Feeding Frenzy: National Food Giants Are Eager to Acquire Innovative Local Brands

Two years ago, when Madeline Haydon was pregnant and trying to eat a healthier diet, she was disappointed by the choices of creamer available for her coffee. Widely used products such as Coffee-mate contained hydrogenated oils and sugar, not to mention mysterious substances with names like titanium dioxide, mono- and diglycerides, and carrageenan. The dairy-free alternatives were watery or simply didnt taste good.

Haydon, an M.B.A. from Seattle University, saw opportunity. Working in her kitchen, she came up with a creamier alternative derived from coconuts and almonds. After raising money through Kickstarter and some angel investors, she set out to market her product on Amazon.com, at food expos and through social media.

Today, her Nutpods creamer is available in 450 stores, including Metropolitan Markets and Whole Foods, and is the top selling nondairy creamer on Amazon. After operating out of Haydons home, Nutpods will soon open a headquarters office in Bellevue. We are more than holding our own against the big brands, reports Haydon, who says her product, which contains no additives and is certified non-GMO, gluten-free, kosher and vegan, is also a good nondairy substitute in cooking.

Haydon is one of thousands of entrepreneurs across the country betting that more healthful, planet-friendly foods and beverages will make them good money. Many are cashing in with tech-like returns, thanks to an ecosystem of investors eager to buy in, consumers ready to try new, clean food and food giants hungry for acquisitions.

As people continue to become more health conscious, Geoff Haydon sees a significant shift in the way people are eating. Geoff happens to be Madeline Haydons husband and a director at Meridian Capital, the Seattle-based investment bank. Meridian recently produced an extensive report on the trend toward food and beverages that are locally sourced and transparent about their ingredients, offer more gluten-free, dairy-free and meat-free options, and use natural processes such as fermentation that are considered good for the digestive system.

The trendiness of these products creates opportunities for small companies to get national attention and to experience potentially explosive growth. For example, Kombucha Town, a small, Bellingham-based producer of fermented tea, has seen its sales quadruple in the past year and is raising new money to help triple production. Its kombucha is so trendy that, last year, Legacy Entertainment, a Hollywood product placement company, offered to place its tea in Spider Man: Homecoming, a Sony Pictures film scheduled to be released in July.

They approached us and offered the deal at cost, about $6,000, compared to the normal price of about $50,000, says Kombucha Town founder and CEO Chris McCoy.

Meanwhile, companies like Kraft Heinz, General Mills and Coca-Cola, whose hundreds of brands dominate supermarket shelves, have seen their revenues flatten as more consumers regard them with the wary eyes a past generation regarded tobacco. While Big Food has tried to introduce products to attract health-oriented consumers, it has had little success. Big companies dont innovate well, says Geoff Haydon. They are set up to create the cheapest products. They dont have the patience to nurture a product until sales are significant enough to make a difference.

Instead, large food and beverage companies have set out to devour their smaller, faster-growing counterparts so they can channel these products through their massive distribution systems. In 2014, Atlanta-based Flowers Foods, the nations second-largest bakery and owner of the Wonder Bread brand, acquired Milwaukie, Oregon-based Daves Killer Bread for $275 million. Flower Foods placed Daves Killer Bread in 9,000 new retailers and added a bakery in Alabama capable of producing a million loaves of bread a week. Similarly, J.M. Smucker bought Seattle-based Sahale Snacks for $80 million, added hundreds of new salespeople and now uses the Sahale brand as a platform to sell other health-food products across the country.

Strong demand for successful health brands has led to valuations even tech companies would envy. Last November, Dr Pepper Snapple Group paid $1.7 billion more than seven times revenues for Bai Brands, a maker of fruit-flavored antioxidant drinks and other health-oriented beverages whose 2016 revenues were projected to be $230 million.

The effort by large companies to buff their images and sales with innovative premium brands is hardly new. Forty years ago, US Tobacco acquired an upstart winery called Ste. Michelle as it sought brands that would make up for shrinking sales of cigarettes. And while the health food sector has received much of the attention, a great deal of the activity going forward has been in very large companies acquiring small beverage brands that use local ingredients and experiment with bold new flavors.

In addition to traditional venture companies and investment bankers, the large food companies have also created investment arms to put money into new food and beverage startups. Earlier this year, 301 Inc., the venture capital arm of General Mills, invested $6 million in Rhythm Superfoods, an Austin, Texas-based maker of kale chips. Early last year, Campbell Soup Company launched Acre Venture Partners, a $125 million fund to invest in disruption. In December, Tyson Foods established Tyson New Ventures, a $150 million fund that will invest in alternative proteins. Other players in the space include Coca-Colas Venturing & Emerging Brands fund and Kelloggs Eighteen94 Capital.

As consumer preferences move toward more diverse tastes and trends, the pace of innovation in the packaged food industry continues to intensify, says Gary Pilnick, vice chairman of Kellogg Company.

