The healthy growth opportunity for challenger brands

09/08/2017
Read Time: 5 Min

Health & wellness is higher up the consumer agenda than ever before. People are exercising more frequently, eating more discerningly, and generally taking a greater interest in living a healthy lifestyle. This is manifesting itself in a variety of ways; declining alcohol sales, rising gym memberships and the surge in flexitarianism amongst them. Whilst the whole nation may not be adding chia seeds, coconut and kale to their weekly shop just yet, it is clear that healthy living has moved out of the realm of calorie counters and is now a firmly established mainstream phenomenon.  It is also therefore very much an area where ECI is looking for growth companies to back.

Good exercise and diet

So, what factors are behind this trend? 

Clearly public concerns over obesity, diabetes, and other lifestyle related health issues have played their part, as has greater education around the benefits of nutrition and exercise. Social media has also had a huge impact, promoting the rise of food as an important social marker and form of self-expression (nearly half of Britons now share photos of food online[i]). On top of this, it has enabled trends to form more rapidly than ever before, and has fuelled the popularity of health-focused bloggers such as Ella Woodward (Deliciously Ella) and Joe Wicks (The Body Coach). Another factor feeding into this is the emergence of the millennials as a significant consumer demographic, who not only over-index on the importance of living a healthy lifestyle but are also more likely to discover and share food trends online. Government policy initiatives, such as the proposed sugar tax, have also played their role.

An exciting element of the health & wellness trend, at least for a growth-focused investor such as ourselves, is that it disproportionately benefits young, nimble, authentic brands. Consumers place a great deal of importance on credibility when shopping for healthy products, and seek out brands that embody a set of values that they can relate to. Thus, legacy brands aiming to capture market share through re-engineering products and adopting “clean labelling” are unlikely to be as successful as genuine disruptors armed with an authentic brand story.

Another advantage that challenger brands have over established competitors, is their ability to innovate and swiftly respond to emerging trends. Health and wellness is an area of rapidly changing consumer preferences, and brands with effective NPD engines can tap into these changes, increasing rate of sale and reinforcing their relevance to consumers. This is not to suggest that brands should reinvent themselves with each fledgling health-related fad; core SKUs are as important here as in any other area of FMCG given that healthy products are often repeat purchases. However, innovation around flavour and format can help underpin the freshness of a brand and attract new, experimental customers. Given these dynamics, the opportunities for growth brands are evident.   

The supermarkets are alive to this and have been actively championing health-focused challenger brands, despite an ongoing strategy of SKU and supplier rationalisation. They recognise that these brands are an important source of differentiation, particularly against the discounters, and often punch well above their weight in terms of consumer appeal. On a category level, they are also vital levers for value growth with their ability to drive premiumisation and attract incremental customers to product types that they may not have shopped previously. 

Woman buys avocados

This is having far-reaching effects across several consumer categories. Perhaps most obviously, products connected to exercise are seeing considerable growth. Sports nutrition is clearly a category that is well placed, capitalising on greater exercise participation and consumer interest in functional nutrients such as protein. Challenger brands have helped to propel the category into the mainstream with innovation around taste (thankfully chalk is no longer the dominant flavour profile), format (e.g. bars and ready-to-drinks) and channel (online delivery) increasing the relevance of sports nutrition products to mainstream consumers. 

As well as seeking out functional foods containing certain nutrients, consumers are also actively avoiding others in attempt to lead a healthier lifestyle. This has resulted in considerable growth within the “free-from” category, which is now worth more than £800m in the UK alone having seen sales rise more than 40% across the year[ii]. Initially the market was driven by consumers with identified intolerances, however growth is now being driven by ‘lifestylers’ entering the category, attracted by the perceived health and ethical credentials of free-from products. Indeed estimates suggest that more than half of households now shop the category with 3.3 million extra people purchasing free-from products in 2017[iii]. Again, this shift has not been lost on retailers who have dedicated more shelf space to free-from products both by adding SKUs to conventional ranges and through specially designated bays.

Elsewhere, we see categories and products that are “naturally functional” – those that possess strong natural credentials and intrinsic health benefits – as being best placed to benefit from the health & wellness trend. Nut butters, for example, have continued to take share from other spreads at breakfast time in no small part due to their inherent nutritional qualities (high in protein and healthy fats). Popcorn is also performing well at the expense of less healthy snacks such as crisps, with grocery sales up 11% year-on-year[iv], as are healthier soft drink options such as coconut water, cold-pressed juices and yoghurt drinks. 

Interestingly, it is not only humans that have benefited from this trend. Consumers are also trading up to healthier products when purchasing food for their pets, mirroring their own dietary preferences. This is driving significant growth within the premium pet food market and has resulted in the emergence of raw, paleo diet and ‘superfood’ pet food products. Our own investment in MPM plays strongly to this trend and, as we have discovered first hand, it is indeed good enough to eat!

Encore pet food branding

Backed by public health concerns, the rise of social media and the increasing purchasing power of health-focused millennials, we expect the health & wellness trend to continue well into the future. We believe it represents an exciting growth driver for UK consumer brands, particularly those with authentic stories and best-in-class products, and we will continue to have a strong interest in brands well positioned to capitalise on the opportunity that it offers.

Please click here to read more on our activity in the consumer sector.

Please contact George Moss for further information.

[i] The Daily Express – ‘Nation obsessed with food’ – May 2016
[ii] The Grocer Free From Report 2017
[iii] Kantar Worldpanel – Inflation continues as ‘free-from’ booms
[iv] The Grocer – Crisps, Nuts & Snacks Category Report 2017
Other sources: Goldman Sachs Millenial Munching report June 2017, New Nutrition Business 10 Key Trends 2017, Waitrose Food and Drink Report 2016

About the author

George Moss

"I’m a Partner in the Investment Team and really enjoy leading investments into and working at board level with high growth tech-enabled businesses across a number of subsectors, for example travel, digital marketplaces and healthcare tech."

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