Just how hot is healthy food? Merger and acquisition advisory firm, Piper Jaffray, reports the compound annual growth rate of the healthy food sector is 24.1%, versus all other food at 8.6%. Healthy food's earnings before interest, taxes, depreciation and amortization (EBITDA) multiple is 26.2X compared to other food's EBITDA multiple at only 14.0X. Such figures explain the feeding frenzy by private equity and public food and beverage companies to gobble up these healthy startups to improve their own returns.
While the financial success of healthy food startups is proof of sector performance, Bill Gross' recent TED Talk, “The Single Biggest Reason Why Startups Succeed,” got me to thinking about just why the healthy food sector is so hot.
Its not like mankind suddenly realized there is a correlation between what we eat and our health, right? In his TED Talk, Gross, the CEO of Idealabs, a company which has spawned more than 100 businesses, including huge successes and failures, reveals the research he did to better understand the factors that most affect success and failure. He studied 100 Idealab businesses and another 100 non-Idealab businesses in order to gain objective and quantitative insight into what matter most. The research revealed five factors, Ideas, Team/Execution, Business Model, Funding and Timing, that most influence success or failure. And the surprising reveal to Gross from his own research was that Timing (perhaps an amiable substitute for dumb luck?) had a greater impact on business success than any other factor, including the "big idea." I suspect it's typically easier to effect control over the other four factors. And the brilliance of the right Timing is usually something we only see in retrospect.
What then can we see in the market timing that suggests why now is so fruitful for healthy food startups? Here are the Timing triggers that I believe are creating healthy food's time in the sun:
1. Affordability Our spending on food, proportional to our incomes, has declined significantly since 1960. According to the USDA, the average share of per capita income spent on food (at home and away) fell from 17.5% in 1960 to 9.9% in 2013. The high efficiencies of corporate farming and food processing have unquestionably delivered America very inexpensive food.
2. Health Education We find it kind of shocking to see old cigarette ads where Hollywood actors, professional athletes and even doctors (More Doctors Smoke Camels Than Any Other Cigarette!) are hawking what the Surgeon General now tells us causes lung cancer. We've now reached a general understanding that the highly processed food that provided us with so much taste and convenience comes with a price, namely obesity (doubled from 1980 to 2000), diabetes (tripled since 1980) and cardiovascular disease (projected to increase to 40.5% of Americans by 2030). We can largely thank a few media "Paul Reveres" for getting the word out, films like “Fast Food Nation” and “Food Matters” and books like T. Colin Campbell's The China Study and Michael Pollan's Food Rules.
3. Healthcare Costs Food as a proportion of our incomes costs us less, so those with more income find it even easier to spend more on healthy food. Dramatic stories in book and movie form have made us broadly aware of the foods to avoid and those to embrace. The final big trigger is the growing understanding of the healthcare cost of unhealthy food. Studies peg the annual healthcare cost of obesity at $300 billion, diabetes at $174 billion and heart disease at $444 billion. Insurers and individuals have a large and growing financial incentive to eat better to control these costs.
The convergence of these factors have driven the dramatic growth of healthy food brands and the multiples private equity and Big Food are willing to pay for these brands. Of course, 3G and Warren Buffett are showing us that timing can be used in a very different way. It's also a great time to make big money at Big Food, by stripping out costs faster than sales fall.