Disruptive food product demand declining

The food industry will see a shift in innovation strategies in the next few years, according to a Rabobank report. Large corporates are likely to refocus on incremental changes to help their bottom line and manage turbulent economic pressures in the short term.

For now, disruption as the focus of innovation strategy has reached its peak in consumer foods. Weaker demand for disruptive innovations, economic uncertainty and the higher interest rate environment have exacted their toll on disruptive products coming to market, according to the report.

Tom Bailey, Consumer Foods senior analyst at Rabobank, said the group of investors that drove the 288% increase in deals from 2010 to 2022 seems to have put the brakes on deals in 2023.

“Moving forward, disruptive innovations will likely face more rigorous evaluation, resulting in fewer but potentially more successful disruptive products that have endured more intensive vetting,” Bailey said.

Companies are more likely to focus on commercially viable innovation, prioritising improving taste, convenience and health rather than getting caught up in the hype of disruption. It is considered safer to create new value through minor product or service adjustments, known as incremental innovation. In food, incremental innovation is line extensions, packaging changes, new flavours and functionality twists.

Incremental innovation offers more immediate benefits, such as supply chain simplicity, sustainability and cost reduction. It helps keep end prices low in an inflationary environment such as today’s.

Those who continue to invest in disruptive innovations will need to exercise prudence to ensure product alignment with end users. Investors who continue to seek out disruptive innovations will be a good source of insight for large food companies that are shifting to incremental innovation but need to keep an eye on the longer-term horizon.

According to Bailey, disruptive food products have underperformed, but the quality of them in the future will be higher and may catch the industry off guard.

Over the past decade, the industry experienced an explosion of investments in disruptive innovations, driven by factors such as an increase in venture funds entering the food industry, companies seeking to disrupt categories and the desire to stay relevant amid changing demands. These disruptions have included plant-based meats, insect protein bars, synthetic fat replacers, precision fermented milk proteins (and sugars) and more.

Between 2010 and 2022, the food space saw a 288% increase in the number of deals in innovation, with venture capital funds accounting for around 50% of the deals over this period. The most significant driver of this explosion in investments was the lower interest rate environment, which drove the peak of deal activity in 2021.

Due to numerous challenges in the industry, such as supply chain disruptions, changing consumer behaviour, rising interest rates and regulatory constraints, many of these investments have not seen growth or been as profitable as investors would have liked. It is also difficult to disrupt personal preferences or even cultural practices when it comes to food.

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