Historically, large, national food companies have reigned supreme on supermarket shelves. However, smaller companies have shown an ability to grow category share. Between 2011 and 2015, it was reported that $18 billion of U.S. sales shifted from large packaged goods companies to smaller businesses, many of which tout healthy or organic attributes, according to the Boston Consulting Group.
In order to learn more about how smaller businesses are capitalizing on their ability to find and develop niches in today’s snack and bakery market, we reached out to Todd Southerland, senior vice president and food & agribusiness industry manager at SunTrust Bank.
Douglas J. Peckenpaugh: Why do you think that smaller specialty companies producing snacks and baked goods have been able to capture more market share in recent years?
Todd Southerland: Consumers are becoming more educated about all aspects of the foods that they eat. There is increasing focus on the supply chain, including the manner in which raw materials are grown. This includes the use of food additives, GMOs and other non-naturally occurring ingredients, as well as closer attention to sustainability, traceability and food safety. Quite simply, the beneficiaries of these trends have been smaller companies that focus on product quality and meeting the demands of an increasingly discerning consumer at any cost, because this growing segment of the market is much less price-conscious. Larger companies focus more on cost containment, which is largely accomplished through high-volume product runs; smaller companies serve a more-sophisticated segment of the market that have different decision points when making discretionary purchases. Because cost is not a focus for this segment, that gives smaller, specialty food manufacturers more latitude in ingredient purchases, production planning and marketing decisions. Smaller manufacturers are following the trends of the consuming population that is willing to spend those incremental dollars and catering to those demands because they are afforded a more nimble cost structure and flexibility in production decisions.
DJP: Do you have some specific examples of snack and bakery products from smaller companies that are doing a good job of standing out in the market?
TS: From a high-level perspective, I can point out several sub-sectors that have been particularly innovative in their approach to capitalizing on the trends we are seeing. Some of these trends are related to convenience and packaging, while others are related to simply making items available to consumers in non-traditional formats to drive awareness and consumption. Yet another segment has capitalized on trends in dieting or health awareness. For example, consider the vast changes we’ve seen in the following sub-categories:
- Jerky: Traditionally this was a beef product, but is now made from all types of protein sources to capitalize on the trend in higher-protein and low-fat diets. Packaging formats have expanded significantly, flavor types have grown, and price points have increased.
- Fruit: Single-serve fruit pouches are no longer popular just among children, who traditionally consumed these items in the form of applesauce or puréed baby foods. Fruit pouches now contain a multitude of fruits and blends, are highly convenient and are healthy. And while typically retail price points are only around $1.00, the margin in these items is extremely high for manufacturers.
- Bars: Once focused on dieters or those with a demand for meal replacement, bars are now marketed to consumers of all types and for all uses, particularly snacks. The varieties in this category are endless.
- Pet treats: Milk bones have been replaced by a stunning variety of treats that use higher-value meat and seafood cuts as manufacturers have capitalized on the “humanization of pets” movement.
These are just a few examples where markets have been flipped upside down, and there are several more. To give a few specific examples of smaller companies that are capitalizing on these trends, here are two in recent memory that stand out:
- O’Dang Hummus: The popularity of hummus reminds me of the evolution of the yogurt category. Hummus can be produced from a variety of raw materials, and there is an abundance of ingredients that can be used to differentiate the product in terms of flavorings. It fits well with the trends in healthy snacking, but aside from the innovation we’ve seen on restaurant menus, there has been much less variety in choices available through other retail formats, such as grocery stores. O’Dang is seeking to change this by offering several flavors and varieties to appeal to a broader consumer base. These products capitalize on the movement in healthy snacking and also trends in convenience foods.
- Hyppo Pop Treats: Americans love sweets, but very few fit into a well-balanced diet. Additionally, trends in all-natural ingredients are apparent as consumers seek to avoid preservatives and high-sugar foods. Hyppo Pop produces a diverse range of popsicles that satisfy these cravings, but use all-natural, highly innovative ingredients that are mostly very healthy.
DJP: What are some product development and marketing strategies that smaller companies use to help them compete?
TS: First and foremost, small companies don’t compete on price; they compete on quality. They avoid mass retail in the beginning, as the slotting fees are exorbitant. Smaller companies launch locally or regionally and find a tipping point. Then they approach mass retail when they have created awareness and a steady consumer following, because retailers will always be interested in shelf space for products that sell.
Smaller companies tend to focus on the following:
- Healthy and nutritious items: plant-based proteins, paleo snacks, minimally processed foods, sugar alternatives, no additives/preservatives
- Specialty products: organic, kosher, gluten-free
- Packaging creativity or functionality (convenience, environmentally friendly)
- Leveraging choices: multiple flavors and ingredient choices
- Creating a local and regional following to establish brand loyalty by using products that identify with a certain city or region.
- Product niches: focus on one product type or format and strive to be the best at it
- Not competing on price; rather, competing on quality and the unique attributes of the product desired by the consumer willing to pay the higher price for the differentiators noted above
DJP: Why are consumers willing to pay a premium price for specialty snacks and baked goods from these companies?
TS: Because they invariably meet the increasing demands from consumers whose list of priorities when making discretionary purchases does not often include price. This includes:
- Health and nutrition
- Quality of ingredients
- Unique flavors
- Food safety
- Traceability or known growing practices that contribute to safety or sustainability
- Elimination of additives, preservatives, and other non-naturally occurring ingredients
- Convenience packaging to assist in “on the go” lifestyles
DJP: How are smaller, specialty snack and bakery companies able to realize higher margins on their products?
TS: Specialty food companies don’t always display higher margins than their larger peers, but they differentiate themselves in order to compete by not focusing on price or attempting to minimize their cost structures at the expense of the quality of their products. In the food business, there are generally two strategies that can co-exist with equal success: low-cost producer of a commodity-oriented item or higher-cost producer of a highly differentiated premium product. Success among smaller snack and bakery manufacturer is often measured by following the blueprint of the latter category.
For example, a small potato chip producer is not going to maintain a cost structure nearly as low as Frito-Lay. This is largely because Frito-Lay focuses on a well-defined set of potato chip flavors that it can produce in high volume to absorb overhead, which is particularly important in the grocery channel where slotting fees can be cost-prohibitive for smaller manufacturers. However, smaller potato chip manufacturers can and do compete by providing highly differentiated products with more diverse flavors and higher perceived quality from consumers that will pay higher price points. This ecosystem exists in virtually every industry sub-sector where smaller manufacturers effectively compete on the basis of quality and the unique attributes of the product relative to those that are mass produced.