He explains in a new report for New Nutrition Business that most large “companies believe that they should aim squarely at the high-volume mass market and that niches should have no place in their strategy.”
However, “very few brands are able to make a success in the mass market on day one,” instead most of the snack industry “is driven by small but loyal groups of consumers” who shop niche markets, he said.
Because these niche markets offer a smaller overall sales base, many large companies are unwilling to deign to serve them, creating a space where small start-ups can flourish without competition from legacy companies that could outspend them on marketing, Mellentin said.
The large companies’ loss, is the small companies’ gain
While niche markets may have low overall sales initially, the consumers who shop them are more likely to try new products, formats and flavors – especially snacks, which are a low initial cost and calorie investment. When they find something they like, they are willing to pay a premium and have repurchase rates near 80% compared to only 35% to 40% of mainstream shoppers, according to the report.
These shopper qualities provide small companies with enough capital to patiently wait for a brand to grow organically – something many large companies are unwilling or unable to do.
Most CEOs of large companies measure the success of a product launch based on one to three years of sales and if they do not meet expectations, they are killed so as not to drain resources or returns to shareholders, Mellentin writes.
However, “you have to measure success over a much longer period,” as demonstrated by Kind Bar, which took 10 years to grow from a start-up to a mass brand worth $300 million in sales.
Time is of the essence
Start-ups also have “more realistic sales expectations” for snack and food brands than large companies, which affords them time to adequately nurture young brands, Mellentin said.
He noted that few nutrition and health products become $100 million brands, which is a goal often touted by CEOs. And when they fail to deliver, the brands are discontinued or not adequately supported for growth.
The CEOs of large companies “don’t yet grasp that the landscape of the food and beverage industry has changed,” and that “in a world of niches, mass-market success is now the exception,” Mellentin said. “Start-ups don’t have these unrealistic shackles imposed on them.”
Options for large companies
Some larger companies have begun realizing that the fast-growing snack market is a better suited for small companies and have tried to gain entry through acquisitions. For example, Hershey’s acquisition of Krave Jerky.
Other large companies have tried to reposition established brands as snacks, but a key to successfully pulling this off is holding on to the brands’ core by continuing to use the same ingredients and staying close to the established identity, said Mellentin. For example, he pointed to Blue Diamond’s repositioning of almonds not as an ingredient but as a snack and Quaker Oat So Simple as hewing tightly to its established base.
Ultimately though, Mellentin said, small start-ups are better positioned to cater to American’s snack interests because “consumers prefer to ‘discover’ small, new, interesting brands for themselves,” and then sharing their discovery with friends.