Phil Kafarakis is a 35-year veteran of Big Food and is now in an entirely different world as president of the Specialty Food Association. But in his new role, he has learned a lot about why smaller food companies have achieved so much success in the last number of years.
FE talked to Kafarakis about the usefulness of incubators and accelerators and why big food manufacturers are so interested in acquiring or learning from the smaller, more nimble specialty companies.
FE: Big Food isn’t doing so well these days but smaller companies are. What can (or should) big manufacturers learn from small or mid-sized companies and start-ups?
Phil Kafarakis: It's clear to me that most big manufacturers are plagued by the same problem: they’re not developing and distributing the types of products that consumers want today. That’s why most smaller companies get started in the first place – they see a consumer need and fill it. As Big Food continues to look for senior leadership from the outside, the expectation is that these leaders will inspire new thinking and leave legacy practices behind. If that proves true, there couldn’t be a better time for the evolution of traditional Big Food company R&D departments to take on real transformational change. With that in mind, sponsoring accelerators and incubators – with their innovative and not-afraid-to-fail processes – will likely be Big Food’s best choice for initial recovery. Currently, Big Food R&D departments function under a centralized, methodical, stage-gate decision-making model focused on testing and retesting – they’re trying to get the future 99 percent right. What they now need is to follow a more decentralized, entrepreneurial, fail-fast-fail-early model – exactly what small companies do best.
FE: You mentioned incubators and accelerators, and some are funded by Big Food & Beverage – what part are they playing in today’s food industry?
Kafarakis: Incubators and accelerators are critical to many start-ups and are starting to take on an important role as Big Food and Beverage struggles to regain lost momentum. An incubator is a space for experimentation created by a third party, either an academic institution or a research facility. In addition to funding, incubators offer startups resources including test kitchens and the ability to leverage technology, so those who have an idea have the resources to develop a working prototype.
The accelerator develops this idea further, taking the prototype and subjecting it to a specific model to prove it out. For example, a startup could create a baklava ice cream cone in an incubator’s test kitchen. They do some consumer testing of the product and begin to receive feedback. They’ve researched what kind of equipment would be required to produce these cones, and this helps them formulate a business plan to make their idea into a viable product and brand. The startup has taken the idea and formulated it; they’ve left the incubator nest; and now they’ve gone into an accelerator.
Last year, Big Food brands made more than a dozen investments in either an incubator or accelerator strategy. With separate resources and decentralized teams, Campbell Soup created Acre Venture Partners, a $125 million venture fund investing in food and ag-tech startups; Kellogg’s funded Eighteen94 Capital with $100 million to take minority stakes in startups; and General Mills established 301 Inc. to focus on early-stage startups beyond General Mills’ core product portfolios.
However, throwing millions at innovation and new entrepreneurial paths is not the sole solution. Big companies can also find a way to reproduce what small entrepreneurs are getting right, at scale. In particular, innovation in Big Food companies, far from being an abstraction, needs to first replicate the passion of satisfying consumers that the small specialty food companies possess. This would be radical transformation in thinking for these big companies, who have been accustomed to putting the finances before the consumer – selling shiny and colorful new food products through massive advertising campaigns too glossy to ignore.
FE: We’ve been talking for years about how Big Food & Bev. hasn’t been innovating in-house but instead acquiring to innovate. What seems to be the fundamental problem? Is it culture or because they have expensive legacy assets or other issues? What other strategies are these companies looking at to drive innovation?
Kafarakis: It might be easier to buy innovation by acquiring hot new companies, but Big Food really does need a longer term strategy. Taking on a venture capital mindset and leveraging resources normally plowed into traditional R&D to support innovation will be a radical twist to the current Big Food company way of thinking. It will require processes that dedicate resources to ideas that might not make it, and patiently nurture them to a point where they can get into the marketplace to prove themselves. Or not. No guarantees.
With millions and millions of dollars on the line — usually two to three percent of net revenue (source: McKinsey & Forbes) is being spent on traditional R&D – the pressure is on R&D to deliver quick financial results. Several sources have reported over the last decade that approximately 67 percent of R&D investments contribute to “maintenance” of a product rather than a breakthrough to something original and new. At the same time, about 26 percent of that investment provides a competitive advantage. The time for disrupting the current approach in R&D labs across Big Food companies has finally come.
That disruption will come at a price, and I mean an actual financial price. Innovation works, but not all the time. The same-old same-old just isn’t delivering results any more but to be quick, innovative and responsive Big Food will have to set aside its dependence on the “sure thing.”
