Serving up big returns: investing in food and beverage

May 21, 2018

In the last few years, the investment world has seen some unprecedented activity in the food and beverage sector. Kellogg’s bought RX Bar, a snack bar famous for having only five or six natural ingredients, for $600M. General Mills bought Annie’s, makers of organic macaroni and cheese, snacks and other foods for $820M. And PepsiCo bought KeVita, the company behind a line of probiotic beverages including kombucha for over $200M.

The deals made investors in these ‘better for you’ food and beverage companies very happy, and left others wondering how they can get in on the action.

We talked to Nick McCoy of Whipstitch Capital on why he thinks there’s so much opportunity in food and beverage, and how investors can take advantage of it.

What’s happening in food and beverage that has investors so bullish?

I think it’s the culmination of a few things: consumers are growing increasingly focused on their food and see it as a way to take care of their own health and are also becoming more self aware. You also have a whole new way to buy your food; you’re no longer limited to brick and mortar retailers. You have online shopping and direct delivery to the home. So it’s opened up all sorts of opportunities to meet consumer demand in a whole new way. This expands the scope of available food and beverages in every geographic area.

Why are so many deals in the snacks and beverage area?

That comes down to frequency of consumption. Everyone’s busy. They’re grabbing snacks and drinks – often with some sort of ‘better for you’ element – and many are consuming them before they even get home from the store. So there’s a higher repeat purchase rate compared to something like canned tomatoes that you actually have to open at home and incorporate into your meal preparation. There are also more distribution points available for snacks and beverages than other categories.

You mentioned online shopping – how does that play into it?

It’s great for new companies. It gives them this access to a broad geographic area of people who are looking for very specific products. And it gives people the ability to see what others think of a product through reviews, which is very helpful for getting people to try new things. There are also a ton of small business tools that companies like Amazon are providing that really help the younger companies scale up their sales for a reasonable marketing investment.

What are the big differences between investing in food and investing in something like technology?

The key things are size, timeframe and type of exit. In a tech portfolio, you may have one or two big winners that make up most of the funds returns. With food, you are more likely to have many winners that are 3X,4X,5X returns and less 0’s. Each individual tech company may have more upside potential but at a greater risk. The timeframe to exit it also shorter, and the exit is almost always acquisition, versus tech where there are more IPOs. Another thing that you need to get used to is the fact that, especially at the later stages – say $10M up in round size – you’re usually dealing with a single investor, not a syndicate. I’ve been in tech. It’s a different game for sure.

With so many options for energy bars or kombucha drinks to choose from, how can investors choose the right opportunity to go with?

You can see if a product shows early indications of customer traction in its sell-through data.  There’s so much data to help determine what will be a winner.  There is syndicated data for nearly all retailers, Whole Foods has their own portal, which is free to all companies who sell there and Amazon also supplies lots of data.

You want to look at things like their gross margin relative to the category, but it’s also things like how they own their white space, and whether they can expand into multiple categories. Like if they have a nut butter, and expand into a peanut butter cup, or a cracker and peanut butter snack. It’s three different parts of the store, from basically one product. That kind of innovation and ability to see the opportunity is key.

Nick McCoy is co-founder and managing director at Whipstitch Capital. He’ll present more insights on food and beverage deals at the Nutrition Capital Network – Natural Products Canada Investor Meeting in Toronto, June 27-28th.