In June, PepsiCo (NASDAQ:PEP) launched the Hive, an incubator in North America that will focus on "new-age" emerging brands. The company also announced a partnership with the Hatchery -- a nonprofit food and beverage incubator in Chicago -- designed to promote innovation and support small entrepreneurs. These efforts join an existing base of PepsiCo's product-innovation initiatives such as the Nutrition Greenhouse incubator in Europe, which was launched early last year.
"We want to create an environment where we have a business within a business, a small entrepreneurial sort of agile group that's thinking about the new age consumer that loves discovery brands while allowing the big brands to thrive in the overall mothership," said outgoing PepsiCo CEO Indra Nooyi.
Traditionally, big companies in the consumer space have been much slower to adapt to changing industry trends, despite extensive R&D budgets, falling into periods of stagnation and slow growth. Incubators have become just one solution to this problem -- and the whole industry is joining in.
Incubators help consumer giants think outside the box
In a race to win customers and gain a competitive edge, incubators produce new innovative concepts, disruptive technology, and a quicker path to growth. And unlike in-house product development initiatives that can be limited to a short-term horizon, incubators provide a platform for companies to explore long-term opportunities.
They also allow young companies to thrive with access to scale and resources free of the parent company's organizational inertia. Here, corporate partners often behave more like investment firms with additional know-how and capabilities that nurture their portfolio companies.
PepsiCo is not alone in its quest for product innovation. Over the past five years, the number of incubator programs in the consumer foods sectors has skyrocketed. Kraft Heinz(NASDAQ:KHC) launched its own incubator -- Springboard -- earlier this year. Other consumer giants like Kellogg (NYSE:K), General Mills (NYSE:GIS), and Campbell Soup (NYSE:CPB) have similarly jumped into the start-up world.
When General Mills launched 301 INC, vice president John Haugen said, "We believe we can meet consumer needs faster than ever by combining the vision and passion of entrepreneurs with General Mills' extensive capabilities."
Surprisingly, even Ikea, the iconic furniture company, is taking a stab at exploring food innovation through its own incubator in Sweden, which it launched in 2017, adding one more avenue for entrepreneurs to explore. Unlike at PepsiCo, where the company gets a six-month exclusivity window to buy an equity stake in the start-up, Ikea is approaching it from a different angle: provide in-house expertise and financial resources without equity investment in hopes of becoming a customer of the start-up in the future. This approach is new, but it could benefit other companies in the food and service businesses.
And for the entrepreneurs, the options for expansion have never been greater. Corporate giants like PepsiCo have to compete with other players in the investment community such as not-for-profit incubators, universities, angel and venture capital investors, and more recently -- crowdfunding platforms and technology companies like CircleUP that directly connect investors with start-ups. With digital disruptions and growing interest in start-up investing, entrepreneurs have a choice in how to scale up their businesses, with or without corporate partners.
The benefits of a corporate partner have to be significant enough to attract high-quality companies and offer things that other investors cannot, including access to research-and-development teams, marketing, and wider distribution channels.
The rewards are promising
While PepsiCo's programs are new, other more established incubators are already seeing early wins from their successful partnerships as the smaller brands continue to expand on the global scale. A good example is General Mills and Tyson Foods' investment in Beyond Meat, a producer of plant-based burgers, which has seen its distribution skyrocket and is now available in more than 19,000 retail stores and restaurants in the U.S. alone.
More recently, General Mills had also led a $17 million investment in Urban Remedy, a plant-based meal program, further expanding its footprint in the organic and natural marketplace.
However some challenges remain
While the general investor sentiment around these partnerships with start-ups is positive, some challenges remain. Consumer giants must strike a balance between investing in brands that fall within their strategic focus and also ensuring that the new brands do not cannibalize existing sales or have a poor return on investment.
Another challenge is scalability and how quickly a corporate partner scale up the business before investors start seeing material results. This has been an issue for PepsiCo over the past several years, where its own emerging brands like KeVita probiotic beverages have been reporting consistent double-digit growth but have yet to make a significant contribution to the overall business.
Start-up incubators are a promising new(ish) avenue for consumer giants to innovate and experiment, but investors should be aware that it's a long-term strategy. Among the winners are an even larger number of failures, and it takes years before most new brands or companies start making a dent in the multi-billion dollar top lines of the parent organizations.