- All categories of protein are forecasting significant growth, creating the potential for leaders to grow share and margins.
- Changes in consumer preferences and food consumption patterns have created new opportunities for protein companies to build brand recognition, differentiate and accelerate growth.
- Tapping into these trends is possible for major protein suppliers and for smaller emergent brands, and private equity groups and strategic buyers are taking notice.
Looking for global growth? It will be difficult to beat protein for the foreseeable future (Figure 1). Even the slowest-growth categories, beef and seafood, are predicted to experience a 30% increase in global consumption between 2015 and 2035. Pork, eggs and poultry are forecast to grow by 35%, 50% and 65% respectively.1
This growth is starting from a massive base: In 2018, global meat production reached 330.5 million metric tons, and per capita meat consumption was 34.7 kilograms.2 Given the sheer volume of protein consumed, companies that can capture even a small percentage of these markets can do very well. Those that find ways to achieve lasting differentiation have the best opportunities to grow share and margins.
In this report, Harris Williams Consumer Group Managing Director Tim Alexander, Director Ryan Freeman and Vice President Brant Wilczek discuss the growing strength in the protein sector, and how strategic buyers and investors can capitalize on evolving consumer preferences and consumption trends.
Figure 1: Surging Demand for Protein
Source: FAO; OECD; Rabobank; FAPRI
The growing importance of brand
Changes in consumer preferences and food consumption patterns have created an opportunity to build brands in protein that didn't exist even a few years ago. According to Alexander, beef, pork and chicken have historically been very difficult to brand. “However,” he says, “there are opportunities to disrupt all of the different protein categories with a branded business if you're on-trend, such as organic, hormone-free, non-GMO, pasture-raised or plant-based products.”
“People are more and more concerned about what they're putting in their bodies,” Freeman adds. “The brand then becomes more important because it represents what the product stands for and gives consumers confidence the product is, for instance, truly hormone free, or raised in an ethical manner. As people become more and more conscious about these issues, branding is going to become just that much more important.”
As the importance of brand rises, Wilczek notes he is starting to see the emergence of branding in protein, and continued momentum in the number of transactions to that end. But, he notes, “the disruptive impact that a brand will be able to have within a protein segment depends heavily on whether or not it’s bringing innovation to a category.”
Five ways to boost differentiation and growth
As brands rise in importance, Harris Williams sees a number of ways protein companies can differentiate themselves and drive profitable growth. In our experience, the following five approaches can be effective both for major protein suppliers and for smaller emergent brands.
Consumers are seeking authentic brands with true and compelling stories. This can transcend categories and price points, and can apply to new and old brands alike. Authenticity can be derived from company history, founder mission or many other attributes.
“Consumers want to know that the brand actually stands for something that's meaningful and has purpose,” says Wilczek. “That may be a focus on the humane treatment of animals, or a mission to support a not-for-profit organization, but the brand must be purpose-driven in some way. Growth in the category is coming from consumers looking for real, meaningful organizations.”
While authenticity may seem the domain of small, emerging brands, some large organizations are also investing in it. For example, Hormel’s national advertising campaign “Good Feeds Us All” is promoting its Natural Choice brand by spotlighting nonprofit organizations with a variety of missions centered on “putting more good out into the world.” 3
Authenticity has also been a catalyst for M&A. Freeman notes that many large organizations have portfolios of brands that may not resonate with consumers looking for authentic “better for you” products. “It can be very difficult for these companies to recreate the authenticity that comes through a founder-led, mission-driven business,” he adds. “Rather than trying to incubate authentic brands internally, some of these companies are expanding their portfolios through acquisition.”
2. Clean label
As shown in Figure 2, consumers increasingly care about what they put into their bodies, and that means the “cleaner” the label, the better.
Figure 2: The majority of U.S. consumers are adopting healthy food behaviors
Source: Rabobank, February 2017
Indeed, according to Food Insider Journal, global sales of clean-label food and beverage products reached $165 billion in 2015, and are projected to grow to $180 billion by 2020. A recent study cited by the publication shows that 76% of global consumers said they would be more likely to buy a product that contained ingredients they recognized and trusted. Seventy-three percent are willing to pay a higher retail price for a food or drink product made with ingredients they recognize and trust.4
As such, says Freeman, it is now common to see front-label claims indicating a protein is antibiotic-free, hormone-free or has no artificial flavors, colors or additives. Consumers have also become more interested in the product’s components and additives as identified in the back label. They want to see protein first, followed by a minimum of other ingredients. And, adds Freeman, they want to verify that the back label aligns with the product’s front-label claims.
Yet nailing the right clean-label claims can be a challenge, notes Alexander. “We’ve seen considerable evolution in front-label claims,” he says. “At first it was organic. Then it was all natural. Then it was no artificial flavors, no artificial colors, no artificial additives and non-GMO. I'm not necessarily certain all that has sorted itself out. There's still some debate around the functional benefits of these claims. Is it necessarily better for you just because it's organic?”
Alexander adds that some consumers have questions about the merit and veracity of certain claims, for instance free-range versus pasture-raised versus cage-free. “It remains to be seen exactly what the right claims are, and how to label them. But what is clear is that consumers care about what they're putting in their bodies, and are seeking simpler, cleaner foods.”
3. Supply chain transparency and sustainability
Just as consumers increasingly care about what’s in the protein they consume, they are paying more attention to the way it reaches their plate. This encompasses production methods, treatment of animals, environmental effects, impact on communities and more. It is a particularly important factor for the large and growing consumer base of millennials and the Z-generation.
