Thoughts on an Evolving Food System
What if the solutions to achieve a more regenerative food system already exist? And, what if a combination of market forces, environmental distress, and economic pressures are naturally enabling these solutions to take hold? We would certainly benefit from the development of supporting technology, increased capital investment, and broad resources being applied to accelerate change. But, by embracing more of a systems approach, maybe it isn’t necessary to invent our way out of our current situation.
Diverse stakeholders are driving our food system in the same direction, which is increasingly defined by fragmentation (e.g. less commodity, more regional production, human-scale brands, middle-market processing infrastructure). And they are doing so for their own reasons without considering the interdependence of their individual actions. Big agricultural companies are trying to protect their markets after realizing that their business models are at risk. Farmers are feeling so much economic pain that they are taking risks to grow different crops and farm in different methods. Researchers are objectively quantifying the environmental and health consequences of our current food system. Large food companies are trying to figure out how to stay relevant with an evolving consumer. The list of stakeholders goes on to include politicians, healthcare companies, academics, investors, technology providers and the consumer. This last group, the consumer, has now taken control of the change and many of the other stakeholders are working in response — either reactively or proactively — to address the corresponding risks and opportunities.
The following thoughts touch on a few threads of a broader thesis about how our food system is evolving, hopefully providing food for thought and a foundation for subsequent essays that address other stakeholders, the role of third party certification, infrastructure and opportunities to support a food system that is beginning to heal itself with the conscious and unconscious help of many participants.
Our shifting relationship with food
The consumer is going through an unconscious, structural shift in their relationship with food. The attributes that consumers value today increasingly resemble those that we valued before the food system was industrialized. It’s not about local or Organic but rather transparency, traceability, authenticity and connection. Prior to the industrialization of our food system, consumers had a connection to the source of their food — either the producer (e.g. farmers and ranchers), the person or company creating a value-added product, or their grocer (e.g. regional grocery store, butcher, fish monger) whom they relied on to vet their food choices.
It’s not about local or Organic but rather transparency, traceability, authenticity and connection.
As the food system industrialized, consumers were so enamored with attributes such as price, packaging and convenience (while being marketed to in ways they had never experienced) that they handed over this ownership of their relationship with food to large companies that told them what they should buy based on who they wanted to become. National, mass-market brands emerged as the trusted food purveyors — trustworthy mainly because of their ubiquity. But through the consolidated scale of these brands, the food system became anonymous, precipitating a race to the bottom on many levels. As producers increasingly sold their output into blind pools (e.g. commodity markets, industrial grain mills), there was no longer a market incentive to do anything but produce maximum yields for the lowest cost. The chain of accountability and trust from the producer to the consumer was broken. This impacted soils, waterways, flavor, nutrient density and ultimately the consumer experience. Anonymity also required consumers to rely on third parties (e.g. FDA, USDA, Certified Organic) to validate that it was okay to eat the food being offered, rather than trusting a source with whom they previously had a direct relationship.
Today, led by a generation of people who can’t figure out why we thought TV dinners and fast food were so novel, and a broader society that takes the positive attributes of industrialized food (e.g. packaging, access, safety) for granted, consumers across diverse socio-economic, cultural, age and geographic boundaries are reconnecting with the source of their food in different ways. Health, the environment and animal welfare are factors but not the underlying reasons why we’re seeing a massive shift across diverse consumer profiles. Key factors also include the consumer experience, discovery, lifestyle, relationship and personal values. Consumers are seeking brands that are an expression of their values, rather than relying on the brands to define what they should value. And in doing so, they’re holding brands to a higher standard. It’s a nuanced but significant shift, because it means the consumer is regaining control. Access to information and a history of deceptive marketing also have created demand for transparency. While third party certification still plays an important role, consumers increasingly rely on trusted brands as their Good Housekeeping seal of approval instead.
…consumers across diverse socio-economic, cultural, age and geographic boundaries are reconnecting with the source of their food
Learning from wine
There is a great proxy for how our food system is evolving, and what it will take to continue, in looking at why and how the domestic wine industry evolved from 300 to 10,000 brands. Along the way we crossed a tipping point where we transitioned from the small guys trying to look like the big guys, to the big guys trying to look like the small guys. This dynamic created a cycle of acquisition that required the big guys to buy the small guys in order to stay relevant with an evolving consumer. The small guys represented authentic core brands that big corporations couldn’t incubate internally. There are many facets to why and how this evolution played out in the wine industry but, suffice it to say, the land, grape growers, consumers, products and wine sector all benefitted.
