BakeryandSnacks met up with Pappalarado at The Hatchery Chicago networking event ‘Raising the Bar on Acquisitions'. Pappalardo has been with Kellogg for nearly six years, most recently, as head of new ventures and Kellogg’s direct whole grain cereal brand, Kashi.
Basic rules for M&A
According to Papalarado, there are three basic metrics for conventional M&A activities among Kellogg and its competitors: the opportunity to enter different geographies, other food forms or categories; to attract new consumers; or to accelerate in the space it is already in.
“The M&A starts with a strategic process: We look forward [to see] where we want to go, what market gap we have and how do we want to fill it? That’s the radar… but if a startup is too far outside the pathway we identify, it’s kind of hard to get on our radar – so it has to fit in the first place,” he explained.
Alternatively, Pappalardo said affiliated venture capital funds, like Kellogg’s eighteen94, are also a way in for food entrepreneurs.
“They are more flexible and look with a wider lens, so it’s easier to get on their radar as long as you meet the criteria: As a venture operator, they are seeking [profit] return. They also look for strategic benefits and those could be learning, networking and building something together.”
Recently, Eighteen94 made its first investment in a distribution channel (Cargo) as opposed to a finished product, while Kellogg invested in building the Hatchery’s new Chicago location hoping to facilitate local organic food business growth.
However, the conventional acquisition rules may not apply to working with emerging brands as the food industry is evolving, he pointed out.
“[Large CPG companies] look at how to form a joint partnership without destroying the authenticity of either side,” Pappalardo said.
For example, RXBar, which Kellogg acquired for $600m last October.
"We did not look at it through the lens of what RXBar could do for us, because that’s the wrong place to start… If we just want to fill a hole in our portfolio, we are already one foot in the grave for the relationship,” said Pappalardo.
“RXBar is a unicorn, not because of its growth, but the way Peter [Rahal, founder of the RXBar] has built the company.
"The outside world sees RXBar as a wonderful brand [with] a marketing plan that has been executed well. What they don’t see is Peter’s vision and the culture he has built around the brand.”
Dos and don’ts
Rahal, who participated on The Hatchery's panel along with Pappalardo, told the audience its incorrect to assume you will be made redundant as soon as your company is acquired.
In fact, he said he had never even considered the RXBar team exiting after Kellogg’s takeover.
"We never had an exit strategy. Picking Kellogg was actually an easy decision. I can exit my business as a shareholder, but I’d never want to leave as an employee,” he said.
Pappalardo also weighed in on some of the mistakes food startups make when they approach Kellogg for potential partnership.
“Do what you do well - have that first space, food form or category, and show your business is sustainable and can evolve, such as jumping into other categories or channels,” he said.
“But don’t rush to plant flags in a bunch of other areas… if you spread too quickly, you can undermine your core. That’s not attractive to someone who wants to start a partnership with you because your partner may have their own ideas.”
Pappalardo added a company would need an historical revenue of at least “eight figures and up” to prove its viability to attract the likes of Kellog, while venture capitals can engage with smaller enterties, although "they need some level of viability too.” .
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