Eric Melloul has spent two decades shaping, as he calls it, “the future of food.” Today, as the Brussels-based managing director of the international investment group Verlinvest, Melloul is guiding many mission-led brands in the consumer goods, health, consumer technology, and lifestyle spaces. Among them are Tony’s Chocolonely, Vita Coco, Mutti, and Oatly, for which he is the board chair.
Melloul recently spoke with McKinsey’s Kathleen Martens about his approach to consumer-focused, midcap investing. Their discussion touches on the value of polarizing marketing campaigns, the importance of distinguishing fads from trends, and the rewards of pairing passionate founders with pragmatic executives. Along the way, Melloul reveals his tips for creating a balanced investment portfolio—though, as he says with a laugh, “There are some secrets I will keep for myself.”
Kathleen Martens: When we at McKinsey talk about growth, we disaggregate it into three components: growing the core of a business, growing through adjacencies, and launching disruptive business models. We find that companies that consistently and profitably grow tend to do all three. Have you seen those three pathways to growth manifest in your portfolio?
Eric Melloul: That observation is consistent with ours. As part of our investment thesis, we are interested in companies that offer a variety of growth levers—across channels, geographies, and business models. A vast majority of our vertical and company investment theses are based on the multiplicity of growth levers.
Very often, founders and entrepreneurs are very good at generating ideas for growth. They’ll generate ten ideas. What’s critical, before we invest, is to prioritize: “Are we going to win with [idea number] one, two, and three? If those don’t work, we can always go after four, five, and six.”
The ‘baby factor’
Kathleen Martens: A midcap company with limited resources won’t have every capability. What critical capabilities does it need to have in-house to have a reasonable shot at success?
Eric Melloul: One is the personality and will of the founder. You need to have that tremendous source of energy, where someone wakes up in the morning and thinks of the company as their baby. I call it the “baby factor.” It may be that the founder is the CEO or that they remain a core part of the business in a different role, but it explains a big part of any company’s success.
Very fast product innovation is also intrinsic to the DNA of a successful midcap. At big food companies, idea to launch typically takes six to nine months, minimum. The midcap companies in our portfolio take four to six weeks. Their failure rate may be higher, but they are able to capture opportunities faster and succeed better.
Then you need disruptive marketing—talking to consumers in a distinctive, authentic way. It cannot just be something that an ad agency is manufacturing for you. The message can be provocative—one that makes a lot of people happy and a lot of people unhappy—so that it catches consumers’ attention and demonstrates the company’s mission. I call it “polarizing marketing.”
Another important capability is assembling an ecosystem of partners and suppliers that do the work for you. Because of limited resources, you cannot do it all. The good news is that when it comes to production and other functions, there are a lot of copartners out there. The critical capability is to assemble this ecosystem of players who can help you get the scale you can’t get on your own.
When it comes to production and other functions, there are a lot of copartners out there. The critical capability is to assemble this ecosystem of players who can help you get the scale you can’t get on your own.
Growth, value, and patience: A careful balancing act
Kathleen Martens: In recent years, we have seen more companies become willing to sustain long periods of unprofitability to invest in growth. What’s your philosophy on this type of growth trajectory?
Eric Melloul: It’s the billion-dollar question today. The world has changed, and money has become more expensive. The public and private markets today tend to favor value over growth, and in some cases are saying, “We’re happy to see less growth but more profit and cash flow.”
Gross margin is the lifeblood of consumer-packaged-goods companies. It is the source of proceeds and resources to invest into marketing, branding, and innovation. That gross margin has to be very solid: I would say 35 to 40 percent-plus, or at least a very shortened path to that number.
I also want to see capital efficiency. A company has to be able to show us that every dollar spent generates either short-term or long-term returns. I like to see that with a $10 million investment the company can generate at least $20 million to $30 million in revenue.
Kathleen Martens: And you’re willing to leave EBITDA in the red for quite some time, as long as these two criteria are met?
Eric Melloul: This is what differentiates a midcap from a large cap. A midcap growth company can evaluate the return on its investments over a three- to four-year horizon. Big companies launching a product will expect EBITDA in year one. The ability to be more patient and take more risks is what sets midcaps apart. At Verlinvest, we have an advantage: our evergreen capital structure allows us to have a much longer-term view of success with our investments. We can partner with a company for two, five, or 15 years if we need to, depending on what makes most sense for that specific business.
The ‘kiss of death’ and other pitfalls to avoid
Kathleen Martens: We’ve talked a lot about success factors. What are the potential pitfalls of investing in midcaps?
Eric Melloul: One pitfall has to do with leadership. A number of midcap companies, after hiring professional managers, lose their souls, or their “mojo.”