There is a great proxy for how our food system is evolving…in looking at why and how the domestic wine industry evolved
For decades, grape growers in the United States were selling into blind commodity pools dominated by the largest buyers (e.g. Gallo, Mondavi, Sutter Home). Market incentives were aligned with producing the highest yields for the least cost. These incentives resulted in generally extractive land management practices, which emphasized production yields and cost over flavor profile and environmental stewardship. These dynamics were lost on the consumer for decades, as they were lost in our food system more broadly.
Despite the market incentives, there were still growers producing grapes in ways that were better for the land, at lower yields and with better flavor profiles. If they sold fruit to the large, industrial buyers, they typically received a small premium over the commodity reference price, which often didn’t justify the effort. For many reasons, some growers increasingly began to use this better-quality fruit to make wine in their garage, or in borrowed facilities. Their motivation may have been economic survival, a market opportunity, personal interest or a generational transition. Regardless, by investing additional resources to vertically integrate, they were able to capture more retail margin by adding value to their fruit.
At the same time, entrepreneurs who didn’t grow grapes wanted to launch their own wine brands and, in doing so, created more demand for the better-produced fruit. This dance of supply and demand evolved over time but was initially constrained by an industrial-scale supply chain that wasn’t built to accommodate smaller production volumes. In many ways, these dynamics are reflective of our current food system across most categories, where the number of farmer’s markets is bursting but there is limited supply chain infrastructure available for most small and mid-sized producers to grow larger.
Everything began to change as consumer demand evolved and people realized there was a business opportunity in building a winery to produce wines for multiple wine brands instead of each wine brand needing to spend millions of dollars on capital equipment for their single operation. Over time, a “custom crush” ecosystem evolved that provided capital equipment as a service and increasingly provided access to other services such as winemaking expertise, branding, marketing, technology, cold storage and distribution. The grower now had a turnkey solution to vertically integrate as much as he or she desired, and the barriers to entry were substantially reduced, enabling grape growers to connect directly with the consumer. That connection created an accountability between the grower and consumer, with a host of greater benefits: the emergence of well-accepted sustainability programs for farming wine grapes, better economic opportunity for the farmer, more choice and better value for the consumer, and a beneficial cycle of innovation.
Re-fragmentation
We are now seeing this dynamic play out across the food system, to differing degrees, at varying paces and in multiple ways. The change occurred in higher margin categories first — think wine, craft beer and spirits, coffee and chocolate. But, it is now occurring in every category of food and beverage, all the way down to fresh produce and proteins. Consumers are reconnecting with the source of their food through authentic, core brands that they trust, and increasingly those brands are being established through human scale production and marketing.
Consumers are reconnecting with the source of their food through authentic, core brands that they trust, and increasingly those brands are being established through human scale production and marketing.
It’s now difficult to find a category of food that is still being defined by the large industrial food companies, but there are seemingly unlimited examples of how smaller companies with authentic brands are driving the market. Large food companies are increasing their pace of acquisitions rather than incubating and launching internal brands. They also are funding internal venture funds in an attempt to understand how the industry is evolving and create a pipeline of potential acquisitions. The industrial scale participants can and will remain dominant from a volume perspective but, the market will be defined by smaller brands that represent an authenticity that can’t be created in a commoditized, industrial system. This dynamic also provides an opportunity to support regenerative agriculture.
The desire of consumers to reconnect with authentic, typically smaller, brands is leading to a re-fragmentation of our food system. As an alternative to the wine analogy, take coffee for example. Coffee drinkers were happy for decades drinking Folgers Crystals at $0.25–0.50 per cup. It would have been hard to imagine that one day, consumers across broad socioeconomic, cultural, age and geographic profiles would spend $4–5 per cup. But, as consumers discovered Starbucks and other brands, and the fact that ordering and experiencing coffee delivered more value than just a cup of coffee, they began an unintentional journey of discovery. The discovery may have been a new specialty drink, a different way of brewing coffee, or simply a light versus a dark roast. And, this experience enrolled consumers who hadn’t previously considered themselves coffee drinkers. Consumers have relished in a lottery-like cycle of good and bad experiences and the opportunity to share new discoveries with friends. There is wide-ranging social value in exploring and sharing new foods. This journey of discovery provided consumers with an opportunity to dive as deep into coffee as they chose but, in general, all consumers are much more knowledgeable about coffee than they were in the days of Folgers Instant Crystals. It resulted in new supply chains that are scaled for smaller production, Fair Trade and direct trade programs that are focused on the land and producers. And, it has redefined the entire coffee market. We could discuss similar analogs in every other category of food.
