“Doing this as many years as we have, I’d like to say that we’ve seen it all,” said Jay Novak, managing director and global head of consumer, food, and retail for financial services company Houlihan Lokey. “But the recession that we’re in is a unique and interesting development within the food and beverage space.”
Novak and Brandon Ng, senior associate of consumer, food and retail at Houlihan Lokey, spoke during an SFA Ask the Experts webinar, Thursday. The veteran investment bankers shared how small and emerging brands can weather the pandemic and come out stronger on the other side. Here are some of their top recommendations:
Focus on growth, then margin. “Both are important,” said Novak, “but it’s widely acknowledged that margins will be lower in the beginning.” However, be sure to build in a pricing architecture so that when you scale, you’ll generate meaningful profits. Novak said that you don’t have to compromise on price. “The most successful companies we’ve seen have never given their products away,” said Novak. “They place a premium on the product and make it worth it for consumers by delivering on their brand promise.”
Don’t forget the club channel. The high velocities of the club channel make it a great way for emerging brands to drive trial and scale up. Makers can also use the channel to drive placement in other retail environments. According to Novak, Stacy’s Pita Chips started with most of its concentration in the club channel, selling its original Naked variety in bulk and then placing its other flavors in other retail formats. Customers would purchase the Naked flavor on their monthly trips to the club store, then branch out to try other flavors on their daily or weekly trips to the local grocery store.
Don’t hang your success solely on Whole Foods. For a lot of specialty makers, being successful in Whole Foods is a huge achievement. However, Novak noted that sometimes the products that sell well at Whole Foods don’t necessarily sell well in traditional grocery locations. Instead of just focusing on one type of retail, Novak suggested to also consider the other end of the spectrum: mass retailers like Walmart or Target. “If you have a product that sells well in Whole Foods and in Walmart, it’s hard to see where it’s not going to work,” he said.
Rationalize your SKUs. “COVID has accelerated the growth trajectory of many emerging brands,” said Ng. “If you’re not seeing sales, take this time to hit the reset button and figure out why.” Having a hero product or a single SKU that carries the majority of the business, can be extremely profitable for makers. Consider which SKUs are working with consumers and which aren’t, and work to pare down your offerings.
The market will tell you when it’s time to sell. There isn’t a straightforward way to tell when it’s time to sell your company. It can depend on many things: what the category looks like or what buyers are thinking at the time. For example, if a specific category is already played out with buyers, they will be less likely to be interested in buying your company. “Build your business like you’re going to own it forever. You can think about when you’d like to sell, but strategic buyers may inform what’s going to happen more than your own plan,” Novak said.
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