Ingredion Incorporated (INGR) Earnings Call Transcript & Summary

Great. All right. Good morning or good afternoon wherever you're joining us from on our global and virtual 2020 BMO Capital Markets Growth and ESG Conference. My name is Kelly Bania. I'm the food retail analyst here at BMO Capital, and I'm thrilled to be cohosting this panel, titled The Future of Food with my colleague, Ken Zaslow, BMO's food and agribusiness analyst. So first and foremost, I just want to thank our panelists for taking the time to share their insights with us today. Before I give a brief introduction of our panelists, I'd like to just set the stage for the next 45 minutes. We have 4 leaders from 4 dynamic food companies, and we are very much looking forward to hearing the group's perspective across a variety of topics as we think about the future of food, the food industry through the lens of growth and ESG. So in a year where consumer eating patterns have changed at a rapid pace even before the wild volatility of 2020, it definitely seems like an opportune time to hear these perspectives. We do have full bios for each of the speakers on the conference website but just for a brief background on everybody before we dive into some Q&A. So just alphabetical order here. First, from Ingredion, we have Mr. Zallie, President and CEO of Ingredion. Ingredion is a leading global ingredient company that turns grains, fruits, vegetables and other plant-based materials into value-added ingredient solutions. With Jim as CEO, Ingredion has been on a steady path to transition itself from a commodity company to a more consistent value-added ingredient company, while at the same time, aggressively reducing costs, optimizing the network and navigating the ever-changing landscape. Also, from Thrive, we have us with us Mr. Nick Green, Co-Founder and CEO of Thrive Market. Thrive is a private company that operates a membership-based e-commerce shopping club that offers natural and organic food products at wholesale prices with the mission to make healthy living, easy and affordable for every American family. And I think I've heard it described by Nick himself as sort of a Whole Foods meets Costco online. And I believe Thrive was also the first national retailer to go entirely non-GMO. So next, we also have with us United Natural Foods. We have Mr. Steve Spinner, CEO of UNFI, who is the largest publicly traded wholesaler, delivering healthy food options to independent, conventional and natural and organic retailers throughout the U.S. and Canada. In fiscal '19, UNFI generated $21 billion in net sales across its 60 distribution centers, delivering 1.3 billion cases of food across 2,200 trucks on the road every day. So thanks for joining us on a busy day, Steve. And then also, last but not least, we have Vital Farms, which recently IPO-ed this summer. We have Mr. Russell Canseco -- or Diez-Canseco. Vital Farms is an ethical food company that works with 200 small family farms to bring pasture-raised eggs and pasture-raised butter to consumers through conventional and natural grocery stores as well as foodservice outlets. Vital Farms' values are rooted in conscious capitalism, and the company has grown dramatically in recent years to become the second largest egg brand by retail dollar sales. So we've outlined several topics that we hope to address with our time here today that may impact the future of food, including just general and strategic outlooks, ESG and how that fits into your company strategy, of course, longer-term impacts of the pandemic, which has been a big topic, technology, dietary trends, affordability, demographics and supply chains. So hopefully, we have time to hit on all these. But we hope all these questions apply to everybody and in each speaker. Feel free to share your insights across each question. And we'll also be monitoring another site here for incoming questions from investors. So with that, I will pass it over to my colleague, Ken Zaslow, to kick it off with the first question.

Hey, everybody. Thank you. We have a 2-part question to kick off the discussion, and we'll go just through the order of Jim, Nick, Steve then Russell, just in that order, just because I -- the way I see it. Looking over the next 5 years, what do you think the 2 most likely changes in food consumption habits will be? And then second, what is the one blue-sky opportunity in food? It doesn't need to be a likely scenario, just a possibility, just really a blue-sky potential. So again, let's start with Jim. And again, thank you guys for joining us.

Okay. Thank you, Ken. I would say looking out 5 years, I think we're going to see a continuation of the trend toward a more healthy offering, typically brand innovation in sugar reduction and also in the area of higher-quality plant-based foods and the alternative to animal protein market continuing to evolve. I think the quality of those products will continue to improve from a standpoint of both taste, appearance and then also nutritional quality and the overall healthfulness of those products. And to answer your second question, from a blue-sky opportunity, what I would say is when you think about it in the broadest sense of the term guilt-free, I would say, we could potentially see a guilt-free ice cream that would be sugar-free, animal-protein-free, clean label, low calorie and indulgent, I think that it's likely possible. We've seen advances in that with some brands gaining significant market share in the last, say, 5 years. But I think ultimately, that's not an impossibility. That is a possibility.