A state of transition
Despite overwhelming consumer demand for the products of small and mid-size producers, our industrial food system doesn’t currently provide most farmers, ranchers, and food entrepreneurs with supply chain infrastructure and services that are scaled to the size of their production. We have a long way to go in developing infrastructure that will support a more fragmented food system. Small and mid-size producers don’t have sufficient access to processing, storage and distribution but, as we saw with the evolution of a custom crush ecosystem in wine, the market is responding to real demand and creating compelling business cases for investment.
Prior to the industrialization of our food system in the United States, food was produced and consumed hyper-regionally. With industrialization, we shifted to hyper-centralized production and manufacturing that plugged into a global distribution system. With a growing shift toward more regional production, centralized manufacturing and global distribution systems aren’t scaled to connect with more fragmented production. Fortunately, with consumers connecting to smaller brands and increasing volumes of regional production, we’re now observing a layer of aggregation develop that is able to accommodate regional-scale production and plug into the global manufacturing and distribution system. We’re still in the early days but seeing increased momentum in these developments.
…we’re now observing a layer of aggregation develop that is able to accommodate regional-scale production and plug into the global manufacturing and distribution system.
Interestingly, and maybe not surprisingly, some entrenched industry participants, investors and entrepreneurs are still trying to innovate around the edges of our industrial food system. They have pursued a path of creating the next astronaut ice cream or Tang (e.g. highly processed, novel products), as opposed to addressing consumers’ inclination towards more simple, authentic and identifiable ingredients that are produced on a human scale, in ways that are better for the earth and people. There is a tendency to look for technological, point solutions to this systemic problem, which ultimately perpetuates our industrial food system and the extractive practices underpinning it. It isn’t where the consumer is heading, in this writer’s opinion, but diverse opinions, approaches and strategies are natural as every stakeholder works to define their role in this evolving opportunity. And this tendency may be amplified as new participants enter the market (e.g. investors, entrepreneurs), eager to help solve for a more sustainable food system. As a society, we seem to value new inventions, which are nicely packaged and fun to discuss at cocktail parties, rather than pursuing an understanding of the systems in which we live. Our current food system took us down a path of reductionist thinking and it will require a systems mindset to evolve in ways that are healthy for the planet and people, and also provide the products that consumers desire.
Where do we go from here?
Fortunately, the playbook has already been written for how to support a food system that benefits all stakeholders. It may not be as sexy as a new technology or food product innovation but, by blending the positive attributes of our industrial food system with an awareness of the related externalities and layering in generations of knowledge in producing food that is good for the planet and people, we have an exciting opportunity. It isn’t a matter of going backwards in time but rather looking at wine, coffee and other leading food categories as examples of how we can move forward. The answers are right in front of us and don’t require us to reinvent the wheel. We need technological innovation, but the solutions are multi-faceted. They include many different players, collaboration among varied capital sources, and participants who see how to connect strategic ideas in the white space of our industrial food system.
…by blending the positive attributes of our industrial food system with an awareness of the related externalities and layering in generations of knowledge in producing food that is good for the planet and people, we have an exciting opportunity.
Diverse stakeholders are driving our food system toward authentic, transparent and purpose driven brands for many different reasons. By investing collaborative, diverse profiles of capital in the production, processing, infrastructure and products necessary to meet growing consumer demand, every stakeholder can benefit. And, we can continue this march toward a less extractive, more regenerative food system.
Stephen Hohenrieder has spent the past decade exploring, learning, investing and collaborating with others in pursuit of a goal to deploy financially focused capital along the value chain of our food system in ways that promote more regenerative land management practices, the production of healthy food at scale, and connect people to each.
