Forecasting a Non-Disruptive Future

Think the last era has been an upsetting time in the food business, one full of disruption and transformative innovation that has totally reshaped the industry landscape? Well then, get ready to relax, because the next few years are going to be a relative cakewalk, with many fewer revolutionary products and formats forcing their way onto the scene or getting real traction.

That, at least, is the forecast of Tom Bailey, a senior analyst with Rabobank, the giant multinational banking and financial services company based in Utrecht, the Netherlands. He recently concluded that the lack of financial results from some potentially earth-shaking new food platforms, such as plant-based meat, will combine with a more skeptical global consumer, and a more challenging economic environment to limit the collective disruption of the industry over the next few years—especially as compared with what has happened over the previous two decades.

“There have been lots of products put in front of consumers that made total sense and truly could displace incumbents,” says Bailey. “There have been thousands of products. But they clearly were not ready or did not have the appropriate attributes or their focus on product development wasn’t on the appropriate attributes.”

Rooted in agriculture, Rabobank has financially backed some of the world’s biggest meat and dairy companies, such as Tyson in the United States and Fonterra in New Zealand, as well as scores of recent startups, including upcyclers such as The Leaf Protein Co., agricultural automation developers such as Bluewhite, and diversified ingredients innovators including Cano-ela.

Bailey recently shared his thoughts about where things are headed. 

You recently issued a report titled ‘Disruptive’ Food Products Prove to be More Hype Than Bite: Is the Age of Food Disruption Over? in which you basically say that disruptions promised by new technologies, including insect protein bars, synthetic fat replacers, milk proteins produced by precision fermentation, and plant-based meat alternatives have come up short. What’s been the reaction in the industry to your conclusion?

There has been 90% head nodding. I excluded some of the slightly more upstream investments where there’s been a lot of success, such as delivery systems. There’s still a lot going on there and will be more success.

What I looked at is actual products. What we’ve seen is a lot of change in how people are eating, but not in what they’re eating. That’s where we’ve seen the disappointments. By and large, people are eating mostly the same things.

So there really hasn’t been a revolution in the business and in Western diets?

Right. It’s been kind of like going to Expo West. There are a lot of the same things there, and at the end of the day, you don’t feel great after having eaten them. There are a lot that you forget because they’re not memorable. For every 50 products, you might find one good one.

Are there categories where transformation actually has fulfilled its promise?

Really the only one is plant-based milks and proteins. Those are being shoehorned into everything. Plant-based milks have picked up 10% to 20% of the [milk] category. I think plant-based meat people thought they could achieve similar levels of penetration. But while plant-based milks under promised and over delivered, with plant-based meats it’s been the opposite.

Surely there have been other examples of success.

Yes—cauliflower-based pizza. You don’t hear much about it, but it’s stocked at Costco, and it’s done very well. There’s definitely a place for these products.

But there’s a short list of successful ones. It’s great to see innovations, but consumers like to see them be close to what they’re [already] consuming, rather than [be] so unique and difficult to understand that they need explanation.

Another example is vegetable chips such as beet and okra. Instead of eating potato chips, there’s been some success with them. They’re displacing traditional chips, and they’ve done fairly well.

What about food for babies and toddlers? Entire new brands that are now huge, such as Happy Family and Plum Organics, have taken over that category.

That’s been based largely on organics, which are more incremental than disruptive. Another category where there’s been even less disruption is infant formula; maybe there are a few new ingredients here and there, but holistically it hasn’t been disrupted.

It’ll be interesting to see what happens to formula with precision fermentation, which ultimately will have a place in more high-end, almost medical aspects of food. It’s how we make a lot of insulin, so it’s not [a] new technology per se. But if you could use it to make pre- and probiotics and sugars that now you can only get from breast milk, that could deliver a return for investors.

What about another category where fermentation is big—cultivated meat?

Those products are going to take more time and investment and the right category alignment. A lot of these companies went straight for the goal of displacing the entire whey industry, or the entire steak industry. Maybe they need to start smaller and look at where they naturally fit first and where they can achieve a margin.

Will insect consumption ever be a mainstream occurrence in America?

We are fortunate with our food system and the amounts and efficiency with which we can produce food. So I don’t see that occurring at scale. For some reasons, people may want to try it out, but I don’t see much more than that occurring. Insect-based protein and nutrition really have gone more down the road of animal feed, and might sit there more naturally.

A big factor in much of the disappointment you see is financial, right?

Yes, as I say in the report, one of the most significant drivers of the explosion of investment by venture capital funds, food companies, and others in the consumer food innovation space over the last 12 years has been the low-interest-rate environment. There was also an influx of bullish investors in 2021 with cash reserves on hand after a very turbulent 2020.

But the world has changed since 2020, and many of these investments haven’t played out the way investors would have liked. Many products have delivered low revenue growth and profitability, and valuations are under pressure from rising interest rates and a number of other challenges.

As this “revolution” has continued, have big CPG companies recovered their bearings?

Not necessarily. But these disruptive products eventually sit with them as they incubate and make acquisitions and scale products up. They have the networks for sales and manufacturing, and R&D know-how to tweak and improve, so ultimately the successes and disruptions will come from large CPGs. But not a lot of that has happened yet.

In high-interest-rate environments, businesses will be more careful about launches. And [launches become] even harder for startups to do, and [higher costs make it more difficult] to be profitable.

Social media has created a huge new pressure on companies and brands to respond to consumer-led creations, such as the Keithadilla that was created by a customer and ended up being adopted by Chipotle as a menu item. How should CPG companies respond?

Well, the Doritos Locos Taco [at Taco Bell] was an incremental innovation called for by consumers, and the company’s ability to respond, and be in tune with what consumers were saying, led to a recipe for success. It was a very good tactic.

This sort of thing is less risky than you’d think because you already know consumers are asking for it, and you have the R&D internally to get it done. But it feels disruptive.

Do consumers really care about climate-change mitigation when they’re buying food? So many companies are playing into that theme now.

They care, but what do you message to them about what your carbon footprint is? Oatly has all this information on its label in the United States, but the feedback on it is mixed. It’s been on their label in Europe for a while. There’s so much information for consumers to process when making a purchase decision. This just adds another layer of complexity.

Does part of the failure of this revolution reflect, especially more recently, the entry of investors who don’t come from a food or even agriculture background?

That’s a good point. We do see VCs from technology and climate coming into food, and over the years, we’ve had countless calls and discussions with them about this space. They’re learning. There are smart people and investors in this space, and they know who to reach out and talk to.

But also there was clearly some overzealousness in their moving into food, where they thought they could perhaps disrupt it like technology and climate, and it’s proven much more difficult to disrupt consumers’ palates than their lifestyles. People will sign up for a Netflix subscription way more readily than they’ll bite into an insect bar. Food is culture for people, and that’s a tough thing to change.ft