Inside view: John Sykes
The former Unilever executive invests in consumer products. He talks about long-term trends in the food and drink market, distribution strategies and crowdfunding
Consumer product investor John Sykes worked at Unilever for 22 years. He left the British-Dutch multinational company in 2011 to become interim financial director, business consultant and mentor at McCormick & Company, Best Foods, and more recently Allied Bakeries, a division of Associated British Foods. In 2014, Sykes became investor director of Perfect World Ice Cream (PWIC), the no added sugar, vegan and vitamin-packed premium ice cream brand. The start-up was his first investment in food and drink.
“Having worked with the roles I had at Unilever, I could see certain market trends, consumer trends, and long-term trends,” he tells me before asserting two aspects that are useful when looking at investment. “The trend of healthier products isn’t necessary about low calories products but about being healthier; there’s a subtle difference between the two.”
Sykes says the second trend is finding a route to offering a tailored-made product. “Twenty years ago, you wouldn’t have the number of gluten-free products that you see today, for example. So, it is about catering to niches.”
The distribution challenge
Having the product and business model right is not enough to secure success in the market. The challenge for all brands, big and small, is getting the product on the shelf.
“Even if there is a trend that is spot on to your product, the biggest challenge is distribution: getting your version to the grocer, especially if you’re not coming from an established business that can leverage the innovation in it. Unilever, for example, has that advantage. The company can spot a trend or segment to fit with one of its brands, and because [Unilever] already has a relationship with the retailer, it’s easier for the brand to get on the shelf. But it may be the case of taking out something that’s at the end of its lifecycle and put something new in,” he notes.
“The trend of healthier products isn’t necessary about low calories products”
Sykes points to the growth of the discount segment as yet another hurdle for challenger brands, narrowing the chances for stockist to list new products. “That conflicts with the trend of having more choices, more tailored products, and more personalisation,” he says. “The contradiction is that the discounted trend gives you limited choices.”
The market seems to be changing in this respect, however. Consumers go for products at the lowest price of acceptable quality only when it is not important to them. People are willing to pay more for products that are tailored-made for them.
“The middle ground in the market is disappearing, and either people are trading up for that more specialist tailored product or trading down to the economy segment. But the economy segment is now of such good quality!” Sykes quips.
It may seem basic, but Sykes encourages entrepreneurs in the journey to launching a challenger brand not to give up. “I think it is a question of trying lots of different ways and using whatever network you can — ex-buyers for example. Try to find people with the expertise or the network to open that door,” he says. For Sykes, the challenger brand’s unique proposition is crucial to attracting the retailer, “but that’s a given”.
Skip the middleman
Commenting on marketing strategies, Sykes opens up and talks about his investment in Beer52, one of the largest beer clubs in the UK. This challenger brand has taken the personalisation trend to its advantage: the company delivers cases of beer direct to the consumer.
Sykes also talks about another start-up he didn’t invest in that was looking at delivering a meat box to the customer’s door, and the customer could either choose products or get a variety box. “I didn’t invest for a technicality, not because I thought the proposition was wrong,” he says.
Sykes explains that the founder worked in the supply chain in one of the discount supermarkets. “He had this idea of distribution: buy direct from farmers and send to consumers, taking out the middleman.”
For Sykes, that’s one way of overcoming the problem of distribution, but it can’t work for everything. “How do you market your brand to the consumer? You have to have a big enough scale,” he adds.
Back to the Beer52 example, brand awareness was created around the power of worth of mouth. People would get a free case of beer through a recommendation of an existing member. “If the company gives a free box to a new client recommended by an existing client, that works as a marketing strategy,” Sykes says. He also notes such a strategy gives the company a big knock-on effect that’s much efficient than the traditional giveaway voucher, for example.
Sykes knows the direct-to-consumer via online channels has proven to be the distribution of choice in the Covid-19 lockdown, but he warns it’s only valid to a limited number of markets.
“It’s too much hassle, I think. You do need online delivery of the grocers/Ocado, and of course, there is the advantage that Amazon has as a portal for everybody, but it only works for ambient products. For a frozen product; forget it: you need the chilled supply chain,” he explains.
Sykes hasn’t got an exit under his belt yet but tells me that seven investments in his portfolio are performing as expected.
“There are two investments that are not consumer products: one has gone bust, and the other is doing exceptionally well — making money, paying dividends, and each subsequent investment round goes up and up,” he says, talking about the fin-tech company Bank of Telecom, the specialist settlement bank for international telephone companies.
Sykes also points out that direct investment into challenger brands is not the only way to grow a portfolio. He sees crowdfunding as a tool with an important part to play, particularly in the food and drink market.
“Some of the companies I have invested in have used crowdfunding, such as Seedrs or Crowdcube. The good thing [with crowdfunding] is that you’ve got a large number of people with a small number of shares — the only way of managing that. Therefore, you also gain people who are a supporter of the product. That’s a marketing bonus: they will be advocates of the brand.”
“One thing you clearly see about crowdfunding is that people follow like sheep”
Sykes notes, however, that food and drink start-ups choosing crowdfunding still need to have some core investors as well.
“One thing you clearly see about crowdfunding is that people follow like sheep,” he says, pointing to how people tend to invest in crowdfunding campaigns that have already raised funds in the early days of the round, as if these early backing were a sign of market approval, and that campaigns with less investment are seen as somewhat weak.
In the crowdfunding landscape, Sykes says, people are investing with an expectation that companies won’t fail, “and that’s worrying”.
For Sykes, the rule of thumb in venture capital is valid in the crowdfunding landscape, too: when you invest and buy companies, you have to expect that some would fail. “As an investor, you need to make sure the one [company] that does well should more than off-set the others that go bust.
“The next financial scandal could be in the fact that a lot of uninformed investors have put loads of money in crowdfunding campaigns of companies that fail,” he warns.
Sykes believes crowdfunding is competition for venture capital and private equity, but not necessarily bad news for them. He says crowdfunding has the benefit that, if used for the right company in the early-stages, it enables more opportunities for challenger brands to go on a Series A round with a venture capital investor, as they’ve got the advocates and the money to grow.
“With crowdfunding, venture capital firms now have more companies to look at if they wouldn’t have gone through crowdfunding,” he concludes.