FE: Do you have any data on the growth of small food and bev. companies? Why are small companies growing when Big Food seems to be floundering?
Kafarakis: Many small emerging brands — innovative, fleet of foot, and totally focused on what consumers want — have crept onto the scene. They begin making big inroads with small steps, impacting the market that big brands used to dominate through sheer scale and hefty advertising. Specialty foods is now a $140 billion industry. In retail, specialty food sales grew eight times faster than sales of all food last year.
Big Food needs to learn to compete with these “little” guys for today’s consumers. These are consumers with clear preferences for specialty, local, creative, healthier, and non-mass-produced products. The things that got Big Food so big in the first place -- highly processed, hyper-convenient, and/or chemically-enhanced foods – are no longer relevant.
In fact, the move toward smaller, more specialized and localized food is now a reality for all demographics, even Baby Boomers —the generation that championed frozen dinners in the past. But taking another step back we see why – Boomers grew up at a time when mom made dinner from scratch every night. So they know quality fresh ingredients, even if they didn’t search them out when their own kids were small, opting instead for convenience.
This change in the dining dynamic led to specialized industry responses: in fact, many of the specialty food companies that have become household names started with a parent wanting to give their child a better quality product, or meet a special nutritional need. Think Annie’s, Amy’s Soup, YumEarth, Ella’s Kitchen, Earth’s Best … the list is practically endless.
Independent and specialty food companies have already taken over more than 15 per cent of market share across retail and food service. This figure is projected to climb to 20 per cent by 2020. They must be doing something right; isn’t it time that Big Food companies started thinking like them?
FE: Where do you see the future of food and beverage processing going in the next few years?
Kafarakis: First, there’s much that food manufacturing can learn from both pharma and the microchip industry in terms of how to create ideal conditions for food manufacturing. We’re going to see an accelerated leveraging of technology with respect to food safety -- likely in the form of advanced sterilized clean rooms pioneered and made famous by Japanese food manufacturers.
This is a regulated air technology that’s prevalent in pharma and chip processing and will come to be the new state of the art for food manufacturing. These clean rooms not only regulate air flow, but go beyond that to prevent cross-contamination. Elements like lighting, temperature control, water filtration dynamics, and others will all come together in our next generation of clean room technology for food processing.
Next is the leveraging of technology to trace ingredients. This will enable us to follow the supply chain all the way back to the field. We’re talking technology that scans, for example, a piece of lettuce that came out of a particular farm at a particular time of day – enabling you to know when and how that lettuce came to be in your product.
Another major development will be the use of technology to minimize product defects. This technology already exists today, to an extent. But quality is a top concern, and while there’s a degree of defect that government agencies are willing to accept, we’re really going to be much more dialed into detecting defects to help us assess product quality
The regulatory environment will also be putting more pressure on food manufacturers and producers with respect to hazard analysis and critical control points. The FDA and USDA have already put Hazard Analysis and Critical Control Points (HACCP) into the manufacturing environment. Their required processes, mandates and standards are only going to get more exacting and will cover not just production processes, but environmental protection processes.
Also coming into play is the notion of biosecurity and counter-terrorism, the ability to have a security system in place to protect the supply chain. For this, we’ll need to leverage technology in multiple ways. I see these becoming critical not only for ingredients and the supply chain, but all the way back to farm itself.
Finally, in the area of labor and efficiency, we’re likely to see the rise of robotics in small-batch operations. I think this is a big trend to watch, particular when automation can be used to make artisan manufacturing affordable. We’ll see more use of robotics designed to make products look hand-made rather than factory produced.
FE: Anything else you’d like to mention?
Kafarakis: I believe wholeheartedly in the future of the food industry. It looks very bright to me. To play a part in the success, companies will have to be good neighbors. Consumers don’t just think that’s a good idea, they’re making purchasing choices based on it.
Food companies need to focus on corporate social responsibility and sharing the values of their customers. This covers everything – the way manufacturers treat the community, their employees, their suppliers, and the earth itself. Animal care, workers’ rights, and particularly sustainable agriculture and the humane treatment of livestock will be evermore in the foreground.
We can all play a part in truly making the world a better place.
About Phil Kafarakis: A food industry veteran and advocate for more than 35 years , Phil Kafarakis is president of the Specialty Food Association , a New York-based umbrella organization representing 3,700 (and growing) innovative, entrepreneurial member companies in the food and beverage industry. Email him at firstname.lastname@example.org and follow him at @PresidentSFA.