Co-Founder at Not Just Co. || 2024 Tory Burch Entrepreneur || 2023 Stacy's Rise Fellow
Last week I had the opportunity to engage with an industry partner in a meaningful way about the state of the food industry. That conversation lead to a follow up, and upon further reflection of that, I send a version of this email to them outlining my perspective. As a former policy wonk and retail buyer, I'd like to think that I see the various ways in which the system is struggling, and how it's currently serving almost no one. I would love your thoughts on the following and your ideas for how to fix it if you can get through this post! 😅 +++ It is my belief that the food industry is in the midst of a significant shift that will reconfigure the way that business is currently done and ultimately how people get their groceries. The current model is predicated on the easy money that was available to strategic buyers in the early 2010s - 2021. During that period, money was cheap for these large corporations to finance deals, and they bought companies for up to 10x revenue. Investors saw those returns and flocked to CPG, flooding the industry with cash. At the same time, grocery margins, which have always been slim, started to tighten even more. So with suppliers flush with investment dollars, retailers implemented more fees for suppliers get on shelf. Supplier fees now account for up to 70% of grocery store profits. Distributors also cut deals with desired retailers, which don’t actually cover costs. That margin has to come from somewhere, so it’s come primarily from suppliers in the form of billbacks, fees, and promo periods. This delicate balance has worked for the last ten years due to the reatively easy capital available to smaller brands, and because of the strength of the US economy, which allowed more consumers to purchase more high-priced products. That ecosystem has now changed. With the spike in interest rates in 2022, both the actual number of M&A events, and the value of those events dropped drastically. Inflation has also caused consumers of all economic statuses to watch grocery purchasing more closely, and as a result, capital investments have virtually dried up. Loans are also much harder to get and the rates are 15- 18% APR. However, suppliers are still being required to pay the retail and distributor fees and unless their margins are enormous and/or they have loads of working capital to carry them through the ultra long cash cycle, the math doesn’t line up. That’s the position that so many smaller companies find themselves in - the retailer/distributor marketplace is getting squeezed and needs to find a way to grow margin, but small suppliers can no longer afford to pick up that tab. And with inflation, customers can’t absorb more of that cost. The result is that small suppliers are going out of business or fire-selling. And with no end in sight for the high interest rates we’re seeing now, I fear that there will be a mass exodus of people who aren’t independently wealthy enough to foot the bill. Thoughts?
So true. I always try to support local small businesses. How can we as consumers make a difference?
Peter Gialantzis
1mo
Jacqueline Grady Smith our founders Larissa Russell and Fiona Lee foresaw all of this 7 years ago and decided to do something about it by creating a disruptive national distribution platform for emerging brands. You are very articulately describing a problem which has plagued the industry for decades now and fortunately there is a solution.
Carly Spatt
1mo
These are such good points and definitely a big concern for so many founders in the CPG space.
Seena Chriti
1mo
Wow great insights
Owner at Brewer's Foods - Upcycled Food Icon-Fighting Food Waste on the Streets - Not behind a Desk
1moBuy local, distribute local , and keep those dollars in your neighbors pockets not the big guys yachts.