Like cabs, hotels and travel agents, consumer packaged goods (CPG) companies are starting to fall victim to more innovative upstarts.

From 2009 to 2014, the largest 25 food and beverage companies saw their share slip from a combined 49.4% to 45.1%.1 These troubles continued in 2015 and are by no means isolated to the top 25 brands—90 of the top 100 consumer packaged goods brands lost market share in the first half of 2015.2

One of the more famous David and Goliath stories among hundreds: Chobani stealing share from Dannon and General Mills and becoming the market leader of the rapidly growing Greek yogurt market, which went from 0.2% of the U.S. yogurt market when Chobani was born to 50% today.3

Why is this happening? Large CPG players are being hampered by their slow operating speeds and a lack of authenticity. Compounding these organic growth challenges, CPG players that have historically relied on larger, late-stage M&A deals to fill strategic growth gaps are now facing increasingly escalating transaction prices.

To address these longer-term growth hurdles, larger CPG players have been increasingly launching venture and incubator models as a way to find the next Chobani still at the ground floor.

CPG Innovation Issues

Many larger CPG manufacturers are not set up to drive truly new-to-the-world innovation.

This is partially the case because large players typically don’t move fast enough to take advantage of new market opportunities. For example, Campbell’s K-Cup single-serve soup product was built with the Keurig craze in mind, which makes sense since it was announced in 2013, when K-Cup sales were up 18%. Unfortunately, the product didn’t hit shelves until September 2015, when K-Cup sales had declined 9%.4

Larger CPG players also typically do not have the patience for a slow multiyear grassroots build, nor do many have the tolerance to continue to support subscale businesses or the risk profile to be able to swing and miss.

Traditional M&A: Not Always the Answer

Given these internal barriers, it’s not surprising that many large CPG companies have historically looked to traditional M&A as a way to augment their organic growth and capabilities. However, thanks to increased competition from other CPG players and private equity investors sitting on excess dry powder, auction-based deals are frequent, driving up valuations. (See Exhibit 1.)

zoom iconEXHIBIT 1: Increased competition among CPG players and PE funds is driving up valuations.For example, consider Bolthouse Farms, which was acquired by Campbell Soup Company at an EBITDA multiple of 19.6, or Campari-Milano’s recent purchase of Grand Marnier Group for an EBITDA multiple of 21.2. Auction formats exacerbate these high valuations, like when Tyson Foods won an auction for Hillshire Brands by paying roughly $600 million more than the next highest bid, which translated to a 70% stock premium.5

Two Alternatives: Venture Capital and Incubation Models

Given the difficulty of driving internal growth, as well as the high cost of traditional M&A, several CPG players have aimed to take a page out of the Silicon Valley playbook by seeking earlier access to successful startups through venture capital (VC) and incubation models.

While these venture funds and incubator models started gaining traction in the CPG industry in the 2000s, they gained new popularity after the recession.

A recent Kurt Salmon audit of 45 large CPG players found that 49% have experimented with either a VC or an incubator model, as shown in Exhibit 2, although many of these venture funds and incubators vary in strategic focus, investment amount and deal structure.

zoom iconEXHIBIT 2: Many large CPG players are testing venture and incubator or accelerator models.VC Models

CPG players’ venture investments typically involve a range of investment sizes ($500,000 to $100 million), with many deals structured to initially take a minority equity stake (typically about 20% to 40%) with an option to complete a full buyout in the future.

Most CPG manufacturers operate their VC arms independently, while others have structured their investment as a partnership with an established private equity (PE) or VC firm.

For an example of the former, consider General Mills’ 301 Inc., which began external investments in 2015 and has so far invested in Kite Hill (nut-based cheese and yogurt), Beyond Meat (plant-based proteins), Rhythm Superfoods (kale and other veggie chips), Tio Gazpacho (organic, vegan, gluten-free, soy-free gazpacho) and Good Culture (organic cottage cheese), all food producers in the fast-growing alternative and healthy spaces.

The VC arm, which operates as its own business unit, helps General Mills keep up with the latest in food trends and invest in leading early stage regional startups. General Mills has said they prefer investing over acquiring because it helps preserve the small company’s culture while using General Mills’ expertise to scale, and deals can be structured such that they have the option to acquire the company down the road.

Coca-Cola has helped build several successful brands through its Venturing & Emerging Brands (VEB) arm. According to Matthew Mitchell, VP of investments and ventures at VEB, their “strategy is to take a minority interest in the company first and, then, if the company continues to be successful, The Coca-Cola Company might acquire 100% of the business down the road. We are not just investing in brands to learn or generate a return; we are placing bets that they will be our next billion-dollar brands.”6 Deals for ZICO and Honest Tea both started with an investment of less than $100 million for a minority stake, set up so that Coca-Cola had the rights to purchase the entire company after three years.

