If you look at the average line extension from a public food or beverage company, this opinion makes total sense. The vast majority of legacy brand product launches are new flavors or formats (drinkable yogurt).
If Brand A launches one of either, their rival can quickly establish an equivalent, potentially neutralizing any brand-to-brand market share problem. Look at the recent hard seltzer craze.
Yet, after working for years in the early-stage end of the industry, I’ve realized how wrong the above marketer was in absolute terms. Defensible innovation is very possible in food and beverage. More importantly, I’ve seen how strategically effective manufacturing-level insulation can be for entrepreneurial brands in their quest for scale.
'Entrepreneurs who insist on their original formulation generally find themselves building their own facilities'
What do I mean by manufacturing insulation? I mean a formulation that US co-manufacturers cannot make at an industrial scale on their existing lines in North America (and perhaps anywhere in the world).
It’s a formula that requires re-tooling lines, buying specialized equipment, too many humiliating trips to European plants that are years ahead of them, or all three.
Entrepreneurs who insist on their original formulation generally find themselves building their own facilities. Sometimes these early facilities act as pilot plants that eventually convince a major co-man to dedicate a line to them. In other cases, these brands scale entirely on their own. I know of dozens of early-stage brands doing this right now.
'Self-manufacturing is probably the most brilliant insurance policy you can take out when it comes to scaling efficiently'
Self-manufacturing is probably the most brilliant insurance policy you can take out when it comes to scaling efficiently. Why? Because it is the best way to eliminate direct competition for years or even entirely (if you can grow exponentially).
I’ll admit that the advantage here ironically goes to current co-manufacturers themselves, at least to the curious Willy Wonka types among them.
Speaking of candy, a great example of how this works is the story of Scott Semel’s now-famous creation: Bark Thins. If you ever wondered why neither Hershey nor Mars launched a similar product long ago (it’s just a smashed-up chocolate bar with inclusions), the answer is in the technical details.
Bark Thins is a fractured random weight product. Candy bars, however, are geometrically uniform across almost all major brands. Breaking up the chocolate and then ensuring that the ounce weight of chocolate shards placed in each bag is identical is a mechanical engineering puzzle.
Moreover, public firms rarely green light expensive technological re-toolings of their existing plants for such an idea (although Hershey later did for its not too successful line - Cookie Layer Crunch). It costs millions and millions of dollars to set up brand new lines for a BigCo style launch, and if it doesn’t work out, the political fall-out is usually worse than the financial loss incurred by the retooling.
KIND... a non-extruded bar with whole ingredients
A much less well-known example is none other than KIND bar. At the time of KIND’s emergence in North America in 2004, public and private bar manufacturing plants focused entirely on 'slab bar' technology. These are bars are made from ingredients mixed into a dough-like substance, extruded, pressed, baked and cut into uniform shapes (granola and energy bars).
Powerbar was the first, then Zone, then Clif, etc. Daniel Lubetzky and his team didn’t have ready access to large-scale plants that could maneuver whole ingredients without pressed extrusion into a rectangle shape on top of a chocolate layer.
In fact, in his book, Lubetzky reveals that they had huge problems just producing those their initial runs, including oxidizing almonds (when nicked or rubbed) and other challenges. KIND was conceptually simple for consumers, yet a royal pain to commercialize. This is, in part, why no major US bar brand had ever even tried a non-extruded bar with whole ingredients.
'The costs of workable used equipment have come down radically in the past five years alone'
I could share more cases of manufacturing insulation, but the more significant takeaway here is something I talk about in my book under what I call the Law of Formulation Anchoring.
It’s very advantageous for a new CPG brand to have a novel formula or production format or both because it creates an initial layer of defense from copycats but also because it creates a foundation for enhanced memorability. However, if this novel formula also requires specialized manufacturing facilities not widely available, it will be tough to chase.
Strategics, especially, will be unlikely to get involved at all, even with a lazy line extension, for sheer lack of a co-man to call up and push through a copycat order. Strategics will more or less have to wait until you scale, if you scale, which is to your financial benefit anyways as a seller.
While self-manufacturing is often assumed to be more expensive than paying co-man tolls, the costs of workable used equipment have come down radically in the past five years alone according to my R&D sources. It is actually cheaper than ever to create a formula that you really do have market control over. If you’re an emerging brand about to start, it’s worth thinking through at length before jumping to the co-manufacturing option by default.
James F. Richardson, Ph.D. – a cultural anthropologist turned business strategist for emerging food and beverage brands - is the founder of Premium Growth Solutions, a consultancy for entrepreneurs and investment firms focused on the premium end of retail food and beverage, the host of the Startup Confidential podcast, and the author of Ramping Your Brand: How to Ride the Killer CPG Growth Curve