Senior executives of Israel’s five largest food manufacturers – Tnuva, Osem, Strauss Group, Unilever and the Central Bottling Company (Coca Cola Israel) – gathered in Shefayim.
The last time they gathered together like this was for an emergency meeting three months ago on the Health Ministry’s proposed regulations for products with large amounts of sugar and salt. That raised the hackles of the antitrust commissioner, who ordered an investigation. This time, however, the antitrust watchdog didn’t need to worry about a cartel being formed under our noses.
The food executives were meeting to learn from young startups how they can improve their work processes, find new ways to grow raw materials and prevent bacterial contamination on their production lines.
All told, about 450 people came to the conference, including some senior figures in the global food industry such as the chief scientists from Pepsico and Estee Lauder, and the CEO of Rabobank, a Dutch multinational bank that is a leading global investor in food and agricultural finance.
For Strauss, which is behind the conference, this meeting was the culmination of a four-year journey. It started with the “Alpha” project in Strauss, which was meant to create and connect technology entrepreneurs, nutritional experts and food scientists, and moved on to the establishment of a body to invest in food technologies as part of a new high-tech incubator named The Kitchen FoodTech Hub a year and a half ago.
The offices of The Kitchen in Ashdod reflect the attempts of an 80-year-old firm to look young again. A large kitchen with a refrigerator featuring transparent doors – and filled with Strauss’ Milky pudding products stands near the entrance. The rooms all have packages of erasable markers and chalk to draw on the walls and windows. The walls themselves bear corporate-style slogans in English, such as “Better Industry. Better Food. Better World,” or “Recipe for Success.”
While Strauss is a trend-setter in placing women in influential positions, with women making up 42% of management in the company – the corridors of the incubator suffer from an almost complete absence of women, which makes them much more like the local high-tech scene.
When Strauss won the tender from the Chief Scientist’s Office in the Economy Ministry to set up its technology incubator, it led to quite a lot of criticism from the other bidders, who claimed Strauss would operate it as its own corporate research and development arm financed by the government.
“Instead of the entrepreneur coming with the product, the incubator that is held by the corporation will convince him to develop products that interest [the company],” one of Staruss’ competitors told TheMarker at the time.
Jonathan Berger, CEO of The Kitchen, takes it all in stride. He brings us into rooms in the complex and presents us to the various teams. “Every entrepreneur who comes here usually arrives with a ‘proof of concept,’” he says.
“We examine and bring in companies that do not necessarily deal with Strauss’ areas of interest. For example, a company that produces protein from flies or one that gives a solution for meat,” says Berger. “The likelihood that Strauss will buy a company that makes a chip that identifies salmonella is very low. What is more reasonable is that the buyer will be a quality assurance company, and Strauss might buy services from them in return for payment. The new company that we brought in, which does personalization of recipes on the internet (My FavorEats), came from an accelerator program that Tnuva sponsors. We are focused on companies that can reach a milestone that will allow them to raise money at the end of the incubator period, and if the companies do not come with their own crystallized idea, then it won’t mature.”
One of the first companies that was hosted in the incubator was Deep Learning Robotics, which shows the type of investment the hothouse is looking for. They develop smart robots that know how to carry out various tasks on the production line. Heavy industry is characterized by many robots who work all the time on the same task, says Berger. “But the food industry is characterized by short production series and high variability of products, so the penetration of robots into this industry is significantly lower relative to other industries.”
Tasks that are complicated to program, such as arranging crackers in a tray, a change in the form of the cracker or tray means changing the production line, and stopping to reprogram it, says Berger. DLR uses cameras that program the robots by having cameras watch and learn from workers doing the same job. After a few hours of acculturation, the robots know how to do the new job themselves. “We hope DLR’s technology will help in increasing productivity in industry,” he says.
Long development cycle, high risk
The choice of the incubator model looked like an opportunity not to be missed. For those running the incubator, it is a simple way to leverage government funding, and it’s easy to understand why there was competition: They are required to finance only 15% of the investment in the startups during the incubator period, in addition to operating expenses, some 40 million shekels ($10.7 million) over the period of the incubator franchise of eight years. In return, they receive 20% to 50% of the shares in the companies in the incubator.
