For close to a decade, “growth, growth, growth” served as the mantra tantalizing investors in the natural and organic products industry. Brands proliferated, based in many cases entirely on borrowed capital from investors gunning for rapid expansion.
But then 2022 arrived. Money became expensive, thanks to ballooning interest rates. Investors held onto their cash. And many brands propped up by equity and debt, rather than profits, ran out of financial resources.
Businesses shrank and foundered. Plenty of them crashed.
In retrospect, investors say, perhaps a better mantra would have been “fortify, fortify, fortify.” Instead of taking money to stoke frenetic scaling and widespread distribution, companies in the natural and organic products industry would have been better served by strengthening business fundamentals.
“Hone your formula. Build your customer audience. Listen to customers. Sell direct-to-consumer. Sell natural channels. Iterate, iterate, iterate and build your community,” said Kathryn Peters, head of industry relations at SPINS. “When you get it right and innovation is spot on you can demonstrate smart growth. You stay away from getting over your shoes in terms of manufacturing capacity. You are building a solid foundation, which not only allows you to grow with more retailers, but investors also see smart, profitable growth and they know what they are investing in.”
Not enough businesses in the industry hewed to this trajectory in the relatively recent past. But now, she said, more and more companies today are pivoting.
“We’re seeing a return to a decade ago,” she said. “Instead of launching a product and seeing how fast you can get into Target, the way to build a brand is to do it right.”
Forging ahead
News emerging from the investment side of the natural and organic products industry has been sour for the past two years. But even as capital raises and mergers and acquisitions have diminished, sweet deals still take place every day. Along the way, companies continually launch innovative new products that land on retailers’ shelves and Instagram accounts.
The effervescent days of just a few years ago may have gone flat. But for many industry players, that’s probably a good thing.
“It’s not a tough environment in general right now, in terms of the overall economy. Lots of good news,” said Liz Myslik, managing partner at investment firm Loft Growth Partners. “But starting a business is hard and scary and what we are seeing now puts a finer point on entrepreneurs doing their homework and working hard to make sure their business has a right to exist and to win in the marketplace. We continue to see exciting brands launching.”
When Myslik and her team at Loft Growth Partners review potential investments now, velocity and margin “are all that we talk about,” she said. Brands must prove that they can sell more each week, and that they can make money on the business. If brands can’t make money, she…
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