Nick, if you want to go next.

Sure. So I think the really obvious trend, which we're seeing very acutely this year is just the shift towards food consumption online. And I would say that's been basically accelerated 5 years in the course of 1 year. I would certainly echo Jim's point about the shift towards more healthy options. And the other one I'd add in there was we're seeing accelerate incredibly fast the last, I would say, 2 or 3 years is the real focus on environmental sustainability, supply chain transparency. And if I want to get real specific, I think the new wave on that is going to be regenerative. So consumers are really saying it's not enough to just be organic. It's not enough to not be doing damage to the environment. We actually want to see companies and brands and products that are carbon-positive, that are sequestering carbon, that are net positive for the climate. In terms of blue-sky opportunity, and this relates to the health trends, the biggest thing we're seeing on Thrive is that health trends are becoming personal. So I think historically, we've seen paleo is a trend and then keto is a trend and then plant-based is a trend. One of the things we leaned into very early was tagging every product across a bunch of different filters so people can shop their personal values. And over the last couple of years, we've just seen use of that feature explode, usefulness and expansion of our data science team to drive things like our onboarding quiz just explode. And so I think one thing we're going to see over 5 years, it's going to be less about what is the trend of the day and more about people using more information than they've ever had before about what is right for their bodies and their health and their families to shop their values and shop personalized.

Steve?

Yes. Thanks. Yes. I absolutely agree with everything that Nick and Jim have said. We certainly have the ability to take a look at what's happening around the marketplace that we do business in just about every community throughout the U.S. and Canada. And I think -- I really believe that 2 of the things that have really continued to change, and one is, as Nick said, this whole notion of transparency in the food chain. And that is the constant migration towards clean and simple ingredients. Consumers are still confused. They don't know the difference between USDA organic and non-GMO. But I think that consumers are pushing their way through a much greater degree of transparency, not only in the products that are sold today, but the products that have yet to come to market and complete transparency in the food chain and so our supply chain as well. The other thing that I think is happening is, obviously, we're seeing a really dramatic increase in e-commerce that's going to be here to stay for sure. And I think that retailers are learning that they need to change their retail environment from one of just 30,000, 40,000, 50,000 SKUs lined up in the shelf to more of a retail experience so that consumers can use the retail footprint to see new products, try new products but essentially understanding that the vast majority of the consumers are going to click and collect or click and deliver. And that's just the way it's going to be. I think we also need to remember that the food space is an incredible space. It's a wonderful space because today, it's over $1 trillion at retail. It continues to grow albeit a couple of hundred basis points, 200 basis points a year. So it's a great place to be from an investor perspective. I think as it relates to the last question, it's -- the future is going to be all about product innovation, product innovation, product innovation, using simple ingredients, bringing the sugar down, getting the GMOs out, transparency in the labeling and, at the same time, making sure that we're providing affordable, healthy options to the geographies that don't currently have it today.

And Russell?

Sure. Thanks. So echoing a little bit of what I know I heard Nick talk about, I think that one of the common themes we've heard during this year is that the impact of COVID has largely been to accelerate trends already underway. And I think that in exposing some of the maybe weaknesses or areas in which there was a lack of resilience in our food supply chain and our food systems in the United States today, I think we've accelerated a trend toward improving resilience in the supply chain. And that gets to things like sustainability. That gets to things like how we treat people who work in the food supply chain, gets to the idea that helping small family farmers be successful over the long haul is going to be critical to having a resilient food supply for the future. In terms of the kind of blue-sky opportunity, I'll go back again to something that Nick shared, which was the opportunity for people to really shop their values. And I think that increasingly, what we're seeing is that people do want to feed their families with food that reflect more sustainability, that reflects better outcomes for stakeholders and that reflect their desire to make the world better with their purchases not worse. And so we'll continue to see opportunities for companies like ours to create value by doing the things that consumers want.

So lots of interesting insights there. I think I'm maybe most excited about the ice cream there, Jim. But wanted to ask just about strategically, has -- the pace of change in the food retail industry, has it made you think about your strategic goals and outlook differently? And specifically, and when you think about M&A, has all these changes and -- has it made you think about M&A differently? So maybe we'll start it off with Jim again.

