MINNEAPOLIS -- For several years, food industry leader General Mills had been trying to develop products to capture consumers' shifting, and fragmenting, preferences. But in October 2015, the company realized it would never be able to out-innovate the many small food startups entering the national market.
Rather than compete with them, Minneapolis-based General Mills decided to invest in them. The company changed the marching orders for its in-house innovation division, 301 Inc., from an idea-generator to an idea-backer. 301 Inc. is now the venture capital arm of General Mills and has invested in five smaller outside firms. The group's goal is to find future acquisition targets from among those it supports.
301 is focused on a different type of innovation than General Mills' primary marketing teams. While the company's various food divisions work to identify trends that it can apply to General Mills' existing products -- such as gluten-free Cheerios -- 301 is seeking disruptive and niche food brands.
Concepts that have caught 301's attention include Kite Hill, which makes nut-based dairy products; Good Culture, a maker of organic and creamy cottage cheese; Tio Gazpacho, which makes chilled and ready-to-drink bottled soups, and Rhythm Superfoods, a maker of vegetable-based snacks. The company's first investment was in Beyond Meat, a plant-based protein maker.
"What we found, to no one's surprise, is that it is very difficult for larger companies to [create this kind of product]," John Haugen, founder and general manager of 301 Inc. and vice president at General Mills, said. "It is really hard to bottle up and replicate that passion and vision and energy that these early-stage entrepreneurs have."
The 150-year-old company, like most major food processors, has seen sales level off in legacy brands, which for General Mills includes Betty Crocker, Pillsbury, Progresso and others.
"In prior years, clients came to us when they were seeing slippage in their [market] shares and were looking to innovate on their existing brands," said Shelley Balanko, senior vice president of the Hartman Group, a consumer foods research firm. "But there is a certain point in time when culture takes over and no matter what sort of innovation you do, if the consumers don't value your brand, it doesn't matter."
Some of General Mills' biggest competitors, such as Campbell's Soup, Hain Celestial and Kellogg, as well as Coca-Cola and Anheuser-Busch, have created their own versions of 301 Inc.
The approach holds the prospect of saving the big companies money. Most have a track record of buying more established firms for exorbitant sums. General Mills, for instance, spent $820 million to buy Annie's Homegrown, an organic packaged food maker in 2014. Coca-Cola spent $4.2 billion in 2007 to acquire Vitaminwater.
"The investment community spent years focused on midsize brands that have $100 million in [annual] sales or more, but these became really expensive," Balanko said. "When you acquire them young, you can get them for a good value."
General Mills first chartered 301, named for the address of the original Pillsbury A Mill in Minneapolis, in 2012.
Executives realized that consumers viewed food differently than in previous eras and this shift would have a fundamental and long-lasting effect on the industry. More specifically, mass marketing was no longer going to work for all consumers. Instead, consumer desires were fragmenting and these various factions would need to be sold on products differently.
So while 301 produced some new ideas for its existing brands in those first three years, it wasn't going to be enough for real future growth.
But the company also lacked the time for small brands to reach critical mass.
"Most early-stage businesses are going to fail," Haugen said. "It is difficult to replicate the skill set that those early-stage entrepreneurs have but also the patience and perseverance that they have."
It will take a smaller brand on average between three and five years to reach $100 million in sales, Balanko said, while a typical consumer-packaged goods brand will hit $100 million in a year. Haugen said large food companies don't have that kind of time or patience. General Mills and its peers are beholden to shareholders and must prove a product's value quickly.
For 301, those first few years of entrepreneur experimentation gave the team insight into the challenges of starting a new specialty brand.
Innovation within the food industry is happening quickly, evident in the number of venture capital firms looking to fund the next hot brand, said Dayton Miller of Boulder Food Group, a venture capital firm that invests in food startups similar to 301 Inc.
Look back 15 years when there were three or four national iced tea brands, Miller said. Then compare that with today when there are about 100 brands of kombucha, a tea drink, across the country. Only two have significant recognition nationwide.
"The future of the food and beverage industry might not see the billion-dollar brands," Balanko said. "It might come from the aggregate of several multimillion-dollar brands."
Business on 10/27/2016