A second problem is category choice. Being stuck in the wrong category is almost the kiss of death. You can have the best management in the world, but if you are in the worst category you will be unsuccessful. Some good leaders are able to completely restructure their businesses from category X to category Y, but more often than not, leaders continue to struggle within a category that is fundamentally not healthy. That’s why we, as investors, are very keen to understand the difference between a “fad” and a “trend”: a trend is a long-term consumer change that we spend a lot of time researching ahead of investment, while a fad is in and out in about 18 to 24 months, which makes it hard to pivot between categories.
Another pitfall has to do with incentive structure. Incentive drives behavior, which drives outcome. I see many companies move from an incentive structure that was based on growth and profit to one based exclusively on profit. That drives the wrong behavior because it forces managers to focus on cost instead of growth, short term instead of long term. This is why, as a board member, I like to be part of the remuneration committee. Incentives—defining the target and the time frame for delivering the target—will largely determine whether a company hits the wall or not.
Kathleen Martens: Many categories—like coconut water or breakfast cookies—have a certain life cycle. Most companies will eventually need to pivot. If you take a 20-year perspective, the likelihood of needing to reinvent yourself is pretty big. How, as an investor, do you guide that process?
Eric Melloul: We look very closely at the home market’s key performance indicators. Do we see a slowdown in velocity? Do we see a deterioration of brand indicators, where people are saying, “It’s not top of mind anymore”? Do we see a category slowdown?
The other thing you need to do is to anticipate the fact that a category will mature. So you create optionality. You launch several products so you’re not betting the house on a new trend.
But let’s also acknowledge that some of the biggest growth stories in food and beverage are brands that have almost obsessively focused on one category. Think Red Bull. I believe that oat milk can be a multi-billion-dollar category globally. Many people ask me, “Eric, shouldn’t you get into other-ingredient milks, like almond or soy?” Given what I see in the market, I actually think there’s an opportunity to build a [global] business just in oat milk.
An inflection point
Kathleen Martens: We’re entering a new era with high volatility, more expensive capital, and a labor market as tight as it’s been in 20 years. Does that change how your assets are looking at growth in the coming five years?
Eric Melloul: There’s a geopolitical crisis, a climate crisis, an inflation crisis, and commodity price shocks. We are spending a lot of time, as an investor, helping our companies develop perspectives and capabilities for managing this new world. But at some point, human beings will find a way to solve most of these crises. Growth overall, as measured by GDP, may slow down, but let’s not be fooled by macro. Once you dig into subcategories and sub-subcategories, you can find growth, because the drivers of growth will still be there.
People want to be healthy, and that’s not going to change. Digitization is not going to change—it’s taking over our lives, whether we like it or not, and it’s going to create huge opportunity for disruptive models. I’m also hoping that we, as the human race, will continue to take ESG [environmental, social, and governance] very seriously, which creates new models. So I believe I still have another 20 years to invest successfully in disruptive brands because these drivers of growth will continue to be there for years to come.
Kathleen Martens: You have successful companies in your portfolio at the individual level. But what’s your secret sauce at the portfolio level?
Eric Melloul: It starts with our motto: “We drive consumer revolutions.” We believe that investing in the consumer space starts with understanding consumer trends. We spend an inordinate amount of time and money on doing “deep dives”: How is the consumer changing? Is this going to last? What are the implications for the way consumers shop, eat, take care of their health, etcetera? That up-front work is critical. We develop a consumer thesis and that drives portfolio decisions. We also look at our portfolio allocation based on geography.
We know that about 80 percent of the return is driven by a few winners. This is offset, of course, by a few companies that are just not doing well. We are making a few bets that, if they pan out, will be highly successful, but we have to combine this with companies that offer lower risk and lower return to create a portfolio that is more balanced.
Managing a successful investing team
Kathleen Martens: Some of the big funds out there have made a strategic decision not to invest in the consumer sector. How have you been able to make it your focus?
Eric Melloul: I’ve been in consumer investing for more than 15 years now. There’s pattern recognition. You get to know people in the industry, so you know who to call for advice. You’ve learned from the failures in your portfolio and others’ portfolios. Sector specialization also benefits my team.
The second thing that’s really helped is that we are not bound by artificial deadlines when it comes to fundraising or selling a business. I’m flexible enough to be able to exit a business after three years or after 15 years, depending on what the business needs.
Number three is that I pride myself on having created a culture where young people, from day one, have to source deals. They’re not stuck in the office running Excel spreadsheets. They’re out there going to trade shows and meeting founders, so that from day one they’re able to see what a successful business looks like. It’s important to provide a space for younger members of the team to opine on whether an investment is right, especially in a world where a lot of the brands we’re looking at have products that are being bought by Gen Z and millennials. We make sure we have a diversity of perspectives when we make a decision. Every single individual on the team, whoever they are, is free to dissent—that is one lesson I learned back when I worked at McKinsey.