There’s a simple rule in the world of innovative food. If you want to be cutting edge, make protein bars. That has never been more true than right now. Protein bars – with their ability to incorporate all the hottest trends (from collagen to keto) at a rate that outpaces everything else in packaged food – are the hottest opportunity in the entrepreneurial world. And agile start-up innovators can move lightspeeds faster than the big brands to capitalize on fast-shifting consumer tastes. This, combined with customers’ seismic movement from grocery store aisles to online grocery shopping, means that the monopoly that the big food industry once had over what people eat has all but died. And left a huge amount of opportunity for smart new innovators on the table.
Just in the last two years, the market-created value of hot protein bar start-ups has been in the billions. RX Bar, which started in the kitchen of one of the founders’ parents, sold for $600 million in 2018. Quest Nutrition, which founder Tom Bilyeu told Forbes he started when he was “dead broke,” is now valued at over $1 billion. And there are literally hundreds of other similarly incredible success stories even more recently – from the sale of cricket protein bar company Exo Bar to the eye-watering fundraising round that Perfect Bar banked.
Big CPG Brands in the Food Space are Dinosaurs – and they’re going extinct!
At the same time, the huge food brands that once dominated the CPG space in protein bars are whining almost as much as the start-ups are winning. Case in point: Kraft Heinz. Kraft’s latest foray into bars, the discontinued ‘MilkBite Bars,’ completely failed even as the consumer interest in bars skyrocketed (MilkBites launched right around the same time as RX). Analysts blamed a lack of innovation in the ingredients and nutritional profile for the failure. It spoke to a larger failure of the mega-brand. Indeed, in February of 2019, Kraft Heinz stock plummeted a whopping 27 percent in a single day after the company announced that it was writing down the value of Kraft Heinz by $15 billion. “The eye-level supermarket real estate that large packaged food brands control has effectively gone from being worth thousands of dollars per square foot to pennies,” explains Anthony Flynn, the CEO of YouBar, an innovative co-packer of protein bars and cutting-edge bites.
To see the sad future of big food brands, just look at toys. When Toys R Us declared bankruptcy in 2018, Mattel’s shares plummeted because the shelf space that made them such a monster vanished. Shares at Mattel are now trading at half of what they were 2 years ago. Now that same thing is happening to the food industry, and Kraft Heinz’s downfall is only the tip of the iceberg. Indeed, the S&P 500 packaged foods and meat index has declined 6% in the past three years, compared with a 47% gain for the S&P 500 overall.
What’s more, big food share prices were being artificially held up since companies like 3G were seen as potential imminent hungry cash purchasers. On the day Kraft Heinz shares plummeted, that now-baseless expectation also took a nosedive – and took with it multiple other big food stock prices. Also on Feb 22, Campbell Soup Co. plunged 7 percent, J.M. Smucker Co. dropped 5 percent, and Kellogg Co. fell 3 percent. On Feb 27, Dean Foods — one of the largest dairy companies in the United States with 50 well-known brands under its umbrella and $7.7 billion in annual revenue— reported a net loss of $260 million in 4th quarter, and is looking to sell the company outright. Analysts don’t know if they’ll be able to find a buyer.
At least one co-founder at 3G, Jorge Paulo Lemann, tried to send out a warning. In April of last year, he told the Wall Street Journal: “I’m a terrified dinosaur. I’ve been living in this cozy world of old brands [and] big volumes. You could just focus on being very efficient and you’d be OK. All of a sudden we are being disrupted in all ways. If you go to a supermarket, you see hundreds of new brands. In beer, we had the new kinds of beer coming in from all over. We are running to adjust.”
They didn’t run fast enough. Far from investing in the kind of innovation that nimbler upstart brands deliver, Kraft Heinz actually slashed its innovation budget care of a tactic known as “zero base budgeting.” Other big food brands have tried to offset their own need for innovation (which they haven’t been able to justify in the ZBB environment) by paying enormous sums to buy brands that they see as being these ‘fresh start ups.’ Case in point was Kellogg’s purchase of RX Bar in 2018. While RX undoubtedly crushed it as a start up (and made its founders rich!), the bar brand hasn’t done the same for Kellogg’s since being acquired. Although press releases from the company say that the purchase has been successful, the numbers show it’s not nearly enough. Kellogg’s operating profit last quarter plunged by 13 percent (excluding foreign-exchange effects). What’s more, they’re slashing staff in the same way that all these companies do when killing innovation. In December, RXBAR laid off 40 employees -- about 20 percent of its workforce. At the same time, internal innovation at Kellogg’s is so shabby that it’s mockable. Their newest innovation? A wavy Pringles chip. Potato chips with waves have been around since the creation of Ruffles in the 1950s.
The New Winners are Agile Protein Bar Entrepreneurs
So who are the winners in this new landscape? Nimble and small new food start-ups that have direct-to-consumer sales (typically through their own websites and through Amazon), fresh marketing tactics (like social media influencers as business co-founders), and an enormous focus on innovation. Anthony Flynn has a special insight into this new world of winners. As the Founder and CEO of Los Angeles-based YouBar, which develops and manufactures cutting-edge food products for leading brands and influencers, he is the manufacturer that is producing for dozens of the new winners. “Kraft Heinz and the legacy CPG brands are all giant dinosaurs,” says Flynn, “And the digital age -- embodied by companies like Amazon and Alibaba -- are the meteor hitting earth. The hot new companies are the little, nimble mammals that move fast, are fresh and innovative and don’t need huge sales to get huge profits.”
Although Flynn cannot mention the names of the companies that YouBar produces for due to non disclosure agreements, it’s possible to get a sense of the winners through simple Google and Amazon searches. Look for the top CPG foods capitalizing on the hottest dietary trends, and you won’t find the legacy CPG brands anywhere. Keto, for example, is the biggest diet trend of 2019 according to Google statistics. And if you type “Keto food” into an Amazon search, you won’t see General Mills or Kellogg’s-owned brands at all. Instead, you’ll find these nimble start-ups.
“We used to get excited when a big brand wanted to do business with us,” says Flynn, “But now, the companies that sell the most are the ones with a couple of cutting-edge millennials at the helm. You want to know who I get excited about working with? It’s the brand new start-ups with marketing expertise and an ultra-lean, innovation-heavy staff cranking ideas out of a WeWork station in San Francisco. Instead of supply chain managers, they have chief innovation officers. Instead of deals with grocery stores, they have in-house Amazon sales experts. They come in with a new idea and pre-sell a million bars on a Kickstarter campaign even before Kellogg’s has heard of the trend!” In other words, the giant legacy dinosaur brands, with their 18-month idea-to-shelf lifecycles and cost-cutting obsessions, are doomed.