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Why most healthy food companies need to ‘sell out’

Melody Hahm
Senior Writer
As consumers demand healthier options, established food giants like General Mills and Nestle are acquiring or making investments in trendy upstarts. It may not be a bad thing for consumers.

The latest health craze is often associated with trendy upstarts that offer premium ingredients free of artificial sugars and GMOs. But, ‘big food’ behemoths often need to get involved in order for consumers’ favorite indie brands to survive.

Noosa, the popular and now ubiquitous yogurt brand, is the brainchild of Koel Thomae, an Australian expat who teamed up with a Colorado dairy farmer to launch the whole milk, Aussie-style product in 2009.

Now one of the crown jewels of Colorado’s local economy, Noosa rakes in more than $200 million in revenue per year. For the average consumer, it may come as a surprise that private equity firm Advent International owns Noosa, as Noosa’s executive team is still in place and maintains a significant minority position in the company. It’s foolish to believe that you can sustain a growth trajectory while rejecting outside help and support, said Thomae.

“At the end of 2014 and for us, we were [far into] our growth cycle. We were still growing so rapidly and running the business so lean that it was almost detrimental to the business,” she said at an event on female game changers in the food industry in New York City on Tuesday.

“We started having really direct competition coming at us, balls were being dropped left, right and center just because there’s only so much that me, as a one-woman sales and marketing person, a COO, and our small team can get done in a day,” she added.

Thomae acknowledged the tension between wanting to stay scrappy and recognizing the need to unlock the company’s maximum potential. Ultimately, she took the acquisition offer because she simply couldn’t keep up with how fast the company was expanding — a happy predicament.

“We realized that to sustain the business, to protect the business, it was going to take some real money. And we hadn’t taken any outside investment up until that point. We were almost a $70 million dollar company before we took any outside investment. While we were very proud of what we did, it was the right time to protect all of that hard work, and again, it was finding that right partner that has really allowed us to think faster and bigger, and that’s been really important to our continued success.”

Finding a partner who leaves a good thing alone

At the same event, Purely Elizabeth founder and CEO Elizabeth Stein addressed her company’s first and only investment to-date. Last April, Stein received a minority investment of $3 million from 301 Inc., General Mills’ investment arm.

“I don’t really have pressure. So, to be 100% honest, I don’t have an exit strategy. And I might stay for 20 years, I might exit in three years — I don’t know. I am thankful that they are amazing partners that haven’t pushed me in that way. That’s why I chose them,” she said.

“That being said, as far as profitability, of course that’s something that as a company we strive to do, to be able to exist and not be stressed out, but I guess I’ve just been very lucky to be in a unique situation with a partner that isn’t pushing a timeline right now.”

Established food giants across the board are catering to consumers’ desire to make healthier choices — and understand the ingredients on a nutrition facts label.

General Mills (GIS) has been doubling down on the natural food space, buying natural pet food company Blue Buffalo for $8 billion in cash. While we may love to romanticize this idea that startups can exist completely autonomously, free of corporate oversight, cash is king.

The future of consolidation

Amazon’s $14 billion bet on Whole Foods was its biggest acquisition ever. Prior to the merger, Whole Foods was trying to fend off activist hedge fund Jana Partners. Meanwhile, Nestle invested $77 million into healthy meal delivery startup Freshly last summer. And in September, privately-owned supermarket chain Albertsons paid around $200 million for Plated to get a foothold in the digital delivery space.

While this is not a new phenomenon, big companies appear to have learned from the past.  Back in 2000, Kellogg (K) acquired Kashi, which was a hot health food upstart that generated $25 million in annual sales. After allowing the company to act autonomously in its southern California location for eight years, Kellogg moved Kashi to its Michigan headquarters in order to boost the brand. Subsequently, the company saw a massive decline in sales, and in 2014 Kashi returned to its California roots and aesthetic. Perhaps other corporations have used it as a case study of what not to do.

After an upstart brand gets an investment or is acquired, the average consumer will see very little change; they may see more variety, if anything. But that’s precisely the point — to let a good thing continue to grow. Maybe selling out isn’t always such a bad thing.

Melody Hahm is a senior writer at Yahoo Finance, covering entrepreneurship, technology and real estate. Follow her on Twitter @melodyhahm.

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