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Just Food: “Mission-led” food brands to “humanisation” in pet and Millennials driving ESG – Verlinvest’s Ben Black talks investment thesis

11 April 2022

“We're very heavy backers of what we call mission-led brands that are delivering functionality, price and quality" - Ben Black

Oatly investor Verlinvest is on a mission to back the next generation of entrepreneurs disrupting food and beverage categories, or creating new ones.

The Brussels-headquartered consumer growth equity investor, which allocates capital on behalf of the family-controlling shareholders of brewing giant AB InBev, is generally centred on brands “bringing something new”, particularly for younger consumers who have different priorities than their peers, Ben Black, a director for the London office and Verlinvest’s Europe portfolio, says.

“The idea being that we can launch disruptive innovations very quickly alongside entrepreneurs, and really act as a bridge between entrepreneur-led private companies and access strategics or the public markets,” Black tells Just Food, adding Verlinvest favours companies with “international potential”.

Verlinvest, with more than EUR2bn (US$2.1bn) of assets under management, is the largest shareholder in Sweden’s oat-based dairy drinks, yogurt and ice-cream firm Oatly. It has also backed Greek yogurt and dairy-free firm Epigamia in India and what Black describes as “heritage brands” with “a degree of expertise within a single product” such as Parma-based Italian sauces maker Mutti.

Outlining the investment philosophy, Black says: “We’re very heavy backers of what we call mission-led brands that are delivering functionality, price and quality but also brands that are doing something good. And that’s often across three different areas – sustainability, supply-chain ethics and better outcomes for health.”

Who Gives A Crap is an example of Verlinvest’s investment criteria, an Australia-based global direct-to-consumer start-up producing sustainable ethical alternatives to toilet paper. And Black says there are opportunities in natural plant-based diets within the health and wellness area, and also with low-sugar alternatives.

“We like those under-fished ponds, as it were, where categories have become very price-oriented, and are looking for someone to reinvigorate those categories, particularly younger consumers – things that appeal to what their purchasing habits are rather than the purchasing habits of people 30-40 years older that have very different criteria,” Black explains.

“Our approach is to try and identify consumer inflection points first and foremost, rather than a particular category.”

“Patient” with Oatly

Verlinvest, which has offices in New York, Singapore and Mumbai, as well as Brussels and London, invested in Oatly in 2016, when Black says the business was a “US$30m brand”.

Oatly went public in May 2021 with a listing on the US Nasdaq exchange and has gone from a $118m revenue operation in 2018 to $643m in the year to 31 December. While the top line was up from $421m in 2020, the pre-tax loss of $215m was much wider than the $58m in the previous 12 months.

“We can be very patient. We hold some of our businesses for ten to 15 years where we think there’s still growth to be had. So profitability should be an outcome of achieving market dominance,” Black explains the investment thesis behind Oatly.

In the early days, Black says the investment in Oatly was centred on creating consumer awareness and education around plant-based milk drinks, starting with out-of-home and with a view to building up retail.

“We were very heavily focused on premium coffee shops – lower volumes by nature than grocery. And the idea was to seed with the right consumer the product, such that grocery would drive volume at a later date, that we would introduce people to the category, introduce them to something new.”

“Humanisation” in pet

In pet food, Verlinvest was an early-stage investor in US e-commerce firm Chewy.com but has since exited, although Black confirms the category remains an investment target. “We do quite a lot in pet,” he says.

Pet food was pinpointed as a “hot” M&A category for this year by investment bankers interviewed by Just Food after a surge in pet ownership during the pandemic as people sought a companion during lockdowns.

Black describes the trend as a humanisation process. “Millennials are now becoming the biggest purchasing group over the past couple of years, globally, and have very different lifestyles and purchasing habits to the demographic groups that came before. One aspect, in particular, is having kids later.”

He adds: “There’s an element of humanisation with these pet purchases that we’ve not seen in earlier generations. We [see] the younger people, particularly Millennials, spending more on their pets, and we see them spending in a more diverse way. And we see them spending on more premium products that are akin to human products.”

Nonetheless, he suggests there may be a differentiation between pet volumes and price as we come out of Covid, with the former unlikely to continue at the same pace. Black says there’s a “fundamental shift” playing out “in the quality and price that people are willing to spend on their pets”.

