In today’s episode, I speak to Nick Fereday, senior analyst of consumer foods at Rabobank, the Dutch food and agribusiness bank. In this role, Fereday tracks startup innovation and is a mentor at Rabobank’s agrifood startup pitch competition FoodBytes!, which last took place in Austin in September.
In this podcast, we talk about how Rabobank’s clients — the large food and agriculture companies — are reacting to this new innovation and working with startups, the acquisition of Whole Foods by Amazon, and consumer trends around natural, simple food as well as alternative meat products.
I hope you enjoy our conversation — there’s an abridged transcription below too.
Louisa B-T: Tell us a bit about your role at Rabobank and how your work has changed amid this growing amount of innovation that’s taking place in food and agriculture. It must be quite a different world now from when you started at Rabobank six years ago.
Nick Fereday: I’m in the research group at Rabo. We’re not a bunch of equity analysts. We’re kind of more big picture, trends, type of guys. I’m in the more consumer-facing part of the food chain, so I’m definitely much more interested in what’s happening at the consumer level and what’s driving at home and how that plays out along the food chain.
We are democratizing access to venture capital. Learn how you can invest with us.
In terms of changes, I think change is always there it just depends who’s doing the change and who’s doing the innovation. Certainly, when you look back five years or even 10 years, it is a very different landscape to what we were used to seeing. Five years ago, or even longer, it was the larger players that were driving a lot of innovation; there weren’t so many smaller players coming up.
I think all that’s really flipped in the last few years. So what you’re seeing now is it’s the small emerging brands that are really driving innovation, either through renovating a tired category or for identifying, what they like to say in the industry, is white space. Gaps in the market and coming up with products that really talk to today’s consumer or the things that today’s consumer is interested in.
FoodBytes, for us, is a great platform to have a firsthand insight into what’s going on. We get hundreds of applicants for each event, so by itself, that gives us an idea of what people are interested in, or what they think they can bring to market, or where they think there are opportunities. Then having been able to interact with these companies that we pick to present is certainly fantastic.
It’s interesting because in my part of the food chain, talking about what’s new and new companies and what they bring to the table is really like the currency. In the same way that when you interview, folk who are more at the farm level and they talk about the latest USDA forecasts or where they think corn acreage is going to be. That becomes the topic of conversation. In my world, it’s all about what’s new and what are you seeing that’s different. So that really takes you to the small players, the emerging brands, because they are driving a lot of change and disruption. And it’s also of incredible interest to the large food companies because they’re kind of struggling to catch up and understand what’s going on.
Louisa B-T: Well, obviously as an analyst for Rabobank, your clients are mostly the big food and ag companies. So how are they coping with this wave of innovation? How are they interacting with it, or not?
Nick Fereday: think for the longest time there was a little bit of denial going on around what was happening. So when the larger players were looking at their sales and their sales weren’t going anywhere, in fact, some of them were heading south, It was very much, “oh, this is the result of the lingering recession, or this is the rise of private label and stuff?” And there really wasn’t enough introspection to really look at their own portfolios and come to a rather scary, but brave, conclusion that they needed to change because a lot of what they were producing was less relevant than to previous generations, such as the baby boomers.
Louisa B-T: One of the things that we often think about is the CEO of Blockbuster talking about Netflix saying they weren’t at all on their radar as being competitive. Then around two years later, Blockbuster went out of business. Do you think food companies are aware of that threat, or do you think it’s taking them some time?
Nick Fereday: I don’t think there’s that level of denial in the food industry anymore. And certainly, when you hear the major CEOs of the big food companies talk, they recognize the pace of change and the fact that consumers have changed.
They’re used to change; companies that have been in existence a very long time. So they’re used to change, and fads, and trends, what have you. But, I think it’s the pace of change that’s caught a lot of people by surprise. So they’re going from a model where they were used to ramping up production of their existing brands, or maybe tweaking them, and now they’re in a world where maybe their brands, or their iconic brands, are less relevant and they’re being threatened by all these emerging brands.
They’re kind of struggling to adjust their business model to be as flexible and as nimble as some of these smaller companies. It’s a bit like one of those large oil tankers that they know they have to change direction, but it takes a while to do that. Certainly, they’re all making attempts to do that to varying degrees of success.
To me, it reminds me of that scene, probably showing my age, in Wizard of Oz, where you meet the magician, the wizard at the end, and he’s got all these levers that he’s pressing. I have this image of these large food companies pressing all the different growth levers, whether it’s mergers and acquisitions, or product renovation, or setting up a VC fund. They’re all desperately pressing these and trying to kick-start their top line growth, which in a lot of cases is not that spectacular.
Louisa B-T: How nimble can they actually be? Because it seems there are new products on the market all the time using social media and other marketing tools to get off the ground with the right angle that consumers pick up on. Is it the consumers are just demanding more options, or are some of these new startups almost pushing the innovation forward?
