A New Way to Build Brands

Lab, accelerator, incubator, springboard, greenhouse, venture capital arm …The names and exact roles or functions of these efforts may be different, but the underlying idea is essentially the same. In response to changing consumer and shopper behavior, many consumer product manufacturers have launched initiatives through which they invest in, acquire or mentor emerging businesses that offer either new consumer products or technologies that can improve consumer engagement.Increasingly, this a critical path to growth for CPG companies, many of which have struggled in recent years to keep pace with shifting consumer trends and business models, including direct-to-consumer sales. Nearly all major CPGs now operate some form of in-house investment vehicle or incubator group, with the largest concentration found in food and beverage, health and personal care.In December 2019, PepsiCo launched its second North American Greenhouse accelerator program, which invests in startups working in plant-based solutions, natural ingredients, energy and mood management and sustainability.Often, these groups are charged with identifying new business opportunities in adjacent categories to the company’s core business units. And they run the gamut in terms of the size and scope of businesses they seek to mentor.The Chobani Incubator, for example, typically works with $3 million-$5 million businesses in non-dairy product categories that do not compete directly with yogurt. “We’re excited about categories that already exist, but we’re looking mostly to support companies that produce better-for-you versions of everyday food items like biscuits and soda,” says Zoe Feldman, senior director of new ventures at Chobani and director of the Chobani Incubator.Procter & Gamble’s P&G Ventures is a studio that partners with entrepreneurs and startups to build brands in household categories such as insect control and non-toxic home and garden, as well as personal care categories including products for such personal care needs as chronic skin conditions, menopause, sleep and personal performance.“We firmly believe that the next billion-dollar brands will come from a combination of internal and external innovation,” says Betsy Bluestone, commercial discovery leader at P&G Ventures. “Sometimes that means partnering with a startup that’s already in-market. For example, the technology for [insect spray brand] Zevo comes from a lab that developed the invention for those products, while we did the packaging, branding and marketing. It depends who the partner is and what their expertise is. Each one of our projects is specific to the business we’re building or accelerating and what they need.”Two Divergent PathsThe incubator model is not an entirely new idea. More internally focused types of accelerators, such as innovation labs and centers of excellence, have existed inside CPGs for decades. This latest iteration is different, however, in that the groups typically function independently and under an entirely different culture and organizational approach, one that often includes non-traditional partners in outside disciplines, such as design thinking.“The idea began to scale up about five years ago when CPG companies realized they couldn’t acquire the latest innovation or technology by staying within their own four walls. They wanted to create a group away from the distraction of the day-to-day business,” says E.J. Kenney, senior vice president of the consumer products industry business unit at SAP.The concept has since split into two divergent paths, says Kenney. “One started out with companies working with startups to get into complementary technologies, markets or brands, and then they’d bring those ideas for innovation back into the core business,” he explains. “Some found that as they went through this process, they started identifying businesses to invest in and it migrated into more of an investment capital arm. So that was another direction. What started off as building synergies and capabilities became a revenue stream that could flow back into the main business.”Not all incubators are focused on building new brands or generating incremental revenue. Chobani, for example, views the role of its incubator as serving a broader social mission to encourage the production of more good-tasting, natural and accessible foods. “We are the only CPG company with an incubator or accelerator model that does not take equity or invest in any of the businesses we partner with,” says Feldman. “We don’t ask for any intellectual property in return for our services and expertise. It’s an equal exchange of ideas and opportunities.”As a private company, Chobani has the luxury of maintaining such an altruistic approach. “Once you become a publicly traded business, that becomes a bit of a stickier wicket,” acknowledges Feldman. “Our founder [Hamdi Ulukaya] has a lot of strong personal values and a social mission that he adheres to, and we make sure that’s part of our ROI. We don’t look at KPIs in the same way that others in the industry do.”Even for large public companies, the funding of incubators and investment arms typically represents a tiny fraction of overall spending. Experts say this shields the groups from Wall Street’s expectations and allows companies more time and space to develop new products. “Big consumer goods companies will spend 1% to 3% of gross sales on technology, and I doubt they’re spending anything like that on these accelerators or incubators,” notes Kenney.Common ChallengesDespite their relatively small size, incubator groups and investment vehicles can create big logistical challenges for CPG companies. “There is a lot of complexity to setting one of these things up. What a venture capital firm does is fundamentally different from what a large-scale corporation does,” says Jeff Wray, global consumer industry market leader, transaction advisory services, at Ernst & Young.As part of its ongoing research, EY has examined the operating structure of several of these groups at large CPGs and found that the way they were managed depended on two things: how much money was invested over time; and how close the mentored companies were to the core business.“Depending on where you fall in between these two dimensions will determine how you manage the investment and your relationship to that investment,” explains Wray. “Something that is one or two clicks away from your core business, or [where] you poured in a small amount of funding, tends to be an early-stage way to explore adjacencies and you pretty much let that run independently, checking in with management teams episodically. Over time, as that business grows, then the strategic [issue] becomes how you fold those practices into your core business.”Different companies take varied approaches to integration. The Chobani Incubator, for example, is considered a part of the marketing function that operates under the demand team led by company president, Peter McGuinness. “We are very much steeped in Chobani culture,” notes Feldman. “I rely on all my colleagues across all functions and levels to help out with the incubator program when it’s in session. I’m definitely embedded in the business.”P&G Ventures has two office locations at the company’s Cincinnati headquarters, including one for its commercial team downtown at the general offices, where the c-suite sits. “Leigh Radford [VP/general manager] wanted our team to be accountable and gave us line of sight to the CEO and board of directors,” says Lauren Thaman, vice president of communications at P&G Ventures. “Like every P&G employee, we share our learning across the organization.“Take DTC. There are other businesses doing DTC within P&G. For example, when Native [deodorant] came in [as an acquisition in 2017], we spent a lot of time understanding their learning so we could apply it back to us.”Increasingly, those are the kinds of investments worth making. “We’re shifting away from an age of resources into an age of ideas,” says SAP’s Kenney. “Taking new or creative approaches from outside companies, whether they come from Silicon Valley or Tel Aviv, has to ultimately flow back into the business if we are going to see the next wave of innovation in CPG.”

A New Way to Build Brands

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