It is an opportunity, too, for the Israeli government to diversify its high-tech investments, by encouraging strategic investors with deep pockets to invest in young startups in areas characterized by long development cycles, large investment needs and a high-risk profile.
The incubator program is intended to help the startups bridge the financing problems while being helped to reach the stage in which they can stand on their own feet and raise the capital they need to carry on in the private sector. In addition, the program is intended to help meet such goals as transferring knowledge and technology from research institutions to business applications, create a technological and entrepreneurial culture in Israel, and provide investment opportunities for private venture capital – in addition to bringing R&D operations to the periphery.
MK Erel Margalit (Zionist Union), who is promoting a center of innovative food industries in the eastern Galilee along with 17 mayors from the region, says that in recent years most of the investments were about the internet, mobile and communications, and that in the case of a slowdown in these areas, Israel could well suffer. In comparison, the demand for food will remain high even during a global economic crisis, says Margalit.
For Strauss, opening the incubator signifies another stage of maturity, along with the change in the way it views the term “innovation” in the food industry. So far, such innovation was linked to launching new products, whose main goal was to beat competitors and take market share from them, for example Osem’s flat pretzels or fancy new yoghurts. Now this view is changing to how to create something out of nothing, and develop new markets.
The best way to find such technologies is through creating a community, cooperation and meetings between the young entrepreneurs and the older companies. This is exactly why Strauss created its Alpha project in March 2012.
“Until now, we talked about changes that meant cannibalization of other products, improvements such as Bazooka [gum] without sugar or manufacturing new value for the customer such as Actimel,” says Dagan Eshel, head of Alpha Strauss. “But for Strauss, most of whose operations are outside Israel, there is no way to compete with the global giants using the same weapons. We need to create value where we have an advantage, and this advantage is that we are Israelis, with a developed high-tech community,” he says.
Alpha Strauss’ activities show the great value that large food companies get from their exposure to young entrepreneurs. “We met with an Israeli company that developed new technology to handle home food. We did experiments with them and found that the technology could pasteurize hummus without damaging its taste and give it a long shelf life,” says Eshel.
“The company was not interested in developing the system for industry, and focused on the home user. But this meeting gave us an idea to search for similar technology, and we found it at an Italian company that worked with drying leather. In order to show how much this story is revolutionary, we conducted 8,500 lab tests, 2,000 chemical tests and threw out 100 tons of hummus along the way to preparing the technology for our factory,” says Eshel.
Sometimes the Israeli entrepreneurs come to the food companies with technologies intended for one specific purpose, but after meeting with and understanding their customers’ needs, they can adapt the product for a different purpose. An example is a startup named Viaar. “They came to our office with their technology, radio frequency sensors that they use to identify breast cancer at an early stage,” says Eshel. During their conversation, Strauss understood that they knew how to identify a small object inside a biological matrix, a human body. So it was possible they could do the same inside food. “The next morning, we received an image of a small piece of glass inside a cake. They went from a situation in which they had an amazing application for a problematic market, medicine, which takes years before you receive approvals, to another, important solution for an easier market to implement,” says Eshel.
The biggest challenge is in the area of health, he says: Reducing sugar, fat and salt in products without harming the taste and texture, while reducing costs for production processes so customers will receive healthier products at a good price. Another challenge involves food safety. The opportunity is in personalization and creating individually appropriate food, says Eshel. In the future, instead of sending trucks with products, we will transport information over the internet and the consumers will receive only the raw materials, which machines will know how to manufacture into various complex products, he adds.
Eshel says they have seen some 700 new technologies over the past year and a half, and Strauss has agreements with about 20 companies at various stages of development.
Global investments in foodtech in the first half of 2016 were $1.8 billion, a drop of about 20% from the same period the previous year. Most of this drop can be attributed to a general fall in venture capital investments in all areas, which declined 14% in the same period. Most of the rest of the gap can be explained by electronic sales sites for food reaching their full potential – for now – which made up a large part of such investments in 2015.
On the positive side are signs of growth in startups raising funds in the first half of 2016 (307 fund raising rounds in the first half of the year), and a large number of new foodtech investors, up 52% to 425. This is mostly due to the rising number of accelerators, venture capital funds and grants available to startups in the foodtech and agritech sectors.
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