Nick Fereday: I think it is very hard to be nimble, and you have to appreciate the operational environments and the working environments that these companies find themselves in. They’ve got a consumer that’s changing, or more swiftly changing their preferences, in terms of moving away from low fat to say, high protein, or gluten-free, or whatever. They’re facing a lot of cost pressure from their shareholders and activist investors who are really getting them to trim the fat of their organizations.
Then you only have to pick up today’s Wall Street Journal, or what have you, to read about all the changes and the increasing level of competition that’s going on at the grocery level and the retail environment. There’s a lot going on, and so I think there are a lot of distractions from actually having a focus on that top line growth.
But to try and be more nimble, they’re buying into some of those growth areas. A lot of these companies are recognizing that snacking is very much part of our culture and increasingly so. They’re buying into the snacking companies. They’re buying into the health and wellness brands. When they buy these companies, they’re less likely to bring them into the fold of the big institutional, the bureaucracy, of the existing company and really just try and keep them separate and often leave them as a B-corporation, or something like that. Just to try and recognize that they just bought something, it’s a shiny new toy, and they need to be really careful how they tinker with it in case they mess up what’s magic about it.
Louisa B-T: That’s interesting. So you are finding they are being careful about that, and how they handle acquisitions?
Nick Fereday: Sure. I think that’s actually one of the questions we get asked the most, about how’s this all working out? There are certainly examples in the past of companies not doing that and really incorporating [their acquisitions] and really absorbing them. But that’s changed.
So if you look at, say, Annie’s with John Foraker before he moved on, they kept that separate. He stayed on board. They kept their offices in Berkeley. They didn’t bring them back to the mothership of General Mills in Minneapolis. Similarly, Campbell Foods has made a number of investments, and they’re not demanding that they come and setup camp in Camden, New Jersey.
I think there is some recognition of that and all sorts of recognition that these large companies have a lot to learn from these small players, as well. It’s a huge dilemma for these companies because how would you have an organization with 10, and in some cases, hundreds of thousands of people and cultivate an entrepreneurial culture. It’s almost impossible, I would imagine.
I think there is a bit of a balancing act and so I would look to, maybe, the example of Annie’s as a success story of how to do that and for other companies, maybe, to learn from that.
Louisa B-T: But if acquisition is the main way, or a key way, for these companies to stay relevant, they could end up having loads of smaller brands operating slightly independently. However I got the impression that a lot of large companies actually feel they have too many brands or different products, and they’re actually downsizing their product portfolios. How do those two things meet?
Nick Fereday: That’s right. Again, you’ve really touched a nerve of some of the tensions that exist. There’s probably a proliferation of types of products out there, so there has been some rationalization. But, at the same time, I think there’s also a recognition that where the consumer is right now, you may not be able to get to billion dollar iconic brands that we’re so used to aiming for in the past.
Rather than saying we’re going to develop the next Oreo cookie, which is going to take over the world, we’re going to have to recognize that we’re going to invest in products that may, ultimately, have a shorter lifespan over time. They may not be around in a hundred years, or even 10 years. Maybe we need a collection of these brands to try and get that billion; maybe General Mills is a good example of that, where they have eight, nine, or 10 organic and natural brands, of which Annie’s is one.
Louisa B-T: I’d love to talk a bit about how technology meets the brick and mortar restaurant, or grocery. Obviously, we had a fairly enormous deal over the summer with Amazon acquiring Whole Foods. It’s a tech first company acquiring a brick and mortar grocery store. What did you make of that when that hit the wires?
Nick Fereday: I think it’s interesting when you try and look at how this plays out in the industry. I mean, I think we talked already about the amount of change that’s going on at retail. So this is really adding even more complexity. Technology and food have a bit of, on a very general level, an uneasy relationship. Right?
If I were to come to you and say, “I’ve got this great idea for a business, but it involves us throwing out our cell phones and our iPads and our computers and going back to using typewriters.” You’d probably laugh me out of the room, but in food, that’s exactly what’s happening. In food, we’re getting rid of the science. We’re taking out the artificial ingredients and the wizardry and going back to simpler, fewer ingredients, organic, natural products.
So there is another tension going on at that very, very basic level. When we talk about food and technology, now, it’s less about this new wonder ingredient. I mean, if I was to tell you that a company had come up with a new sweetener that’s 10,000 times sweeter than sugar, the average consumer might recoil in horror about now. There was a time when that would have been seen as a very positive development.
So the technology story now is how the technology surrounds the food. It can surround it in the packaging; it can surround it in how you go about purchasing that food. So the idea, that some people hold in the industry is that the days are numbered when we all spend our time wandering around the aisles of a traditional supermarket. We will be firing up an Apple, or speaking into our computers, or whatever to make those orders and come in to collect it at a different point or have it delivered to our home.
