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Small Is The New Big: Specialty Food Growth Outpaces The Market

Recently, the Specialty Food Association (SFA) released its annual State of the Specialty Food Industry Report, which highlighted that small or specialty food brands are driving the most growth and innovation. According to the report, total sales in specialty foods grew by 10.3% versus 3.1% for all food at retail, bringing specialty food’s market size to roughly $150 billion or 16.1% of the total market. And, there seems to be no sign of the market slowing down.

Specialty food is becoming less of a fringe item and more mainstream, which provides retailers with an opportunity for differentiation. This market was previously dominated by Whole Foods and smaller specialty food stores. However, as Amazon continues to integrate Whole Foods, the culture has become more corporate and lost its feel – this presents a void and an opportunity for all retailers.

One example is the growth of plant-based meat alternatives such as Beyond Meat and Impossible Foods. Beyond Meat went public in May with a valuation close to $6 billion while Impossible Foods raised more private funding this past May to bring their total to $750M. Both companies have been able to garner the attention of grocery operators and restaurants alike and prove it can drive increases in traffic and same-store sales.  Lofty evaluations aside, the momentum for alternative and plant-based proteins seems real, driven largely by millennial demand.

Specialty foods are driving growth and disrupting the food retail industry. I saw many new trends in the market at this year’s Expo West Show that continue to grow.

    1. Dairy-free alternatives are expanding into other categories and exploding the segment.
    2. Functional beverages are blowing up with creative infusions including CBD, Kombucha, and others that serve a distinct purpose.
    3. Healthy alternatives are on the rise to accommodate dietary needs including paleo, grain-free, and gluten-free among others.
    4. Food conglomerates like Kellogg’s are making major investments in health foods including brands like RXBar.
    5. Innovation continues to improve in frozen and refrigerated options.

This has two significant points of impact on the industry at large:

  • From a retailer point of view, the Amazon influence on Whole Foods is running the risk of alienating its core customer. A void has appeared that represents an opportunity for other retailers such as Sprouts, Natural Grocers and new chains popping up on a regional basis. The retailers that cater to these shifts in specialty food will demonstrate growth and relevancy to a wider audience of consumers.
  • From a “big” food standpoint, growth will continue to be fueled by small to mid-sized brands that do a better job of capturing key food trends that appeal to the next generation customer. With the big CPG manufacturers largely failing to develop these brands on their own, expect more efforts around incubation, VC backed efforts (often in collaboration with the large brands) and rapid acquisitions of promising start-ups.

The buzz around small and specialty is very real, and likely will be the driver of future industry growth.

Interested in innovations? Download a copy of our Retail Innovations book here.

This article first appeared in Forbes.

Neil Stern

Neil Stern is Partner Emeritus of McMillanDoolittle. During his career at McMillanDoolittle, Neil has developed strategies and new concepts for a diverse variety of clients across the retail industry. Neil currently serves as Chief Executive Officer for Good Food Holdings, which operates over 50 supermarkets on the West Coast of the United States under five different banners.

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