The most popular sauce in Russia used to be mayonnaise, according to Ivan Sidorok, co-owner of the NMGK Group and Board Chairman of Enactus Russia. “94% of Russian families consume the product, and yet, according to our estimates, in the next five years, the demand for the product will stay at current levels, while other categories of sauces (ketchup, salad dressings, etc.) will show an annual consumption growth by 6-9%,” said Sidorok. The mayonnaise market is stagnating – people prefer niche products, such as sauces. NMGK already produces a line of 10 sauces called “Astoria”. In 2012, the sauces made up 9% of total revenues from mayonnaise and sauces, and by the end of 2014, the share had reached almost 15%. In absolute terms, the sales volume for this product nearly doubled in the past year compared to 2012. We need new products, however, the development of new recipes for sauces is a very capital-intensive process that has unpredictable results. This is reserved for the fanatics and specialists, and mayonnaise products are a priority, we say at NMGK. This is why NMGK plans to invest 1 billion rubles in successful culinary startups, so they can develop the new niche products for us.
Using his own money, last year Sidorok launched the Mabius Food Startup Centre – a 50 square meter lab located in the Kristall plant in Moscow. “Today I predict a great future in personalized production, and the winners will establish a continuous flow of new ideas and solutions,” Sidorok said. “For example, take the smoothie brand ‘innocent’, which grew from handmade to one of the leaders in the beverage market in England, and was bought by Coca-Cola. Or Red Bull- first was a drink for extremists and now its mainstream. In fact, we expect to repeat such a growth trajectory, although I understand that in the startup industry, the chances are 1 in 1000,” he said.
NMGK decided to put their money in niche products for another reason. Internal development investments make up 1 percent of turnover at NMGK (the group’s 2014 revenues totaled $2 billion, according to the company). Lately, the effectiveness of these investments is low or even negative compared to the profits, which in the short term can yield successful products. And the sheer number of products on the market isn’t very big. According to the company, 30 people work in NMGK’s R&D department, and out of them 18 work on retail products – these are food industry workers. Every year, only 5 of about 60 products in development (64 in 2014) are implemented. “It is twice as fast and three times cheaper to launch a new product through co-creation,” said Andrey Ryvkin, Director of Mabius Centre.
Mabius is an experimental lab needed to create product prototypes, Sidorok explains. “Using the lab’s equipment, we make micro batches, a volume of product that cannot be made at home,” he said.
The lab was in test mode all of last year. Of the 40 registered startups, four products went onto the final, and already one of them – Marc&Fisa Frustiki – went on sale at the supermarket chain Azbuka Vkusa in the beginning of April. Frustiki are a children’s sugarless snack made from cereals and natural fruits and vegetables created by entrepreneur Alexandra Sharorost. Mabius has invested 3 million rubles into this product, and the expected turnover at the end of 2015 is 15 million rubles. “Alexandra has already independently started in the premium segment with cookies, granola, and candies called Marc 100% Natural” explained Sidorok. “However, to enter the next level of business she needed third party investments, structured marketing, and other scales of operation,” he said.
For a new product launch to be considered large-scale, investment should be between 10 and 20 million rubles. By the end of the year the center has set an objective to find 50 new food products to invest in. One problem – not all entrepreneurs go beyond their gallant ideas. “Almost 90 percent apply the formula of minimum effort, maximum results,” Sidorok said. Many can’t even properly fill out the application with a sensible business model and calculate an investment model.
If an entrepreneur has a promising idea, Mabius signs a contract and sets up a joint company. “The startup’s share in the business can range from 5 to 50%,” Rivkin said. “It all depends on what a person comes to us with. If it is just a project idea that we still need to invest a lot, the share is less. If this is an already streamlined idea in mini-production, the share is more,” said Sidorok.
Investment in the culinary center’s first lab totaled 40 million rubles. The money went into buying equipment, conducting tests, and salaries for product engineers. By the end of the year, Mabius plans to create two more labs for new startups. The budget for 2015 is 1 billion rubles – NGMK’s money as a general client of Mabius.
Fatten up and sell
Mabius has a team of 15 people. In addition to Sidorok and Ryvkin, four people work in outsourcing – exploring the potential market and providing expertise. The project also includes three product engineers, two marketing experts, a specialist who liaises with retail chains, as well as those who promote Mabius itself and its brands and startups.
According to Ryvkin, NMGK wants to enter five similar product categories: confectionary products (flour and sugar-based), sauces, oils, spread, and processed snacks. While in its test mode, Mabius only brought one product to market (the previously mentioned Marc&Fisa snacks), but hopes to deliver five new products to stores by the beginning of next year. “Apart from performance which is an interest of NMGK, Mabius will function as an incubator of startups as an online platform, where any investor will be able to contact an entrepreneur and invest in their project,” said Ryvkin. After a year or two, Mabius hopes the company Marc&Fisa will be worth $30 million, and then we can think about selling it.
NMGK intends not only to support gastronomic startups, but to also develop the “Smart Shelf” and is now selecting suitable frontrunners for the project – IT startups. “Our task is to cram as many technical apparatus we can into the Smart Shelf project that allow a better understanding of customers, improve user experience based on interaction with the project, the Shelf, etc.,” said Sidorok. NGMK is also ready to invest in startups that offer solutions to increase the average check amount offline, and also in development of big data, the company said at a recent retail conference.
“With regards to startups in the food industry, there is a high risk of investment write-downs; it would be good if 5% of projects turn out to be more or less successful,” estimates Timur Nigmatullin, an analyst at Finam Investment Holding. In order to attract investment for the development of niche foods, the team needs people with experience – professionals – not just enthusiasts, the expert said. Furthermore, the market sector that the product is in must be dynamic and have at least a multi-billion ruble potential, he added.