Startups Are Finding a Powerful Partner in This Hidden Corner of the Food Economy

October 5, 2016, 7:05 PM UTC
Photo courtesy of Back to the Roots

For decades there has been a tried and true path for natural food companies looking to grow: Start in your hometown’s natural food store. Next, try to get your products into your region’s Whole Foods and then build out with the natural food chain region by region. After that, see if you can get your goods placed on the shelves of conventional grocers like Kroger and Safeway, followed by mass retailers such as CVS and Target, and then finally club stores like Costco.

Only at this point, when you’re a $150 million to $200 million brand by sales, would you consider selling your product via food service, the decidedly unsexy and low-profile food companies that provide meals in venues ranging from school cafeterias to corporate campuses to hospitals.

“There’s a lot of skepticism about going down the food service path—that it’s low margin and doesn’t translate into building a brand,” says Alejandro Velez, co-founder of Back to the Roots.

But that’s exactly what he and his fellow founder, Nikhil Arora, decided to do with their burgeoning startup. Last month Sodexo, one of the world’s largest food service companies, started carrying Back to the Roots’ cereal with its school customers. This month the startup’s breakfast offerings will launch in the rest of Sodexo’s accounts. Velez says that his brand is displacing cereals that have higher sugar content.

In Sodexo, Velez says Back to the Roots found a company willing to understand the true costs of making its products and one that wanted to help the startup scale. The company is now also developing a single-serve snack for Sodexo that will launch with the food service company in January before going into retail outlets. “They have become more mentors to us because we took a big risk with them,” says Velez, pointing to the fact that school cafeterias are a notoriously challenging business. “You lose money in schools—they’re a loss leader,” Velez says.

Food service has become an increasingly important channel for natural food startups, which Velez says companies like Sodexo view “as the future.” Sodexo in 2014 said it would purchase $1 billion in products and services over three years from small- and medium-sized enterprises; its other small partners include Paleo baked goods company Base Culture, Village Tea Company, and Gavina Coffee Company. Sodexo competitor Compass Group carried Hampton Creek’s vegan mayo early in the startup’s tenure and was the first to carry its dressings.

Teaming up with small brands is a chance for food service companies to tap into consumers’ growing interest in natural foods and desire for transparency—an area where startups have led the rest of the industry. Back to the Roots is “really aligned well with what we’re hearing from customers, clients, and employees,” says Lorna Donatone, ‪who runs North America for Sodexo. “There’s more and more of a demand for local and organic.”

Back to the Roots also sells home growing kits like fish tanks that produce human food and mushroom kits made with coffee grounds—a line of products that was actually the company’s first. “It’s both a food and a science project,” explains Velez. As part of its deal with Sodexo, the growing kits are also going into classrooms along with corresponding curriculums that will help kids understand where their food comes from. “We create products that have to work in a kitchen or a classroom,” Velez says. “That’s been in our brands since the very beginning.”

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