convince shoppers why they should spend more on this unfamiliar product than one tried and tested from a competitor.

‘People need to love the packaging and have an emotional – but not necessarily a logical – response to it,’ says Marie Schultz, designer at award-winning Big Fish agency, which has worked with now-firmly established independent supermarket favourites like Clipper Teas, Dorset Cereals and Gü Puds.

It’s not something Hugh Thomas got right the first time around – or the second. The 27-year-old’s sugar-free drinks brand, Ugly, is currently in its third incarnation since its launch in 2015. Gibb, however, thinks Ugly’s approach to design is exemplary.

‘People spend a load of money on branding and consultants, but they don’t need to. They should just invest enough to get to the next stage,’ he says.

While still stocked in small retailers, Gibb explains, food businesses have the luxury of rebranding and repackaging based on customer and retailer feedback. Propercorn is a case in point: its first attempt at branding didn’t even reach the shelf.

‘I spent £6,000 – 60% of my savings – with a very competent packaging designer,’ says Stavrou. ‘But when I got the artwork back it didn’t feel authentic or personal. It wasn’t the essence of what I wanted Propercorn to be about, so I basically threw it in the bin and designed it myself, asking an illustrator friend to draw a wave at the bottom of the pack.’

‘It was a really big lesson,’ she goes on. ‘You can be seduced by the experts and start overthinking and overanalysing everything. But ultimately you should be led by whatever feels the most authentic.’

Coco-what?

For businesses selling a completely new kind of product – insect protein bars, fermented drinks – the challenge of establishing both category and brand is even steeper.

US coconut water brand Vita Coco went on a charm offensive when it expanded to the UK in 2010, running in-store demos, handing out free cartons, attending music festivals and targeting influential workplaces. Revenue grew from around £1m to £50m in three years.

‘Coconut water went from something nobody knew about to something that was everywhere,’ says Thomas from Ugly, who was one of Vita Coco’s first hires in the UK. ‘I think that was pretty much all down to Vita Coco – we had a 90%-plus share of marketing [in the category].’ He says he’s learned a lot from its playbook.

Cold-pressed juice (and now baby food) brand Savse is hoping to achieve similar success, but without the big marketing budget that Vita Coco had. Guka Tavberidze, the 29-year-old founder of Savse, started his business from his mum’s kitchen in 2013, aiming to recreate her nutritional smoothies for supermarket shelves.

He found out about an emerging production process (high pressure processing, a technique which preserves more nutrients than pasteurisation) to extend the drinks’ shelf-lives. This year the brand also expanded into baby food, after Tavberidze became a father himself.

Authenticity is no problem, nor are sales: Savse turned over £12m last year. The challenge is selling an entirely new type of product to supermarkets. Savse’s baby food, like its drinks, needs to be chilled. But supermarkets traditionally don’t have fridges in baby food aisles.

‘We have created something that is totally innovative, but no consumer understands that this product exists,’ says Tavberidze, who says he is working with several retailers to explore how to stock the baby food in-store.

Online, however, the difficulty is removed: Savse’s baby food range appears under the same tab as its long-life competitors, making it easy for parents to discover the new products.

More cold-pressed competition could also help Savse down the line – as Stavrou learned, painfully at first, with Propercorn. Six months before she launched her brand, two competitors also hit shelves with healthy popcorn ranges.

‘I went home in floods of tears – but it was the best thing that could have happened,’ she says. ‘Competition creates a demand; it means there are three people with marketing budgets creating hype.

‘Retailers are much more likely to consider [a new product] if three brands are looking at the space. Your job is to be the best. Would Propercorn have had the momentum it had if it had been doing it all by itself? Probably not. Competition can be healthy.’

Frying pan to factory

‘Everyone struggles with upscaling production from the kitchen table to a manufacturer,’ says Gibb. The production runs a small brand will be able to fund will often not match up to the order size a factory requires. ‘Manufacturers want to turn on the machine at the beginning of the day, and turn it off in the evening,’ says Gibb. ‘You have to persuade someone to take a punt on you.’

Along with manufacturers, brands also need to hunt down ingredient suppliers, packaging suppliers, packers, logistics partners and wholesalers. Amber Fraser, founder of roasted pea snack brand Brave, says it’s all very covert; partners become part of a brand’s ‘trade secret’.

Fraser spent months swotting up on the food industry and pulling her supply chain into place while continuing her day job at a large corporate: in her spare time creating spreadsheets of dozens of spice houses, pea suppliers and roasters, emailing and chasing them, asking for recommendations.

Eventually she found a co-packer with a track record of working with successful startups, who was willing to run the relatively small production runs of 10,000 units she needed. Last month, her supply chain had its first real test: Brave launched onto every Ryanair flight in Europe.

Stalking supermarket buyers

Equally enigmatic are the buyers – the people who decide what gets on the shelf. Inundated with product samples, unlikely to give feedback and nigh-on impossible to get time with, they’re the gatekeepers to growth for most small brands.

‘As a producer, you more or less have to stalk a buyer to get a meeting with them,’ says Gibb. It can cost at least several hundred pounds to get a stall at a food conference, with few guarantees of speaking to the right people.