Okay. So at Ingredion, we [ fully are ] very active. The dynamic growth to M&A that's really tied to support this value proposition are inherent in our growth platform. For us, expanding texturizing capability in our starch and hydrocolloid portfolio, expanding our problem-solving capabilities to formulate sugar-reduced food, expanding the tool set to deliver great-tasting plant-based products, for example. So we feel fortunate actually that despite the pandemic, what it has done is it's really validated our strategic focus for our 5 growth platforms that are still very much aligned towards consumer trends, which we've all talked about and that are embraced by a push for more sustainable offerings as well. So for us, we've been able to pivot towards that. Actually, during the pandemic in April of this year, we acquired the leading stevia-based, high-intensity producer, PureCircle. And also, we were able to expand our plant-based offerings with an acquisition of a company by the name of Verdient, so we have a whole range of pulsed-based, legume-based flours, concentrate and isolate. And we overlay that with all of our formulation capability. So it's really -- the pandemic, I think, has just helped to validate our strategic move and our M&A focus, and M&A will continue to be an important part of our growth moving forward.

Perfect. Why don't we just go through the same order? And if you're done, we'll go on to Nick.

Sure. Sure. So we have an interesting vantage point as both a retailer and then a brand ourselves. I'm sure Steve sees this with the brands that he works with as well, but I think it's a tough time in some ways to be a brand. There's huge opportunity for innovation. There's lower barriers to entry than there ever has been, but that pace of change also means that what consumers want is constantly changing. And a brand can be spot-on for the trend 1 year and a couple of years later really, really struggle. So one that we've seen is that the life cycle of many of these brands that are tapping into short-term trends is much shorter. The counter to that is, I think, brands like Vital Farms that are tapping into long-term secular trends that are going to be decades at play. So we try to do that with our own brand. And then we've also really relied on the fact that as a platform, we can be flexible and responsive to where those trends are going. So unlike a brand that plants its flags only -- flag only in keto, we really want to empower our members to shop their values, decide what diets they want, and we'll have the right brands on there for them. And from an M&A standpoint, we're earlier in our life stage of the business so have not done any acquisitions. Kind of philosophically, we're also, I think, biased towards build versus buy. So as I alluded earlier, we're a brand as well as a retailer. Today, 30% of our sales are on the 700-plus Thrive Market branded products that we've developed. We use all the data on the third-party side to actually drive that pipeline. And then this year, we actually launched our first control brand. So we launched a whole new supplements brand called wellmade, fully owned by Thrive Market, and it's becoming one of the best-selling supplement brands in the site. So looking forward, we're really keen on that opportunity to leverage our data, take advantage of the fact that we are a platform in a facility that gives us and a lot lean into the Thrive Market brand as well as launch new brands that we actually create and develop in-house.

Great. Do you want to go ahead, Steve?

Sure. Sure. Yes. So the interesting thing about COVID is we actually figured out that we have far more capacity than we thought we had because you go back to February, March and April, and our business in some DCs was up 75%, 100%, 150%. And so as a result, we've hired over 8,000 people since, I think, April and have brought them onboard. But as you might imagine, trying to do that at the same time that we are trying to provide a very high level of service and keep our people safe was extremely challenging. We did learn that actually, we could do a lot more than what we thought we could do, and it really changed our view of how we strategically think about the way we build DCs and the way we run DCs over the future. From an M&A perspective, we've been pretty acquisitive, but we [ looked at a kind of ] corner a couple of years ago and saw that the whole world was migrating to wholesalers that have the capacity to do more, not just narrow channels of products. And so we did make a transformational acquisition, which we're now pretty much through. Looking in the future, I think that most of our growth in any M&A, if we choose to do it, are going to be in our higher-margin solutions business, our technology business and, most importantly, our brands business. Today, we have a $2 billion brands business at retail that covers natural, organic and conventional. And those brands really help retailers compete in their local markets, and they rely upon UNFI to continue to be innovative in continuing to roll those products out. So brands are going to be a more and more important part of what we do in our portfolio. From a services perspective, we have 28,000 associates. We cut 66,000 payroll checks a week. So we're actually doing the payroll for a large percentage of our independent conventional customers, and we'll continue to do that because we can do it better, faster, cheaper than they can do on their own. And that's just one example of the types of solutions that we need to provide to help our regionals and our independents succeed as we get out of COVID. But no, we don't -- I don't see us doing any wholesale M&A in the near term.

Perfect. And last but not least, Russell, anything on this question?

Thanks, Kelly. Yes. So the headline, to answer the question directly, is the recent events have not changed our perspective on M&A. We were a relatively new public company. Our story is about building a trusted brand and growing quickly with largely internal capabilities and organic growth. So we wouldn't necessarily see a need to buy other brands that may or may not share our values. I think we've enjoyed strong growth, and we'll continue to drive that with organic growth. We may find opportunities pragmatically to help build capabilities that we don't yet have. For example, as we look to further expand our product portfolio with new product innovation, there may be new categories where we simply don't have the expertise in-house, but I think that's a little further out.