Looking at ZICO specifically, after its initial $15 million investment in 2009, Coca-Cola allowed the coconut water brand to continue developing organically by maintaining its entrepreneurial brand strategy as it entered new markets, focusing on grassroots marketing and sampling in fitness studios. ZICO’s sales grew more than five-fold from 2010 to 2011 as it outpaced the category, before Coca-Cola took a majority stake in 2012, when sales had grown to $40 million.7 It fully acquired the company in 2013 as sales hit $87 million. As it increased its stake, Coca-Cola also began providing more resources in addition to capital, like full distribution through the Coca-Cola fleet and ad campaign marketing.8

Unilever is an example of a CPG player that has partnered directly with several PE and VC firms. A few of its equity partners have included Langholm Capital, Catterton and Swander Pace Capital.

And Kellogg announced in June that it will join the VC partnership game, establishing eighteen94 capital, a partnership with Touchdown Ventures to make minority investments in startups pioneering new ingredients, foods, packaging and supporting technology.

As Kellogg Vice Chairman Gary Pilnick said, “By investing directly in the most promising entrepreneurs and ventures, we can increase greatly our access to game-changing ideas and trends that could become significant sources of growth for us.”9


Most CPG-run incubators are established as partnerships with venture development firms, where the venture firm manages the program and operations with the CPG player offering their expertise as well as access to retail customers. The investment (often between $20,000 and $1 million) and equity exchanged (typically less than 10%) for an incubator are both typically significantly lower than a venture investment. Additionally, in some cases, the objective of the incubator is simply to learn about emerging market opportunities rather than explicitly to create a longer-term option to acquire a startup.

For example, Mondelez partnered with Prehype, a venture development firm, to start their Shopper Futures program in 2012. The 90-day incubator program aims to empower Mondelez employees to be more entrepreneurial and bring an internal startup mentality to the company. Mondelez and Prehype select a few startups to help scale, activate pilots with Mondelez’s brands and become standalone companies. One such example is Betabox. The product sampling distribution service, which pairs brands with e-commerce partners, was launched by the Shopper Futures program in early 2014 as a beta platform.10 In 2015, it had grown enough to pique the interest of leading digital marketing agency VaynerMedia, getting acquired only one year after incubation.11

Coca-Cola stands out as one of the few CPG players that appears to be running its own startup accelerator program. The Coca-Cola Founders program gives digitally minded startups seed funding while letting them keep control of their company and intellectual property rights—Coca-Cola takes no equity upfront. Coca-Cola invests anywhere from $1 (yes, one dollar) to $1 million in each company and connects them to a strategic advisor and relevant business units within Coca-Cola with the goal of nurturing them to Series A funding and beyond. It then has the option to take a minority equity share once the company has a proven business model and is ready to scale. Participants so far have included Home eat Home (on-demand meals service in Germany), Weex (virtual mobile operator in Mexico), noSolo (real-time activity finder) and Winnin (curated video search).12

VC Partnerships and Incubators Aren’t for Everyone

While Coca-Cola has been active in the VC and incubation space, PepsiCo has ceased its activity. Starting in 2010, Pepsi granted 10 media and technology startups from the United States, Europe and Brazil up to $20,000 each to partner with its brands to execute pilot programs. The tech platforms revolved around innovating on expediting the shopping process, mobile and retail experiential marketing.13 But despite the positive press received, Pepsi pulled the plug after 2012, likely to place greater focus on growing its base business.

Staying Power

While some CPG players may follow Pepsi’s lead by pulling back and others are still perfecting their individual models, overall, corporate VCs and incubators look like they are here to stay.

As the rate of industry disruption accelerates and larger CPG players remain pressed to augment internal innovation, CPG executives will increasingly see the value in VC and incubator models helping them tap into the latest trends to plug their long-term growth gaps.

Deryck van Rensburg, president of Coca-Cola’s venture arm, is certainly one of them. “We estimate that as much as one-third of our industry’s growth in North America over the next five to 10 years could come from disruptive brands in categories that do not exist today,” he said.14

To stay ahead, leading CPG players and investors will also continue to think creatively about how they can team up and develop new partnership models that allow them to leverage each other’s expertise to exploit emerging growth opportunities.

Without a doubt, the search for the next Chobani is heating up.

  1. Forbes, 2015
  2. The Pathfinder Group, 2016
  3. Business Insider, 2013
  4. Food Dive, 2016
  5. Distil Retail, 2016
  6. Coca-Cola Company, 2013
  7. Coca-Cola Company, 2013
  8. Coca-Cola Company, 2015
  9. Advertising Age, 2016
  10. Mondelez International, 2014
  11. Chicago Tribune, 2015
  12. Tech Crunch, 2014
  13. brandchannel, 2010
  14. Coca-Cola Company, 2013