Ross Iverson is Chief Investment Officer and Co-Founder of Manna Tree Investment Partners
Russ Alan Prince: What impact is inflation having on PE firms focused on health and nutrition such as Manna Tree?
Ross Iverson: Food is a basic human need that’s not going away, and consumers are recognizing the everyday decisions they make affect their health. Even in the face of inflation, the healthy food sector has generally proven to be a resilient and steadily growing asset class. The greatest inflationary impact has come from increases in the cost of ingredients, but at the same time price increases have helped offset those increased costs and we believe many of those higher prices are here to stay.
The entire food industry has had three rocky, unpredictable years and we anticipate more stability as we head into 2023 and beyond. A lot of the supply chain pieces have been corrected which should ease some of the sticker shock consumers have been experiencing in the supermarket. I think we’re already starting to see that with meat pricing stabilizing.
In most industries, the companies caught in the middle struggle, and in food right now, the groups that are performing well are either in the health forward segment or they are marginal cheap food options. It’s the brands and companies that are in the middle that are undifferentiated. They are too expensive to be cheap or they don’t have any functional benefits that are additive to a person’s health.
Prince: Obviously, eating more nutritiously becomes more difficult in a recession, especially with the prices of food skyrocketing. How do you see this shaping consumer buying habits?
Iverson: At Manna Tree, we are focused on a specific niche, what we refer to as “the health forward consumer.” Before we make an investment, we look carefully at the incentives or disincentives for trading up or down in the category. For example, many consumers will not trade down if they are affected by food allergies, regardless of price. We found the consumers we’re targeting generally make food choices, including when they dine out, based on convenience, taste, and perceived health benefits. That doesn’t mean they won’t consider switching within a category if there’s a product similar to their usual brand that has a similar ingredient profile and it’s on sale for a dollar less.
With that in mind, our investment thesis calls for investing in category leaders that have a very unique ingredient profile, because when people build a specific brand or product into their diet, they are less likely to switch. Less health-focused consumers have fewer reasons to stay sticky with a brand and they’ll go for price more often.
The health-forward consumer also looks for alignment around their social values and typically in a recession that person isn’t going to throw their values out the window. For example, some consumers may choose a certain brand because they have good animal welfare practices or policies of inclusion. But the highest rank order is health. If you’re allergic to certain chicken feed that goes into your eggs, you might upgrade the quality of your eggs to a premium brand to avoid having an egg allergy. Those consumers aren’t going to go back down just because of price.
Prince: How difficult has this environment been for your portfolio companies to continue growth?
Iverson: It’s in big market cycles like this where you see a lot of innovation and that translates into growth. One of our companies, Gotham Greens, has taken very labor-intensive outdoor agriculture and brought it indoors, added technology, and reduced labor substantially. One of the big drivers of inflation has been labor costs. Gotham Greens has continued to scale through this environment nicely because of that.
Another great example is Cheetah Technologies, which works with small independent restaurants. If you’re a small independent restaurant in this challenging time you are trying to manage your food cost and not necessarily pass everything on to the consumer. Cheetah is a tech-enabled logistics business that allows restaurants to have more just-in-time inventory and a broader set of SKUs than a traditional supplier to small independent restaurants. Cheetah has been able to help their restaurant customers save margin, have less food waste, and add to their profitability because of that switch. Cheetah offers ordering later in the day than a typical foodservice distributor, so restaurants are able to dial in exactly what’s needed for the next day’s ingredient count.
Manna Tree is focused on the health-forward consumer who is getting functional benefits such as energy and lowered risk of disease. In our view, that consumer didn’t really exist as a demographic the last time we faced a recession. Post-Covid that market has stayed resilient, and we believe the products in that category should be able to weather the inflationary market better.
RUSS ALAN PRINCE is the Executive Director of Private Wealth magazine (pw-mag.com) and Chief Content Officer for High-Net-Worth Genius (hnwgenius.com). He consults with family offices, the wealthy, fast-tracking entrepreneurs, and select professionals.