Great. Well, you guys talked about how foods can align more with customers' individual value system. There's 2 parts here. And maybe we focus first on Russell. What are your companies doing to make a healthier and more sustainable food affordable for the average consumer, particularly those who are focusing on animal welfare? And it's important to them, but yet there is a cost issue. And how do you make that affordable for everybody?

Yes. It's -- that's a big challenge for sure. I think we are at historic lows in this country in terms of the percentage of household income that we spend on food. And it's hard to imagine making things any cheaper than they already are with the current system. That said, I think there's a fair challenge to say, hey, it's consuming the values that you want to uphold. And it's not just about animal welfare. It's the way in which we make what we do sustainable for all stakeholders, employees who have health benefits, and farmers who don't go bankrupt at the end of the movie. Those things do cost more in some cases than the sort of concentrated factory farming that has come to dominate American food production. One thing I'd point out in terms of sort of affordability or approachability, I don't think it's an accident that our success has come starting with a product category, eggs, which even though we have a premium price which we're not embarrassed about, we have a product that is still a very approachable way to vote with your dollars for a better food system. If you're currently spending $3 a day on a quick service food breakfast, you can substitute in our highly ethical, pasture-raised eggs, some milk, black -- a cup of coffee and a piece of fruit and actually save money in the process. So while the price point relative to the cheapest commodity, caged egg is certainly higher, it's still a very affordable entry to high-quality, naturally produced product like ours.

Jim, let me ask you a question as well. Just changing little topics here. The sugar reduction -- and again, I'm with Kelly on this. I truly would enjoy an indulgent, guilt-free ice cream. But Americans obviously are -- 40% of Americans are now obese. I know you've been working a lot on reduced sugar, alternative sweeteners. Have the products with reduced sugars and alternative sweeteners gained acceptance across consumers? How is that going? And how do you play in that role?

Yes. So for sure, it's one of the most explosive categories, not just here in the United States, but around the world, and it's being driven obviously by concerns around obesity, diabetes. The pandemic has obviously shined even a brighter light on that as it relates to comorbidities associated with COVID-19. But equally, governments around the world are looking at increased labeling requirement on food that's happening all throughout South America and Latin America right now with traffic stop signs on the product pack that is forcing food companies to look at offering reduced-sugar product. For us, that is a real opportunity because again, having products in our portfolio such as a range of stevia products with differing taste profiles, flavoring profiles, sweetness profiles along with what we call functional build back. So when you replace sugar, you're replacing bulk also. So you have to deliver not just the sweetness but you also have to deliver the mouthfeel. And so we have products such as a rare sugar that's allulose, which is about 10% of the calories of sugar but provides all of the mouthfeel enhancement. And also, we have a whole range of starch-based texturizers that deliver mouthfeel, and we've invested a lot in sensory capabilities to understand, not only from a texture standpoint where we've developed what we call a TEXICON to be able to describe texture but a sweet tabulary for sweetness descriptors as well. So that combination of having ingredients to impart the sweetness potentiation as well as the functional build back and mouthfeel, we think, presents a tremendous opportunity. But we again see this on a global basis based on the prevalence of diabetes and government regulations continuing in force really for the next number of years. And again, product quality will continue to be enhanced.

Perfect. I'm going to jump in here with another one that just came up in the first -- or in the first question, and that was just about innovation. And as I think about the last several months across the food retail space, there's just been so much discussion in terms of cutting of SKUs and focusing on the fast-turning SKUs. And so maybe I'll start with Steve, but just you mentioned maybe that innovation and how important that is. And so how do we get back to that more innovation and new -- I'm assuming it's a lot of those ancillary SKUs that got cut that tend to be some of the more innovative. So when do we get back? How do we get back? And maybe for Jim and Russell, just the impact on the supply chain and how you can react to some of those innovations.