Accepting an investment from an equity company can be a mixed blessing. The sale of Daves Killer Bread raised a ruckus among consumers who accused the company of selling out, but it had little choice but to sell because it had a large equity investor. Greg Steltenpohl recently told The New York Times he was so unhappy that his first company, Odwalla, ended up in the hands of Coca-Cola that he would never sell Califia Farms, his latest business. Yet Steltenpohls acceptance of a $50 million investment from the New York-based equity firm Stripes Group could make it difficult to remain independent.

Typically, an investor-partner is looking at a five- to 10-year horizon, says Erik Einwalter of Cascadia Capital, the middle-market investment bank that handled Agrials acquisition of Seattle Cider.

While acquisitions by larger companies can reduce independence and innovation, Tim Crosby of the Cascadia Foodshed Financing Project, a collaboration of foundations and investors who want to use market-based strategies to grow the Pacific Northwests regional food economy, says new investments in healthful, organic foods will generally have a positive impact. A large Daves Killer Bread production facility in Alabama, for example, will create more demand for organic grains, enticing more farmers to adopt organic practices.

Demand for higher-quality breads in the Seattle area has led to the development of specialty grains that sell for higher prices, making it easier for small farmers to survive. The popularity of quinoa, a high-protein grain, led Washington State University to do research that concluded the high-value grain could be profitably planted in Washington state, Crosby adds.

Finally, the broader trend toward organic packaged food has created a rich ecosystem capable of responding to consumer demand with products more attuned to a health-conscious lifestyle. But those who hope that the food giants acquisitions of organic, local brands will have a ripple effect on the food giants might consider the case of AB InBev, the beer giant that owns mass-produced beers like Budweiser. The companys acquisition of Red Hook took the energy out of that pioneering brewery, and locals are concerned that its recent acquisition of Elysian Brewing Company of Seattle will have a dampening effect on the craft beer movement.

So is there a conflict between organic values and Wall Street investment?

Madeline Haydon of Nutpods sidesteps the question carefully. Were just getting started and we are having a blast growing our brand and our company, she says. Her answer reflects the ambivalence of many of the regions emerging brands toward the question of whether the healthy/local/clean food movement and good old-fashioned capitalism are ultimately compatible.

Here are some stories that illustrate how local entrepreneurs have addressed or might address the issue.

seattle-based nuun Hydration launched as a business school project 14 years ago in an effort to find an alternative to sugary sports drinks. The company founder, Tim Moxey, came up with a tablet, which, when plopped into a bottle of water, provides a refreshing, fizzy drink with the right blend of electrolytes. Not included: the unhealthful sugar and a wasteful plastic bottle.

When Kevin Rutherford joined Nuun as CEO in 2013, the firm started to move more aggressively to embrace its natural origins. The product was reformulated to remove artificial sweetener, and it received non-GMO, vegan and gluten-free certification. We made it cleaner and got the credentials, says Rutherford. He hopes to upend sports drink giant Gatorade, whose popular 20-ounce bottles contain nine teaspoons of sugar.

When you have an obesity epidemic, Rutherford says, why would you want to add so much sugar to a drink?

Today, with 264 employees, Nuun is the No. 1 drink product in sports specialty shops. Last year, available at racecourses around the country, it was used by a million runners and cyclists and saw 30 percent improvement over the previous year.

Rutherford is looking for financing to build on Nuuns growth with a digital marketing campaign and by adding new products such as Nuun Vitamin, an anytime drink aimed at the broader consumer market.

Building a national brand requires a lot of money, so many firms look to investment banks for the cash, a path that often leads to the eventual sale of the company. David Lee, cofounder of Field Roast Grain Meat Company, doesnt like the idea.

Field Roast, which produces sausages, cutlets and loaves made from a thick mixture of wheat gluten, fresh vegetables and spices and sells them to retailers such as Whole Foods, Kroger, Costco and Walmart, has attracted plenty of investor attention.

Weve been offered a lot of money, says Lee, who maintains that independence and a strong belief in vegetarianism are integral to the Field Roast brand. Lee sees his company as part of a broader mission to end the inhumane treatment of animals. So the companys 44,000-square-foot SoDo facility, staffed by 140 employees, keeps expanding its menu of vegan products, including a recent cheese offering made from coconut milk and tofu.

Lee is also concerned about growing income inequality and the extent to which acquisitions, by filling the pockets of a few investors and owners, end up widening the gap. For that reason, and for fear that a buyer of his company would be less dedicated to its vegan philosophy, he looks for other ways of raising capital. One option is considering a Regulation A+ public offering, which allows private companies to raise up to $50 million from the general public, not just accredited investors.

Such an offering, Lee says, would allow him to sell shares to customers, employees and anyone else who has this vision, thereby allowing them to take part in the success of the company.

So whats the next trend that could catch the attention of national and international buyers?

Consider kombucha, a naturally fizzy fermented tea thats a probiotic widely believed to be good for the stomach, but is also sometimes consumed as a cocktail. The product has grown in popularity so fast that Pepsi announced in November it was acquiring KeVita, a California producer of kombucha.

Here in Washington state, one of the more ambitious producers is Bellingham-based Kombucha Town, launched by Chris McCoy, who learned to make the tea from his roommate at Western Washington University and decided to go commercial with a product in 2012.

I wanted something that made me feel good, he says, but was tasty and more refreshing than some of the more strictly health-oriented products.