‘Because so many people want to access the buyers, they put up a brick wall,’ says Gibb. ‘It’s survival of the fittest; the most serious people will persevere.’

Typically, small brands follow a predictable path up the retail hierarchy, which begins with spots in local delis and niche supermarkets chains in London such as Whole Foods, Planet Organic, As Nature Intended and Sourced Market. Next comes listings in Ocado and Waitrose, followed by – for the lucky – orders from the likes of Tesco and Sainsbury’s.

Places like As Nature Intended are popular testing grounds; minimum order quantities are generally lower, and new brands can run in-store tasting sessions to get useful customer feedback.

Stepping up to the big shelves

Moving to multinational retailers requires a gear shift. Packaging often needs to be reformatted. Sometimes new manufacturers with the necessary levels of accreditation have to be found. Batches need to be coded and all ingredients traceable; shelf lives have to be extended; listing fees must be paid and money put towards in-store marketing.

‘The odds are, in many ways, against small brands,’ says Theadora Alexander, who was previously head of operations at Propercorn (one of its earliest employees) and now founder of Young Foodies, a network of small food businesses. ‘A supermarket is basically a real-estate business. You pay for the space but, if someone like Walker’s wants that space, they will pay more for it.’

Increasingly, however, retailers are looking to small brands to give them an edge. ‘The discounters are constantly chewing at the market share,’ says Alexander. Aldi and Lidl’s annual sales were up 13% and 14.8%, respectively, in February. Tesco’s were up 3.1%, Sainsbury’s just 0.8%. ‘Sainsbury’s and Tesco are quaking in their boots. Everybody is trying to give themselves a point of difference, and this year Sainsbury’s has really pushed independent brands.’

Supermarkets have also revised how they pay small companies; once notorious for late payments, today many (but not all) have preferential payment terms for companies with a turnover under £1m and are regulated by the Grocery Code. They are still, however, able to demand up-front payments to secure good spots on shelves.

There remain many financial footfalls in dealing with the big retailers. Boots fines companies £250 for delivering outside their half-hour window. In 2017, Holland and Barrett asked all of its suppliers to pay £800 to be included in an in-store brochure – or be de-listed. For many small companies, that wiped out their annual profits with the store. It’s led some food brands to avoid supermarkets altogether.

There’s another way Gibb thinks supermarkets can exploit small brands: stealing their ideas. ‘Innovative brands come along and create a new category, or refresh an old one, then supermarkets get wise and their own label offerings get better. It becomes a battle of price,’ he says. ‘That’s ultimately going to implode, destroying innovation.’

Keep innovating

Typically, once one product has found success in several formats, food brands look to develop another, taking advantage of economies of scale. Savse has moved into baby food, Pip and Nut launched nut milks in 2017, and cereal brand Rude Health has grown across drinks and snacks.

‘Innovation is the hardest thing to get right, and it probably gets harder as you go on,’ says Stavrou, who’s experienced her own product development let-downs. In 2016, Propercorn launched half-popped popcorn, hoping to fill a gap for a snacking alternative to nuts. It was delisted after a year.

‘It just didn’t quite work: it was creating a whole new category, the supply chain was complicated and perhaps the positioning should’ve been different,’ says Stavrou. ‘As you grow, it’s easy to lose yourself.’

Another stumbling point for scaling food businesses can be the lure of a foreign market. ‘People are seduced by the idea of growing globally, but it’s often better to go slowly and go deeper,’ says Libby Gibson, Propercorn’s investor at venture capital fund Piper.

Propercorn retails in 11 countries, chosen selectively. ‘We didn’t want to be scattergun,’ says Stavrou. She picks new markets in the same way she assesses new product ideas: ‘With everything, it takes a little bit of data, speaking to people on the ground, spending some time in the market, getting some expert advice – and relying on your gut instinct.’

Cashing in

Propercorn is currently valued at £9.2m. Is Stavrou ready for her big exit paycheque?

‘It’s way too early to answer that for us: we still feel we’re so far from any finishing line,’ she says. ‘There’s so much more we want to do in terms of countries, flavours and products. I love the idea of always being involved with the growth of new brands, and I definitely have more ideas in me. As the business gets more successful, I’d like to give back – popcorn isn’t saving lives.’

If or when she reaches the line, there are likely to be some eager buyers. ‘Big food and drink has realised it can’t create brands itself. It’s realising it needs to invest in and partner with smaller brands,’ says Thomas, who’s considering ‘several options’ for Ugly in the long-term. ‘When a business sells, that’s great for the ecosystem. It creates a culture of success.’

Small brands are attracting investment – whether from institutional investors, crowdfunders or big retailers – because a clear route to a sale (and return on that capital) has been demonstrated.

Craft beer company Brewdog is one that could buck the trend. With global revenues of £139m, and a penchant for rebelling against the norm, there are murmurs that it could float on the stock market.

There’s also another (slim) possibility. ‘Something I think is quite interesting for the food and drink industry is the power of smaller brands coming together,’ says Stavrou. ‘With that comes buying power and a stronger category proposition. I don’t think it’s been done – but there’s something in it.’

Independent food companies teaming up to match the multinationals’ economies of scale? The food fight’s just beginning.