The global food industry is moving its innovation strategy to one with less fireworks, more sparklers as it looks to manage tougher economic conditions, Rabobank’s latest report says. The ‘Disruptive’ food products prove to be more hype than bite report said the market disruptors of recent years – think, plant-based meats, insect protein bars, synthetic fat replacers, precision fermented milk proteins – that promised to revolutionise what we eat have turned out to be “more hype than bite”.
“Plenty of these trends have failed to catch on with consumers, have seen limited revenue growth, and/or have not been profitable,” report author and Rabobank senior analyst Consumer Foods Tom Bailey said.
Bailey said one of the key lessons from recent years, particularly for investors outside of the food and agriculture industries, has been how challenging it can be to change what and how consumers eat, especially if there is a familiar, better-tasting alternative.
Economic uncertainty, rising inflation, and cost-of-living pressures are making it even harder.
“The hype cycle is over for disruptive food products; incremental innovation is back on. Disruption as the focus of innovation strategy has already reached its peak in consumer foods – for now,” he said.
“Get ready for boredom, because the next few years will bring about far more incremental innovations and fewer disruptive innovations to consumer food products.
“Disruptive innovations will likely face more rigorous evaluation, resulting in fewer but potentially more successful disruptive products that have endured more intensive vetting.”
Drivers of disruption
Between 2010 and 2022, investment deals in the food industry increased 288 per cent FIGURE ONE. Bailey said arguably the most significant driver was the low interest rate environment, which peaked in 2021 with an influx of “bullish investors” who had cash to spend after a “very turbulent” 2020.
The increase of investment in disruptive innovations over the past 10 years was driven by several factors, including an increase in venture funds entering the food industry, and companies seeking to disrupt categories and wanting to stay relevant amid changing consumer demands.
In that 288 per cent increase in consumer food innovation deals mentioned above, 50 per cent of the deals were by venture capital funds. But according to Bailey, those investors have “put the brakes” on deals in 2023.
Research by PitchBook and Rabobank found the breakdown of venture capital investments in 2022 was 40 per cent in early-stage companies as seed funding through Series B funding, and disruptive consumer foods accounting for 67 per cent of deals.
During this time, the scale – and purchasing power – of Millennials (1981-1995) and GenZ (1996-2010) also started gaining traction, with the Australian Bureau of Statistics 2021 Census showing Millennials outnumbering Baby Boomers for the first time. Millennials represent 21.5 per cent of the population, GenZ, 18 per cent.
Just as the alcohol sector became alert and alarmed at these cohorts, mainly GenZ, becoming a generation of non-drinkers (with thanks to Covid and its lockdowns for at least slowing that trend), food brands and manufacturers became eager to appeal to this younger, more experimental, exotic, and fun foods.
Innova Market Insights’ annual Top 10 Trends has ‘Generational Push’ as number three, saying health benefits and affordability might cross all generations, but for GenZ in particular, novel flavours and the “new and different” are siren calls. For them, food and brand choices are important signifiers of lifestyle, beliefs, and values.
Bailey said while private equity and venture capital funds were now on the playing field, existing food companies also started their own investment arms including retailers Woolworths and W23, and Coles with its Nuture Fund.
The cherry on all this, is that developing new and innovative products, particularly in the alternative protein realm, had the added pull of appealing to sustainability and other environmental issues that are particularly important to younger consumers.
For Bailey, these and other factors all come together to create a “hotbed for the rise in disruptive food products entering the consumer food space”. But many of those investments did not pan out. Low revenue growth, limited profitability, valuations being pressured by rising interest rates and other challenges.
As he said, the world has changed since 2020.
What quelled the disruption?
Many of those investments then got buffeted by a number of “headwinds” which resulted in them not growing or being as profitable as investors had hoped.
Bailey outlines four major challenges: the shift from a low interest to high interest environment; geopolitical changes causing re-globalisation, nearshoring, and supply insecurity; the volatile commodity markets “impacted everything”; and shortages in the labour market.
The cumulative effect of this new reality is a mindset of caution and reducing risk.
“Food companies are focusing their vision of product innovation on innovations that prioritise commercial viability.
“In other words, those that are more likely to be profitable and are easier to manage through market challenges such as volatile pricing of ingredients and supply insecurity due to geopolitical uncertainty,” Bailey said.
Of course, these factors impacting business also impact consumers.
“Inflation is pushing consumers to value-based purchasing decisions rather than values-based,” he said.
Retailers reporting major growth in private label products. In its Q3 FY23 report, Woolworths’ private label and exclusive brand sales grew 9.1 per cent in that quarter alone, while Coles recorded an 11.4 per cent uptick with $2.9 billion in sales and another 227 Coles Own Brand products launched.
Bailey also suggests that investors may have overestimated consumers’ willingness to dramatically change their diets, and that our relationship with food is far more intimate – and difficult to disrupt – than with other sectors.
There are still issues with the taste and texture of many new disruptive food products, something the industry doesn’t shy away from, but there are even harder consumer hurdles than those.
Many of the products are highly processed and use unfamiliar ingredients and manufacturing processes.
In May last year, taste and nutrition company Kerry interviewed 1500 consumers from the UK, US, Australia, and Brazil. It found that while sustainability was a top driver, consumers were unwilling to compromise on taste and would seek out products as close to the taste experience of animal products as possible.
Kerry strategic marketing director, Fiona Sweeney, said: “The need for a great taste experience is universal. However, ensuring a great taste experience – involving a full sensorial experience of sight, sound, and texture – is highly complex and in plant-based foods it is inherently more challenging because the bar is set high with meat and dairy as the benchmark,” she said.
For Bailey, a final key factor is the close relationship consumers have with their food, making it difficult to disrupt deeply rooted personal preferences and even cultural practices, particularly in times of uncertainty when we turn to the familiar.
So what happens now?
According to the report, a return to incremental change means less hype and creating new value through small changes like prioritising improving taste, convenience, and health. It includes line extensions, packaging changes, new flavours, and functionality twists, Bailey said.
“The main benefit of incremental innovation is that it offers more immediate benefits: supply chain simplicity, sustainability, cost reduction, and generally keeping customers happy and interested.
“Furthermore, it is better suited to keeping prices low for consumers in an inflationary environment like the one we have today,” Bailey said.
For those who continue investing in disruptive innovations, more prudence will be required.
“They will need to take more steps to ensure product alignment with consumers in terms of taste, health, and convenience.
“Investors who choose to continue to seek out disruptive innovations will be a good source of insight for large food companies that are currently shifting to incremental innovation but need to keep an eye on the longer-term horizon,” he said.
For Bailey, the underperformance of disruptive innovations will see better quality in the future.
“After lessons learned over the last decade, the challenging financial environment, and recent incremental focus may drive funds to more heavily scrutinise disruptive innovations that do come to market stand out more and could be more successful.
“According to Amara’s Law, disruptive innovations may have underperformed against our expectations for now, but they are likely to come back with greater success at some point in the not-to-distant future and surprise us with their impact in consumer food products.”
Ultimately, the Rabobank report’s advice is to enjoy some standard incremental innovation while keeping your eye on the horizon for the next disruptive cycle.