He sells his kombucha to wholesalers for $1.75 per 16-ounce can. It retails for $3.49. After quadrupling sales in 2016, McCoy is now looking for financing to build a 1,000- to 2,000-gallon brew kettle to supplement his existing 500-gallon kettle. Walton Beverage Company, one of his distributors, is an investor. That company has a big stake in Spire Brands, which helps local snack and beverage companies expand distribution. He is also talking with the Starbucks innovation department about introducing the product into some Starbucks coffee shops.

Would he sell?

It depends on the offer and level of control, says McCoy. I want to control the quality of the product and the way the brand helps to create community. For the brand to realize its potential, core values are important.

McCoy says Pepsis acquisition of KeVita is good for business. It helps put kombucha in the public eye, and it will help build legitimacy in what is still an emerging industry.

Two of the more unlikely recent beverage deals locally involved French conglomerates acquiring tiny Seattle firms.

Westland Distillery enjoyed phenomenal early success, winning a cascade of national awards, including Craft Producer of the Year in 2016. But, as CEO Matt Hofmann observes, Its an expensive business to be in, so in order for us to make more whiskey and tell our story to more people, we needed additional capital.

Enter Paris-based conglomerate Remy Cointreau, which got into the scotch business in 2012 by acquiring highly regarded distiller Bruichladdich. It was looking for a way into the American market and last year found Westland in Seattles SoDo neighborhood.

Its never been about flipping a business for me, Hofmann explains. Im interested in the work, in our mission. As long as were allowed to continue that work unabated and with more resources, Ill be a happy guy.

Meanwhile, the largest cider producer in France, Agrial, a Normandy-based agricultural cooperative with $5 billion in annual revenues and 12,000 members, was also looking for a way into the United States market. It turned to Cascadia Capital, which introduced the cooperative to Two Beers Brewing, also situated in SoDo.

Two Beers was launched 10 years ago by Joel VandenBrink. He called it Two Beers because, says VandenBrink, If you have a couple of beers with someone, you get to know them better. Today, the company sells a quarter-million gallons of beer a year from its SoDo brewery and is the 13th-largest brewery in the state. In 2013, Two Beers decided to jump on the no-carbs bandwagon with a line of dry ciders produced on location. To expand its U.S. presence, Two Beers acquired Seattle Cider Company, which had distribution in 12 states.

Last spring, a get-to-know-you dinner between an Agrial delegation and the Two Beers team took place at Goldfinch Tavern in the Four Seasons Hotel. That meeting was followed by another meeting in France, which led to an equity partnership with the cooperative. VandenBrink will remain in place, the employees will keep their jobs, but both Two Beers and Seattle Cider will be folded into Agrial. Seattle Cider gets access to its expansion capital, while Agrial gets access to North American markets.

Josh Schroeter and Edmond Sanctis were climbing Mount Rainier in 2003 when they realized the trail mix they had brought along was tasteless. They came up with their own mixture of nuts, dried fruit and honey, and called it Sahale Snacks. In 2007, they attracted a minority investment from New York-based Palladium Equity Partners. Seven years later, The J.M. Smucker Company, owner of such brands as Pillsbury, Folgers and Dunkin Donuts, acquired the firm for roughly $80 million.

The two men then launched another company called Peak Sherpa, which sells tsampa, a sprouted and roasted barley that is a food staple of people who live in the Himalayas, and which Sherpas take with them when guiding climbers up Mount Everest.

Schroeter continues to run Sherpa, while Sanctis teamed up with a former colleague from his NBC days to launch Reason Venture Partners to invest in food startups. Traditional players in the packaged food sector alone are losing $4 billion in market share every year because the publics taste is changing, says Sanctis from his new office in Menlo Park. But unless startups get off on the right foot, they wont reach escape velocity.

His group is now supporting a venture called BitiCulture, whose goal is to use the latest fermentation science to replace sugary and highly refined foods and beverages with tasty, nourishing products that provide probiotic benefits.

Equity companies often mentor the companies they invest in, helping them sharpen strategies and clean up balance sheets. But they can also invite ruin. Consider the grocery chain Haggen, which served the Bellingham market for decades with a dozen stores distributing local products. In 2011, the Haggen family asked Miami-based equity firm Comvest to sell the business. Comvest installed a retail executive who sold the land under Haggens stores to a California firm for $200 million. That CEO was then replaced by a troika of Comvest executives, who proceeded to sell off the stores one at a time. But when the Federal Trade Commission required Albertsons to sell 150 stores as part of its merger with Safeway, Comvest reversed course, spending most of the Haggen real estate money to acquire the Albertsons stores and convert them to Haggen stores while selling the land under many of the Albertsons stores. The arrangement failed. Comvest sued, claiming Albertsons sabotaged the deal with mispriced inventory, rigged invoices and poisoned supplier relationships, and asked for $1 billion in damages. Then Haggen filed for bankruptcy protection. The buyer waiting in the wings was none other than Albertsons, now part of another equity firm, Cerberus Capital Management. Its unclear what the Haggen family received in the end. What did suffer was the Haggen brand and thousands of hourly workers who were laid off. R.H.