Why Packaged Food Startups Fail
It's not you. It's us.
Welcome to Truth Be Told, the weekly food and fitness newsletter published by The Whole Truth Foods.
Editor’s note: We’ve got something different this week (and the next). Shashank Mehta, the founder of The Whole Truth Foods, has written two insightful articles on the business and economics of the food industry—a topic we haven't yet explored in this newsletter. With his permission, we're republishing a lightly edited version of the first part today. (Second part next week.) I hope you find it useful.
For more of Shashank's writing on his entrepreneurial journey, check out (and consider subscribing to) Mid-Life Entrepreneur.
Packaged food, personal care (skin, hair, body), electronics, apparel, jewellery - all are multi-billion dollar industries in India. And all of them have seen unicorn outcomes being built just in the last decade. Apart from one: Food. Why?
Forget unicorns, you'll find it tough to name five packaged food brands that started in the last decade and are over 200 crore rupees in revenue today. That number for categories like personal care would be over 20. Why?
Ask any venture capitalist (VC), and they'll have a strong thesis on food. They badly want to invest. But they are struggling to find food companies that can potentially go public with an initial public offering (IPO). Why?
And yet, look around, and you'll find everyone and their mother (quite literally in this case) starting a packaged food brand. Why oh why!
Packaged food brands don't scale. This isn't my opinion. It's empirically true. You'll find a ton of brands under 50 crore rupees in revenue. You'll barely find any over 100 crore. Basically, packaged food brands either remain small, or they die trying to get big. Why!!?
I didn't know these stats before I started The Whole Truth, or else I might not have (ignorance, truly, is the mother of all enterprise). Now that I do, I feel compelled to keep asking 'why'. And to share what I've found, with anyone starting up in food. Here goes.
It all starts with gross margin (GM). Or the money you have left after subtracting the 'cost of goods' (raw material, packaging material) and the 'cost of conversion' (factory operating costs) from your net revenue (post discounts and tax). The higher your gross margin, the more you can spend on marketing (or pocket as profit).
Personal care has an industry-average GM of 70%. Apparel is at 80%. Beauty and Makeup can go up to 90%. And food comes in at a princely 40%. Maybe 'gross' was added to the term only after seeing packaged food numbers.
This is a hard, industry-wide fact. I used to think that maybe it's just that food companies are badly managed. But no.
Unilever's skincare business has 70%+ GM. Food is <45%. Same massive company. Same massive economies of scale. Same people and capabilities and distribution and everything. And yet, same story. Why?
This is the key question to answer. Why aren’t consumers ready to pay a premium for packaged food?
Why are they happy paying 1000 rupees for a face cream which is largely water, costs 50 rupees to make, and comes in a beautiful glass jar (which, by the way, costs 100 rupees, twice the product inside)?
But not 100 rupees for a protein bar that costs 45 rupees to make (because it has great ingredients like almonds and dates and whey) and comes in a 50-paise plastic wrapper?
The same trend repeats with apparel, shoes, and watches. Even luggage has higher GM than food. Why?
Basically, anything we can wear on ourselves, anything we can flaunt, anything that makes us look good to others - we pay high money for.
We're social animals. We want to look good (great hair, glowing skin, sexy clothes, trendy headphones). We're constantly signalling our status (look at my trainers, my belt, my expensive leather bag). And by doing all this, we're constantly trying to look attractive to a potential mate (you can't beat evolution now, can you?).
For a product that does one of these things, a good marketer can charge you anything. Because the price is no longer linked to the cost of goods. It's linked to our sense of self-worth.
Unfortunately, packaged food can't do this. You mostly eat it in private (so no flaunting). And even if you eat it in the open (like a protein bar at the airport), you've torn the wrapper to get it out. The brand is gone. What's to flaunt?
Of course, eating nutrient-dense food will also give you great skin, great hair and great happiness. But it'll happen gradually. Over time. And no one will see it. Instead, put on your make-up, pull out your luxury Tumi luggage, get that Gucci airport look going, and you've got instant signalling. Instant attention. Instant gratification.
This, I believe, is the core reason why packaged food brands are unable to charge a higher margin to the same consumer who is happy splurging on a skin cream or an absurdly expensive watch. Because we humans value how we look outside much more than how we feel inside.
And this low GM is the core reason why food businesses are tough to scale.
If, after the cost of goods and cost of logistics and discounts and retailer margins, all you have is 15 rupees left on a 100-rupee product, and from that, you also have to pay salaries, then how do you grow? You barely have 5 rupees left for marketing! Your friend selling snail mucin magic serum has 50. She can hire Deepika, fly her to Maldives, make an ad and run it in the Indian Premier League. You can set up a flea market stall. Maybe.
Add to that shelf life. Your product lasts barely 5 months (remember, natural ingredients). 20% of what you sell to a retailer doesn't sell out. The retailer returns it and doesn't pay for it. Your friend's organic avocado crème mousse shea body butter has a shelf life of 30 months. Nothing ever comes back.
Add to that, you need flavours. Consumers get bored having just one chocolate bar. They want hazelnut and cranberry and 'make something fruity na, like orange'. But no one asks your friend for a chicken chettinad under eye cream. I wish they did.
And lastly, after all this, there is taste. Which famously changes every 100km in our country. Thankfully, for your friend, every 100km you travel, people are equally vain and equally eager to attract a mate.
Sigh. Can you tell I am a frustrated food entrepreneur? :)
Most food businesses die. Those that don't, don't scale.
Financially speaking, the reason is low gross margin.
Anthropologically speaking, the reason is that we've evolved to procreate, and hence attracting potential mates is the top-most priority. So we're willing to spend inordinate amounts to look good and signal our superiority over others in the race.
And philosophically speaking, we humans are rubbish at long-term thinking. If we weren't, we'd realise that food is the real personal care. And pay a high gross margin for it.
I now know all this. Yet, I continue to build a packaged food business. Why?
Because I didn’t choose this. It chose me.
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Great review.👍👍👍
Good insights