And he doesn’t expect any marked trade down in the category into areas such as private label as inflation really starts to bite consumers, even as prices go up along with human food categories. It’s a sector that has proved “remarkably resilient”.

“People across all pet categories, so within healthcare as well, are spending up to 25% of their disposable incomes on their pets, and we don’t see that changing too much over time. It’s a generational shift,” Black suggests.

Pet food could also be ripe for consolidation given the longer-term trend around changing consumer behaviour not related to Covid, with the onslaught of inflation and higher interest rates playing a part.

Black explains: “As monetary supply tightens, both from a consumer and financial aspect, you’ll see the huge fragmentation that we saw, of lots of niches emerging. I think you’ll see consolidation.

“We’ve got lots of local heroes with impact within pet food in particular; you’ve got lots of niche products and niche premium products. It means a lot of consolidation within that to make better use of and better leverage over overheads. So I see both the consolidation opportunity and the growth opportunity.”

Cell-based entry

Cell-cultured foods are on Verlinvest’s radar too, although the vast majority of companies engaged in the space have yet to commercialise products and the challenge will be affordability – a drawback of many alternatives to conventional protein, along with the taste profile and differences around creating unique products or solely mimicking the species they are trying to replace.

Black says Verlinvest hasn’t yet invested but would be eyeing businesses that have commercialised.

“We’re intrigued by the prospect of creating a real analogue with meats or seafood, which today we’ve not found – I’m not sure how to say this pragmatically – [with] many of the things that are trying to imitate meat or seafood,” he notes.

Convincing consumers to try such technologically-advanced cell-based products and return as repeat purchasers might be a challenge if the category is to set a course for long-term and sustainable growth. Meat-free has been around for years, and despite some impressive growth rates, signs are emerging that demand is beginning to slow.

As with plant-based alternatives, Black argues “fundamental baselines” around nutrition, taste and price need to be achieved to reach that “switching moment” and drive repeat, beyond what he calls “a nice marketing story”.

“You’re making a bet that that happens first and foremost, that you can receive that baseline. Once you’ve got comfort that that can be the case, our view is to take a very narrow perspective on where we can drive trial,” he says.

Investment landscape

When it comes to the general investment environment, Black says there’s a heightened risk element and caution around supply chains, inflation, rising interest rates and the war in Ukraine, even though he says private-equity and food investors bolstered their balance sheets amid the uncertainties of Covid-19.

And he throws another consideration in the water, what he terms “de-globalisation” with “lots of onshoring of production”.

“There’s a lot more macro-risk associated with investing in food systems now, particularly global food systems, than there was 18 months ago,” he says, adding that corrections in company valuations as stock markets come off have made deals “harder to do” in the public markets.

“If you ask me, there’s still a period to go down where there’s a gap in valuation expectations from both buyers and sellers that needs to be bridged. I think that will take some time to normalise because we see a number of different companies still asking the question – ‘should I raise money publicly once the stock markets return or should I do it privately?’

“Those questions will become more apparent as it becomes clearer whether stock markets will return to record highs or whether we’re going to continue to see them slide or flatten out at these lower levels,” Black says.

ESG for Millennials

Environmental, social and corporate governance (ESG) was a key topic before Covid-19 and awareness was further heightened around COP26 last year. However, the macro and micro risk elements, particularly disruption to global supply chains as we emerge from the pandemic, and now the conflict in Ukraine, have raised concerns priorities might be put on the backburner.

In terms of Verlinvest’s portfolio, Black believes the exact opposite.

“We’re seeing younger consumers begin to look at these inflection points as proof that the world needs fixing. For us, I think onshoring production is a topic that’s both good for sustainability and good for business. But also becoming more transparent in our supply chain because people are becoming more aware of the globalisation of the world and supply-chain issues.

“If anything, this is pushing the consumer in one way, which is more towards ESG. So our businesses are leaning into that in a big, big way,” Black says.

However, he admits, based on pure hypothesis, that when cash becomes tighter, sustainability could take a back seat.

“This is a very different environment than the previous generations, where it was about price, it was about brand, it was about quality. And now people take that for granted, which is great, don’t get me wrong. But it’s the expectation the bar has been raised,” he suggests.

An interesting proposition for food manufacturers?

“It changes the game. It changes the game because it’s no longer about price. It allows you to actually re-inject value into categories by offering the consumer something different.”

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