Yes. So Kelly, as you know, and certainly, Nick, you know, too, that innovation has always been at the core of the natural products industry. And it's always been what I think has made it so exciting and so differentiated. And you're 100% right that for the last probably 6 or 7 months, most of the big CPG manufacturers have migrated towards let's sell the hell out of the brands that consumers want and the ones that we can produce. But I think we're starting to see some innovation starting to come back into the marketplace. Certainly, a lot of folks like Thrive, like UNFI, like Kroger and some of the other bigger brands are bringing more innovation into their own private label product offerings. Again, I think the vast majority of the growth being in products with more simple, easy-to-understand ingredients because that's obviously what consumers want. It's a big part of UNFI's forward-looking sales growth. If you go back 10 years, I think it was 15% or so of our annual sales growth came from new product innovation. And so it's just at the core of the industry, and it's certainly going to come back, and it will probably come back at the same time that big CPG promotional spend comes back as well because that's essentially dried up for the past 6 or 7 months. But we've got to get back on an innovation trajectory. It is the future of our industry. It's the future of what is going to continue to allow the food space to grow, and I think we're getting to the point where it's starting to happen.

Sorry. Nick, did you have anything to add to that before we go into supply chain?

Yes. Sure. I mean it's an interesting question because we're a highly curated catalog to begin with. We only carry 500 SKUs. And so we don't actually see innovation and SKU proliferation necessarily being synonymous. And in fact, we try to drive innovation by curating down to the most innovative brands, the ones that are truly differentiated. And then I think on the more commoditized products, what we certainly did during COVID was focus on those really high-quality brands that we have deep relationships with. So while we were curating more, I think we are actually curating in the more commodified areas and keeping those differentiated brands where there was real loyalty, where they really were presenting something unique to members or members to vote their dollars, keeping those on the site. So I tend to think curation can actually be a form of innovation. And to Steve's point, I think that simplification is actually a vector of innovation as well. And for a lot of members, seeing a bunch of different products when they walk into a retail environment, particularly with a bunch of different health claims, can be overwhelming and confusing. So I really see the future of innovation in COVID and beyond COVID being towards finding those things that are really differentiated, have a really clear story and being able to share those with our members. And for us, that's been very successful. We -- during COVID, we expanded our member base by over 40%. Earlier this month, we hit 1 million members, which, at our stage being just 5 years old, is generating hundreds of millions of dollars of sales and I think proving that, that model, there is a base of conscious consumers out there for whom that definition of innovation really fits.

Just one thing I would add to something that Russell said, and that is that I think it's the responsibility of the industry in its aggregate to educate because I think that's one thing that's missing today. And for those of us that are in it, the more we can do to educate consumers about what you can provide better food with simple ingredients at a rate that is affordable if you just change your mindset a little bit. It doesn't have to be about the low-cost, high-sugar, high-fat product. And the more that we can do to educate, the better off everybody is going to be.

And by the way, I would add to that that's one of the greatest, I think, potentials for e-commerce, right? When you're in a brick-and-mortar retail environment, you can only share what's on path. In e-commerce, we really do have that ability to create content and inform and inspire consumers in a way that wasn't really realistic before.

Perfect. Russell or Jim, anything to add on the supply chain on that? And then I'll let Ken jump back in.

Yes...

I would just say that with supply -- I would just say that supply chains have been great, obviously, through the pandemic. In our particular case, we supply 18,000 customers in 120 countries around the world. And food away from home, food at retail, food for leisure, hospitality obviously got hit very hard. Food retail benefited. And so for us, we supply to all of those customers, different products for different functionalities. So we had to quickly really connect intimately with our customers, make sure that we have the right products at the right time because for them, business continuity and facing, product facing, be available [when they] wanted it was very, very important. And so now going forward, we had to make some judgment calls. An example of that right now is we made a call in the summer that we thought there might be a second wave, and we made sure that we had enough inventory for our customers, the likes of the major CPGs that need to get products on the shelf when consumers are again at home cooking and preparing food. So some of it is really being intimately close with the customer, and some is just trying to make some educated guesses and good business decisions, and we feel we've done that as best we can through the pandemic thus far.

Nick and -- actually yes, Nick and Steve, let me ask you a question. You guys talked about grocery e-commerce and how it's going to evolve. Can you talk about -- do you expect grocery e-commerce to grow in 2021 off the accelerated pace of 2020? How can e-commerce in the food industry become more sustainable as well? I'll put it for you guys as well.

Go ahead, Nick.