I think Amazon and Whole Foods is all part of that story, where Amazon has less of the savvy around food that Whole Foods has, but it has its algorithms, and it knows about efficiency and getting things delivered in a timely manner. So I think most food companies, or food retailers, will be less fearful of what Amazon and companies like that know about food, but it’s of more interest to them around what they can bring on the technology side.
Louisa B-T: I want to come back to the Whole Foods delivery space in a bit but just picking up on something you said about processed foods and natural foods. Obviously, that’s absolutely right, and people want to know more about what goes into their food. They want more transparency, but there is another trend at the moment for alternative meats, cultured meat, or plant-based meats. Actually, some of these products are highly processed, and there are things going on in that technology that a lot of us don’t understand.
So I’m very interested to know why consumers will be okay with that; is it the greater cause of replacing meat for sustainability reasons? And also, is there a potential for a margarine 2.0 situation? It’s an interesting dichotomy.
Nick Fereday: Well, first I should declare that I’m a big believer in cycles and things coming around. And at some point, there will be a margarine 2.0 absolutely. I think it’s super interesting. When I get to speak to some of these companies that are pushing the more scientific lab-based meats the question I always ask them is, “Is the consumer ready for this?” And, of course, they’re all convinced that the consumer is, but I would be a little more skeptical.
I think consumers have a priority of preferences. Probably the top one is usually around convenience. They will be more persuaded to make a leap if they consider this new product a more convenient solution. But, of course, there are other things, as well. The whole movement towards plant-based foods is driven by lots of different drivers from ethical to sustainability to taste and so on. And it’s not necessarily a vegetarian or vegan-based theme; it’s more flexitarian where more people are not necessarily looking for meat on their plates every day.
I think you have to have that conversation now around this interesting area. I think people are going to have to spend the time to get comfortable with it, for sure. I mean, yogurt’s very popular in this country. Greek yogurt is very popular, but we’re still nowhere near the level of consumption say in Europe. Fifteen years ago, yogurt was pretty much nowhere in this country, certainly not in the same way.
Because when you started talking to people about the health benefits of yogurt, and you started explaining all about the microbiome movement, probably that word wasn’t even invented back there. But there was this idea that there were things in your stomach, and you should feed them prebiotics or whatever. It was very alien, so it takes a long time often for consumers to get some type of acceptance. I think it’s great to have those conversations and certainly all the lab-based stuff and what’s coming out of the accelerators like IndieBio, or our own FoodBytes! and Terra accelerator.
I think the planning horizons are often very optimistic about when we are going to see these products on the shelf – next month, or next year? Probably not. It’s going to take a little while. The veggie burger 2.0, which isn’t like the 1970s tofu burger and has better ingredients and better taste profiles — consumers can get that very quickly. But getting comfortable with a lab-based meat, I think, will take longer.
Louisa B-T: It’s funny how some of these trends get a lot of media attention; when we released our AgriFood Tech investing report, I had a journalist get in touch and say, “I don’t see any mention of cultured meat in here.” And it was because there was only one startup that had raised a small seed around. But because Bill Gates has invested and this segment captures the public’s imagination, it seems people think these things are bigger than they are.
Nick Fereday: Absolutely. I think that also talks to the bubbles that we all live in. Right? So we have to be very conscious of what we see and what interests the media, and people in the industry, and where the regular consumer is in that conversation. We’re at different stages of that conversation, and I think the media can get overexcited about some of these things, for sure.
Louisa B-T: So getting back to the topic of food delivery There was $2.7 billion of investment in food delivery services in the first half of 2017, according to our report. Even without the mammoth $1 billion deal from China’s ele.me, that was $1.7 billion, which is a huge amount when you think that’s over a third of what was raised overall in AgriFood Tech ($4.4bn). I get a little bit bored of food delivery as a segment as there are just so many startups, but I think the Amazon Whole Foods deal did put a bit of excitement into the space.
But why are there so many entrepreneurs looking at this? How revolutionary are these services really?
Nick Fereday: Yeah. And great points. I think it’s still a hot area. It still seems to generate a lot of excitement. I think it’s kind this thing where it’s a great idea, but it’s everyone’s great idea. So people are making their own uncoordinated decisions to enter this market around the world, and it seems to me everyone’s getting more and more niche in terms of what they’re trying to deliver, rather than say supplying everything, they’re now targeting pregnant women, or vegans, or vegetarians, or paleo folk, or whatever.