Nielsen’s 2017 global sustainability survey found that 67% of consumers want to know everything that goes into the food they buy, and 46% of Americans say that claims on food products have a direct influence on their purchase decisions.5
“These issues are inevitably increasing in priority for companies, and many are taking very visible actions,” notes Wilczek. He points to the fact that Ball Park took early action on the trend by removing nitrites and nitrates from its beef hot dogs and eliminated by-products and added fillers from its meat line in 2017.
Wilczek says private equity groups and strategic buyers are taking notice, pointing to the acquisition of Niman Ranch by Perdue Farms in 2015. The company works with a network of more than 720 independent farmers and ranchers to raise livestock humanely and sustainably. It expects to double that network by 2028. Niman Ranch is credited with motivating Perdue to improve its broader grower-company relationship and increasing the company’s focus on animal welfare. And, with Perdue’s backing, Niman Ranch has been able to expand its brand while continuing to adhere to its mission.6
4. Ability to extend the brand across categories
Growth can be accomplished through creating scale in a brand’s core category and, importantly, by expanding the brand into new categories. (See Event Report: Natural Products Expo West for related insights from Alexander and Freeman on growth factors for natural and organic products.)
“Brands have to be able to show the ability to scale – that they have a large, addressable market with white space remaining in their core category,” says Alexander. “They also must have a plan or have demonstrated expansion into other categories that will exponentially increase the size of their total addressable market.”
Alexander cites Applegate as a great example of brand extension in protein: Since being acquired by Hormel Foods in 2015, Applegate has successfully extended its brand well beyond the deli meat category it initially entered when founded in 1987.
As Freeman adds, “Although a brand is growing 30% or 50%, that, to the ultimate acquirer, may not move the needle on its bottom line today. What the acquirer is really looking for is that the brand stands for something, and has traction and the proven ability to extend beyond its initial category. It wants the brand to help it achieve growth for the long term, not just the next couple of years.”
“It’s a balance for growing brands,” says Alexander. “You don't want to spread yourself too thin too early. You need a home-run product and increasing scale in your core category to develop the brand. Then, at what point do you start to extend into other categories? Which categories do you attack first? What are the logical adjacencies? These are critical decisions for growing protein brands.”
5. Convenience and value-add
Convenience continues to be a growth area within grocery, and protein is no exception. Companies that are bringing to market value-added products that provide convenience, such as prepared or fully finished meals, can create a niche for themselves. There are also constant opportunities to serve consumers looking for new flavor profiles as consumer demographics change in America.
“We are seeing this trend across all food companies, but certainly in the protein space,” notes Alexander. “Consumers want something that is already prepared or fresh and ready to mix, cook and serve. Foodservice operators also want things that are simpler to execute, which saves them time and labor.”
A second attribute that makes such value-added products attractive is the margin profile they generate. “The additional value-add of more fully prepared or marinated protein usually translates to a meaningfully better margin within the protein category,” says Wilczek. “So, from that perspective, a protein company focused on further value-added products can successfully eliminate some of the commodity nature of the underlying industry.”
Differentiation in action: Vital Farms
Vital Farms, which Harris Williams recently advised in securing an investor, is representative of a company taking full advantage of the opportunities in this segment. The company was founded in 2007 with the core mission of bringing ethically produced food from family farms to the consumer. Vital Farms exemplifies a rare combination of size, growth and white space in its addressable markets.
With a growing portfolio of pasture-raised shell egg products, butter and hard-boiled eggs, Vital Farms is experiencing 40% year-on-year revenue growth, and has significant white space available for continued growth amongst its existing and new retail customers. As it gains scale and expands across multiple product categories, the brand is poised to maintain a strong growth rate for the foreseeable future.
The strength of Vital Farms’ unique brand is attractive to investors. It is authentic in its reason for being, as a company that specializes in the ethical and humane treatment of animals. It’s also built a brand that stands for high-quality products. There’s a direct correlation between its core essence of animal welfare and the quality of what those animals produce. Hens that are pasture-raised and cared for can produce higher quality eggs because they have a varied diet, and experience less stress.
As Freeman points out, “with eggs and butter that are better than those of competitors, the company can charge a premium relative to its peers.” Its eggs cost three times more than conventionally raised eggs, yet Vital Farms is one of the fastest-growing egg brands in the country.
According to Vital Farms President and CEO, Russell Diez-Canseco, “the root of the brand that we are building is the spirit of transparency.” The company has educated consumers on its mission by providing transparency from its farms to its processing to the shelf. It takes extensive consumer education on the benefits that come from terms such as pasture-raised, for both the animal and the consumer. Finally, Vital Farms has demonstrated in the successful launch of pasture-raised butter that it can carry its brand into other growth areas.
Wilczek sums the brand up nicely: “There's a lot of white space in Vital Farm’s core categories, but there's no limit to where you can take this brand. In protein, that’s anywhere that consumers care about the ethical humane treatment of animals, and that’s a massive addressable market.”
Vital Farms is just one of many protein companies that are thriving because their brands align well to the underlying consumer trends driving growth in the protein segment and broader food industry. Consumers are calling for authenticity, clean labels, supply chain transparency, sustainability and convenience. Major protein suppliers and smaller emergent brands that can appeal to these needs and extend their lines beyond core products are well poised to benefit in the coming years.
Published August 2019
1. OECD; FAO, Statista 2019