I mean, yes, it's -- I get that question all the time, and we've gotten it throughout the pandemic and everyone's expected at every turn for there to be some regression to the mean. Clearly, some amount of that's going to happen at some point and hopefully sooner than later if that means that things are normalizing in the real world out there. But look, I think the point was made by Russell already that what happened during -- or what's happened during the pandemic has been an acceleration of an existing secular trend towards online. It was early in that trend. But I believe we packed 5 years into what seems like 6 months, now it's gone on to 9 months. And we've seen ebbs and flows during that period but never anything that remotely came back to the initial set point. So I don't know whether 2021 specifically or any given quarter what's going to happen, but I can tell you that in 2022, there's going to be higher e-comm grocery sales than there was in 2019, for sure. 2021, there will be -- probably both those years will be higher than 2020 as well. And I think the reason for that is that like a lot of other categories, shopping online is simply more convenient. And I think if you look at models like ours, it also can offer price advantages, right. By cutting out steps in the supply chain, by shipping directly to our members, by not having to have a brick-and-mortar footprint, by innovating on private label, using the data that we have online, we're able to offer our branded products at wholesale prices and get at or pretty close to the conventional supplement prices. So I think at the end of the day, if people try online and they find it's more convenient, they find the pricing can be better and they find, to Steve's point earlier on education, that they can learn more about the products, I think you're going to have a lot of people that stick with it even once they're not under lockdown.

Yes. I agree completely. I think that the place -- there's always going to be a place for brick-and-mortar retail especially as it relates to perishable, whether it's frozen or chill or any of those categories that are really difficult to handle. But I agree e-commerce is going to continue to grow. And by the way, when you look at kind of the sustainability of e-commerce, you have to take into consideration the fact one thing COVID has demonstrated is that people do their shopping much less frequently. And so if you think about the average basket size pre-COVID to the average basket size during COVID and what's likely to be the average basket size coming out of COVID, click and deliver, click and collect are 3x the basket size of what the basket size was for retailers pre-COVID or pre-pandemic. And so as people shop less and they go to e-commerce more, that's generally a good thing for the environment because people are getting in their cars less frequently. But click and collect certainly works for the e-commerce providers, and it really does work for the retailers as well. The key thing is that the retailer of the future -- and I'm sure you've all read about kind of the micro fulfillment center and the role of all the dry grocery fulfillment center and the store of the future being 15,000 square feet instead of 80,000 square feet and being entirely focused on produce, fish, proteins, et cetera, et cetera. I think that over time, that will continue to play out.

I'm going to ask Jim one question and then Russell, and then we'll have Kelly wrap up the conversation just because there's so many things to get into. Jim, on the plant-based stuff, how do you -- how do companies -- you see a really inside view on this. How are companies differentiating with respect to plant-based? How do you determine who will survive and who doesn't? And plant-based are clearly more sustainable. But does the industry need to be more -- need to convince consumers that it can be healthier and tastier? What's your view on that?

Yes. I mean you're right to raise it, 63%. I guess the consumers are selecting plant-based foods because they perceive that they are healthier. And the size of the global alternative to animal proteins is growing significantly. It's greater than -- it's projected to be greater than $13 billion by 2024, and 70% of that is going to be plant-based. And as those products come to market, consumers are going to become more educated about the actual healthfulness of those products. So they will continue to see differentiation along the lines of labeling the ingredients that are in there. So I couldn't agree more with Steve in regards to the clean and simple aspect. The consumers are going to be looking for that. They're going to be looking at the fat content. They're going to be looking at the type of fat, whether it's a saturated fat or not, the salt levels that are in those products, whether the ingredients are non-GMO derived or whether they're organic. So those will be all the points of differentiation. At the end of the day, though, I'm 37 years in this industry and what I will tell you it will continuously come back to is whether the product tastes good and whether it appears appetizing. So if the product is appetizing, the product is flavorful and tastes good, that will carry the day. And I genuinely believe the amount of money that's going into investment in food science and technology in this alternative to animal protein and plant-based protein area will lead to more nutritionally dense, high-quality protein, great tasting products, and it's just going to be continuously iterative. But at the end of the day, companies, food companies, can't take their eye off the product, the product quality from a taste and appetizing nature of it.

Russell, the only thing that -- the big theme that's come out of this whole 45 minutes is really the education. And you have a product that there's a lot of misunderstanding, right, of what exactly your product does serve versus cage-free. How do you go about the education of consumers? And what is the process to which you can do that to make sure that they understand the process of understanding what your product does and delivers? And then after that, I'll turn it over to Kelly.