I think it’s interesting now that the larger players are getting involved, as well. There’s been a whole series of announcements about investments by the likes of Nestle and Campbell’s Soup. And now we read that the retailers are coming in as well. I think we’re probably going to be entering a period of slow down and concentration where people realize that, okay, it’s a huge market; there is no room for this, it’s not going to take over the whole world, but it’s another route to the consumer. And see, there’s an opportunity and some of the large, if we just looked at the grocers, the supermarkets in the U.S., for example. Most of the big players, the likes of Kroger, or whatever have lots of different formats. They have gas stations. They have big huge stores. They have discount stores.
So to them, this is just another route to the consumer that they can take advantage of either on their own, developing their own meal kits, just like what they’re doing already and selling them on the shelves, or to experimenting in other ways. I think it’s at that point in the market where the bigger existing players are coming in, and there will be some rationalization. It also comes down to the ambitions of some of these startups because often, at some point along the line, they don’t actually want to go the whole way. They do, actually, want to be of sufficient size to be sold to a larger player. Whether that’s a restaurant chain, or a supermarket, or a food company, or whatever.
In some ways, it’s a lot of excitement, but it not necessarily poses an existential threats to anyone. Because, at the end of the day, they have a sell me, or a buy me sticker slapped on their forehead.
Louisa B-T: Do you think then some of the large brick and mortar grocery stores would just acquire a startup to help them start their own delivery?
Nick Fereday: I think it’s a case of understanding what can we learn from these small companies and what will it bring to them into their existing system? This takes you back to the whole Amazon Whole Foods story, where everyone’s speculating about the mood of bricks and mortar. Is that a recognition that, at some point, the customer wants to touch the produce and not everything can be online? This story about having 360 or 460 stores (or however many they have) as distribution centers to reach the type of consumer.
I think there’s a lot of exploration into our earlier points about changing plans and changing consumers. To make say a $5 million investment in one of these companies, as opposed to the more capital investment of growing another store, this is actually a very smart thing to do, in terms of small bets.
I think everyone’s recognized that you can’t just be what you were last year. You have to evolve, so if you’re a protein company, protein includes everything now, it’s not just a meat protein company. You have to think about plant-based because that’s what the consumer is interested. It can be very run-of-the-mill stuff, like soy protein, or beef protein and it can be all the way out there to algae and cultured meats, and I have to say crickets and cricket flour. We get a lot of those coming from FoodBytes and stuff. So it’s super interesting.
Louisa B-T: Obviously, I can’t help but notice that you’re British, as am I. And I’m intrigued to know, did you cover the food industry back in the UK before you came here?
Nick Fereday: We can laugh about two Brits talking about the US market, but just to prove my credentials, I’m an American citizen in January of this year! But, yeah, I’ve spent my whole career involved in food and agriculture I suppose. The start of my career I was doing basic farming systems research in Papua New Guinea. I’ve been a work at different places along the food chain, if you like, but primarily in research. And in the last five to six years, increasingly focused on the consumer-facing stuff.
Louisa B-T: Do you think there’s a lot more activity in the US, in terms of AgriFood innovation, than other parts of the world? It represents about half of the deal activity that we report on. Do you think the more relaxed regulatory landscape of the US plays into that because it’s just easier to launch new products here than it is say in Europe or elsewhere?
Nick Fereday: Yes. I’m sure that is a factor, but I think that the emergence of smaller players will most certainly happen [in Europe]. I think there are lots of reasons. I mean, private label is certainly a much bigger, important thing in European markets, like the UK, our home country, 40% of products are from private label. And I think that may act as a barrier to entry also. In a way that isn’t here. So there may be more opportunities to differentiate, but I think as these new trends, these new brands, take hold in the U.S., as you pointed out earlier with the speed of social media, there is growing recognition.
Then you have to go to some of the food hubs around the world. Whether you’re in Shoreditch in London, for example, that’s no different than Brooklyn, in terms of the things that they’re doing. And we expect to be more of that. It’s kind of why we’re trying to roll out FoodBytes! in other parts of the world, just to be able to pick up on those trends and because it may have originated or maybe most activity here, but we expect it to disseminate globally, for sure.
Louisa B-T: Do you get involved with the startups at FoodBytes? Have you done some mentoring? Do you speak with them?
Nick Fereday: Yeah. I get involved in the selection of the companies and also in the mentoring of the 10 demo companies that present at FoodBytes! And that’s a lot of fun, meeting these entrepreneurs because they are the complete opposite of me. These guys are highly motivated, very driven entrepreneurial types and it’s very infectious, the passion that these guys have for what they’re doing, then their commitment. It’s certainly very exciting atmosphere to be in and really appreciate getting those firsthand insights and connections, as well.
Louisa B-T: I could probably keep talking to you about all the different trends for hours on end. Maybe we can pick this up another time.
Nick Fereday: For sure, thank you so much. This has been fun.
Want to listen to more of our podcasts? Click here!
Image: Inside Colombia pavilion at Expo, universal exposition on the theme of food on JUNE 5, 2015 in Milan – Shutterstock