Morning O’s, Revisited

You might have heard that Campbell Soup Company bought Sovos Brands (most known in my house for Rao’s, but in others for Noosa) this week. And much like everyone else who buys Rao’s or Noosa, Campbell paid a premium: a 28% markup on the portfolio’s stock—which also includes Michael Angelo’s—for an acquisition price of $2.7B.

There’s plenty of commentary to be had about what this deal means for the markets, but this isn’t really that type of newsletter. Instead, it seems, it’s worth talking about how Sovos—but, really, Rao’s—got here. Because, for all the talk of modern DTC brands and the celebrity-led brand spin, the Rao’s playbook (super simplified in this newsletter to be sure) is not to be slept on.

Running it, of course, requires a different prerequisite (some might say “ingredient”) than what most people talk about: a great regional restaurant brand. With that often comes a need for a great product—be it a dish or a component of a dish—that actually puts that regional restaurant on the map. You expand your restaurant footprint from there, then hit the supermarket aisles with premium-priced, flagship products that tie tightly to your restaurant and

Rao’s is the of-the-moment example of this, but Momofuku is doing this and Vista Hermosa is a few steps behind.

The play may not be repeatable by most—and that’s precisely the point. Because it’s not, you can immediately command a premium. And that premium can be even more absurd, while still distributed to the masses, if you can produce some level of “squint your eyes and your in the restaurant” type quality.

In a newsletter from a couple years ago, we questioned how much better a Cheerio’s-inspired product needed to be to reach scale. In it, we wrote:

It seems more likely, though, that the next wave of upstart CPG brands will follow less of the Bonobos/Warby Parker playbook—where value is the main driver—and more of the Parade/Topicals/OffLimits playbook—where being straight-up different, be it category, product, or brand, is the main driver.

A slightly-better-for-you version of something at not-quite-a-premium price is how the traditional DTC brand could be described. You could also describe this as attempting to blur the lines between value and high end. And based on the IRI insight, it sounds like that approach may end up being an uphill battle.

Restaurant brands are, inherently, different. They’re limited in their distribution (i.e., their restaurant footprint) until they package their products for retail distribution. If you’re a restaurant that catches fire, then, you’re building demand for a product that doesn’t even exist yet, lending more pricing power advantages and basically saying “eff it” to any sort of value claim.

IRI, in it’s 2020 CPG Growth Leaders report specifically called out how this type of play might be buoyed by market tailwinds: “Large CPG innovation and hyper-targeted small CPGs” are increasing premiums at the top-end of the market, while more value brands and private labels are capturing more of the rest of the market.

It seems that, rather than try to create that premium in-house, Campbell found it elsewhere. Not a bad outcome for Sovos—or a small New York City restaurant.