Yes. Great question. In the early days, we used to ask ourselves whether we were an egg company or an education company because in the early days, we were the only and the very first producer at scale and marketer at scale of this new potentially commodity item called pasture-raised eggs, eggs produced by birds that go outside and primarily live outdoors instead of being confined inside a barn or potentially inside a cage inside a barn. And what we found was that as we educated consumers, one by one, they often found that what we did to be appealing and maybe even what we did to be what they thought they were buying under a different name. So one of the great insights we found when we first started building a real brand team internally was that in 2016, we pulled 1,000 buyers of cage-free eggs, which had received a lot of press around that time for some new state laws that were passed to support that requirement and some pledges by different retailers and foodservice concepts to -- only for cage-free eggs by 2025. And what we found was that the majority, more than half of the 1,000 consumers of cage-free eggs that we talked to believe that cage-free meant birds outside primarily. And when we explained to them that, that actually wasn't what cage-free is, cage-free just means they're still in a building but they're not inside a cage anymore, they felt surprised, in some cases duped. They voted with their dollars to pay 2, 3 and even 4x the cheapest price on the shelf for eggs for something that they thought was meaningfully different and better, and they didn't find that cage-free was all that. So we took the opportunity to begin to focus on that group of consumers, the ones that have already voted with their dollars for something better, to demonstrate that they hadn't quite gotten all the way to bright. But over time, what we found is that actually, our brand in particular is about a lot of things, not just about animal welfare. So yes, there are plenty of options out there to buy pasture-raised eggs or pasture-raised butter, including ours. Ours tends to be the most expensive of those options, and that's in part because our mission and our values and 100 decisions we've made around how we bring products to market, how we treat cocreators and stakeholders in our business model are reflected in our brand and in our price. It will continue to take big investments in marketing dollars to tell that story. If a consumer is in a prepurchased sort of position where maybe they haven't even heard of us, that might look like a targeted message in a social media context to say, hey, we think you might be somebody that's interested in food that is produced this way. Let's tell you about our story. If they're already buying our products and we want to help reinforce the message and help them continue to have transparency about our practices, that might look like profiles of different members of our stakeholders to help understand what a farmer does all day or what one of our employees does. And then we'll continue to find ways to bring transparency. So on -- one of the things we rolled out actually pre-COVID but earlier this year was the ability to trace back the eggs in your carton to the exact farm from which they came and see a video of that farm. Those are all things consumers are looking for, and we'll continue to bring focus to that.

All right. I guess we're a little bit over time. If we just could do a brief wrap-up question here. Since this is an ESG conference, I just want to touch a minute on that and like a 2-part question. One, how does your company set their ESG goals? And then two, we talked a little bit about the pricing premium for some of these higher quality, cleaner ingredients, but it also seems like there's some cost savings to be in ESG. And so I guess second part of the question is, do you see ESG compliant as being positive, negative or neutral to the bottom line maybe over time? So maybe Jim, we'll start with you.

Yes, for us, we conduct a traditional sustainability materiality assessment, and it's also known as materiality matrix. And we set our goals in line with the UN Sustainable Development Goals. In fact, our 2030 Sustainability Report reports out against those UN Sustainable Development Goals. And specifically, we're looking at science-based targets based on carbon reduction, water usage reduction, renewable energy consumption, et cetera. And as far as whether it's a good value proposition or good to the bottom line, let's say, over time, we would say absolutely 100% yes because we think of it in the context of an ability to generate cost reduction. And that comes in the form of waste reduction, reduced energy costs. But also, certainly, right now, I think all of us would probably agree that over time, there will be increased regulation to protect the planet, to protect climate, and the cost of doing business in the wrong way will increase. So getting ahead of this is good for business. Certainly, from a standpoint of your supply chain and risk mitigation, I think that that's very important. Your brand enhancement, certainly, my colleagues on this call would certainly, I think, agree with that, that having a purpose-driven brand and something that is supporting the sustainable ESG elements is very important. And honestly, we're seeing already that customers want to buy ingredients that are produced through sustainable farming, sustainable agriculture. And so it's going to be a condition of being able to supply a customer. And certainly, we see that now with our non-GMO and organic offerings. And then lastly, it's going to be about are you going to be a desirable place where employees are going to want to work because they're going to want to work for a company that's purpose-driven. In our case, the essence of our purpose is to make life better. So for us, we think it's absolutely going to be very important to the top and bottom line and going to be good for business. And that's why we've embraced sustainability and ESG is a very important part of our value proposition.

