Patel helped set up Distill Ventures, the venture capital fund linked to Diageo, on the basis of this hypothesis in 2013, he told founders’ festival Bread and Jam in London last week.
The investor and start-up mentor suggested that developments in the food and beverage space are proving him right. Over the last two years in the US alone the top ten food companies have lost US$20m in revenue, he noted.
“It is a bloody brilliant time to be a food or drink entrepreneur,” Patel enthused.
‘Discover your story and tell it’
Small brands and start-up companies have been able to “steal share” form large food corporations thanks to a series of factors that have combined to create favourable market conditions.
Technological developments have lowered the barriers to entry and securing funding is “easier than ever before”, Patel suggested. However, he added one proviso: “If you have a good enough story.”
And it is here that Paten believes start-ups and mission based brands truly have an “unfair advantage” over established players.
“Consumers care about the founders, the ingredients, how it was made, your mission. You have an unfair advantage if you can discover your story and tell it.
“Big brands have lost trust. They are built for scale and efficiency. The thing about big systems is they are not very good at change. They are not very agile… They can’t compete.”
‘Fat and lazy’ targets
As smaller brands work to shake up categories, Patel believes that there are some sectors with large targets on their backs due to a lack of innovation and consumer excitement.
“There is a big thing going on in F&B: Where there are fat, lazy incumbents it is easy to go and make people care,” he told his audience pointing to sectors like yogurt and snacking as examples ripe for disruption.
“Everywhere they look in food and drink consumer usage is fragmenting. That is to do with people getting into specific things. Big brands struggle to get that,” he suggested.
More routes to market
The rise of e-commerce has played an important role in enabling small companies to meet consumer demand for niche products.
This, Patel noted, is contributing to the disruption faced by big brands, who are used to reaching consumers through traditional marketing channels and large retail multiples.
Rosie Price, head of buying at online retailer Ocado, recognises this scenario. “We have never seen fragmentation like this,” she said, noting that online sales are the fastest growing segment of the grocery sector.
Retailers like Ocado are increasingly interested in finding exclusive brands that give consumers a reason to shop with them – providing many small brands with an ‘in’ to the mass market.
“For us, small brands are really important… Products really excite us,” Price said. “We offer a unique range… The buyers are challenged to get two products you can’t buy anywhere else in each basket. We now get four.”
Ocado wants its suppliers to agree to exclusivity in order to build its point of difference and drive customer loyalty. This kind of relationship can also be beneficial to small brands, Price argued.
“We offer mainstream pricing. We have to be competitive with mainstream products. If you are in the ‘big four’ [Tesco, Sainsbury’s, Asda or Morrisions] we will have to match the price,” she explained. “When I talk exclusivity, I fear that when you go into a big retailer the price immediately drops… You have to make that choice commercially, if it is better for you to drive volume and go into Tesco. We have to match the price.”
William Chase, founder of Tyrrells, Chase Vodka and Willy’s Apple Cider Vinegar, also cautioned against rushing in to arrangements with large retailers without first thinking through the implications for your brand – and bottom line.
“A lot of people are so desperate to get in the big guys they will do anything,” he observed. Chase recounted an anecdote where, in the early days of Tyrrells, Tesco “called us in” and offered “£5m” in sales “if you cut your prices, cut your margin”.
Ultimately – after thinking about it for a “nanosecond” – Chase declined their offer to list on the basis that it would put pressure on profitability and devalue the brand. When he sold Tyrrells to Langholm Capital (reportedly for around £40m) it was making a profit of 4.5m on sales of £16m, Chase revealed.
Working with a corporate: ‘Very bad speed dating’
As part of Distill Ventures, it is perhaps hardly surprising that Patel believes good things can happen when big and small companies come together.
However, he echoed concerns over entering a retail multiple before a start-up business is ready. “Stay out of the big four for as long as you can, as long as you should,” he suggested. “It is easy to test and learn on your own Shopify site.”
While he sees the benefits of linking up with a large F&B player, Patel also suggested that it was important for small businesses to go into any tie-up with their eyes wide open.
“There are some watch-outs if a large company approaches you and says ‘do you want to partner’,” he said. “When large corporates go into the world and talk to entrepreneurs it is like very bad speed dating… It is a very one-sided relationship.”
In discussions with corporations, Patel said that the best place to start is “at the end”. He continued: “You should have a clear idea of the end game and you should ask them… check your interests are aligned.”
Again stressing that small brands no longer need large-scale distribution systems, Patel stressed small players should be certain they need of what is on the table, be it marketing, distribution, investment or advice.
“You do not want or need their distribution,” he stressed. “Beware of big company mentoring… Big company people think like big company people. They work in a certain way… That’s not what you do.
“Everyone underestimates the culture gap… There is a very different mind-set working in a big company. It plays through in how people think about things, about time.”
In short, if and when founder-led brands link-up with large corporations it is vital that they don’t lose the qualities that enabled them to grow in the first place, Patel concluded.
“The best entrepreneurs are good at understanding what they are good at and what they are crap at… I am looking for magic in a founder, the ability of an entrepreneur to convey their passion.”