Yes. On the Thrive side, ESG, honestly, that acronym wasn't even something I was aware of when we started Thrive. So we didn't do it because it was ESG or because we saw it as a market opportunity. We did it because that was the reason we started the business. And we believe in creating sustainable supply chains. We believe in doing carbon-neutral shipping. We believe it is possible to do zero waste fulfillment. And it's been sort of a fortuitous circumstance, but that's now also the core of our brand and the reason we have 70%-plus annual renewal rates and high customer loyalty and engagement on Instagram. And I think one of the really interesting things we've seen is as we've sort of -- we call them climate BHAGs. So as we set 5 targets for ourselves that are very visible and that we can share with our member community, we've seen them sharing Thrive in a way that they wouldn't when they just save money. So I'll give 2 examples of that real quick. One has been on carbon. So minimizing carbon emissions is being core to helping solve climate. We went carbon neutral in our shipping from day 1, and that was definitely a cost. But what we found over the last few years is we're getting as many inquiries on carbon-neutral shipping now as we do on free shipping. It is a reason people say the reason people come to Thrive. It is a differentiator vis-à-vis other e-commerce platforms. And actually now, we're thinking about not just going carbon-neutral in our shipping but also doing it across the entire company, so quantifying our carbon impact as a business. And where we'd ultimately like to be is what we're calling climate positive, where we are basically a regenerative company, so having a net positive impact on the climate through our reduction of carbon and our purchasing of offsets. The other quick example I'll give is waste, and that's actually a good example for it did benefit the bottom line. So in 2016, we said we want to go zero waste in our fulfillment centers. And I'll tell you I got a lot of pushback from some of our more financially minded stakeholders on that. We did 20-plus CapEx projects across the period of 2.5 years but ultimately had an average of 18-month payback period. So we actually were able to have a bottom line positive impact. We finally did get to zero waste in 2018. And now similar to carbon, we're going and saying we want to be a zero-waste company. So we're quantifying our waste impact across the supply chains and not just in fulfillment. And just to end where I started, what's amazing now is that consumers are so conscious. Russell talked about this a lot, that they want to vote with their dollars. They're willing to pay a premium. And more importantly for us, because we're not charging a premium, they're loyal in what they never would be when they see their values reflected for authentic reasons.

Wonderful. Go ahead, Steven. I think you were just muted.

Sorry. Yes. So I would add that one of the great things about UNFI is that we have a long history since our founding of being a company that's really on the forefront of being good to the environment. And I like to refer to it as we love doing business with companies that have soul. And UNFI certainly is a company that has soul and will continue to have soul, not only because of what we do on the organic front but -- and what we do on the sustainability front, but because we are also at the forefront of having science-based targets, we're really excited about our 2030 initiatives that we're going to be rolling out in the next couple of months. And the other thing I would add to what Jim and Nick said because they're all 100% right on is that one of the worst culprits in the food industry is food waste. And so we've signed on to be a very active participant in trying to figure out how to take all this food waste and move it to places that need it the most as opposed to throwing it in the trash. And so that's relatively new for us, but I really feel like we can make such an important difference in food waste. The other thing that I would add to what Nick and Jim have already said is that D&I, diversity and inclusion, has become a much bigger and more important part of ESG than it ever has before. And so you could say, well, it's always really been there. But I think in the last 6 or 7 months, since the murder of George Floyd and social and racial injustice around the country, companies like ours need to do more. We need to be more inclusive with people of color or gender, people from all over the world. It just makes us a better company. It makes us have better debates. It makes us roll out better products. It makes us more innovative. And so D&I has to be something that becomes a much more important part of who we are as a country and who we are as a company as well. But I think that ESG, for the companies who really embrace it for the right reasons, give the company soul, and that's such an important part of retaining the right talent, recruiting the right talent and providing a positive return to our stakeholders.

A lot of what Nick said resonated for me as well. We often get the question, how did you become a B Corp and what did you have to do? Or what did it take to become a public company that was a public benefit corporation. When our founder, Matt O'Hayer, decided to let the chickens roam free, when we built a Board that has 50% women and 25% minority, when we offered every employee full health benefits, life insurance coverage, paid time off, we didn't do any of those because we ran a materiality matrix and have an ESG strategy. The reality is we don't have an ESG strategy today, which might be unnerving to some people at this conference. Our ESG bona fides are simply a reflection of the values on which we built the business. Now I'm not saying we won't have a strategy in the future. I'm not saying we won't do things to better hold ourselves accountable for goals. But the reality is that we think of ESG, a shorthand for building a resilient, enduring company across environmental, social and governance. And we just happen to have made a bunch of choices over the last 13 years that roll up to a pretty good credential in that area, and we'll continue to challenge ourselves to make the world a better place. But I can't say that we have an ESG strategy today.

Perfect. Well, I think that's a great place to wrap it up. This was a fascinating panel, fun topic. So we definitely appreciate everyone's time for dialing in today.

Thank you, guys, very much.

Thank you.