What’s in your strawberry yogurt?

February 10, 2016 | Kara Lilly Print

The Keystone Business Model


A giant bowl of squished strawberries sits in front of me. And next to it, a tub of plain yogurt. I am attempting to mix the two together until my concoction tastes like the strawberry yogurt I am used to buying in the supermarket. Unfortunately, my attempts are failing abysmally—my yogurt is still bland and I am now covered in strawberry juice.

So why am I bothering to make my own strawberry yogurt when I could easily buy it at the store? The catalyst for my experiment was a casual conversation with Christian (co-manager of the Global Small Cap Fund) on the subject of strawberries.

Christian had noted in a meeting that the annual global harvest of strawberries was not large enough to meet the annual U.S. demand for strawberry yogurt. What then, I asked, was in my strawberry yogurt?

“Ah, very good question,” he replied.

What followed was a conversation on the multi-billion dollar global food ingredients industry. It turns out that strawberry flavour, like many other flavours in processed foods, rarely comes from strawberries themselves. Instead, the strawberry flavour in strawberry yogurt is synthetically derived and manufactured by one of the global food ingredient makers—and bears little resemblance to the actual fruit.

The flavour in strawberry yogurt is an example of a business model that is often wealth-creating: a keystone business.

In architecture, the keystone is the wedge-shaped stone piece at the apex of a masonry arch. It is the final piece placed during construction and locks all stones into position, allowing the arch to bear weight. An arch cannot be self-supporting without this piece; yet paradoxically, it carries the least amount of weight.

A business model is said to be “keystone” when the product or service a business provides is critical but does not represent a major part of the purchaser’s overall cost structure. The net result is that keystone businesses often have pricing power, stickier clients, and a greater probability of generating wealth over time.

Food flavours fall into this camp. Flavour is arguably the most important factor in any food that is sold. Customers have very specific preferences for the flavours they desire and yet for many multinational food manufacturers like Nestle and Pepsi, flavour is not produced in-house. Instead, these companies rely on food ingredients makers like Frutarom and Kerry Group to provide them with a broad range of flavours such as strawberry, mint and orange.

At the same time, flavours usually only represent a marginal component of a food manufacturer’s overall product cost. According to Frutarom, flavours typically account for only 3-5% of the cost of the end product. This gives the flavour producer an obvious advantage: their products help define the brands using them but do not represent a major cost component to the purchaser. Thus, the flavour producer can afford to push up prices annually without much, if any, customer backlash. (Imagine if Cheetos opted to switch out of the “cheesy” flavor they have used for decades to save 2% on their gross costs!)

Of course, the keystone business model is not only found in the food industry. We see many sectors where this model exists. For example, it’s evident in the lubricants industry, where lubricants are used in large machines to minimize downtime, and in the cosmetics world, where specialty chemicals companies such as Croda provide some of the beneficial inputs to skincare cream.

The strength of the keystone business model was even reinforced by my ill-fated strawberry yogurt experiment. While intellectually I was motivated to re-create my favorite yogurt using actual strawberries, emotionally I craved the taste and familiarity of my usual brand.

And while I haven’t quite surrendered this fight, I find I’m still purchasing my regular yogurt (for research purposes, of course).



  • Glenn Robinson 10/02/2016 9:15am (5 years ago)

    The artificial flavor industry is an interesting economic case for you, but the production of artificially flavoured foods that depend on huge amounts of sugar being added to make them palatable is a health disaster. People, especially children, don't need all that sugar. Look at your favourite yogurt and figure out how much sugar is in it and what proportion that represents of the daily recommended allowance of extra added sugars (vs. naturally occurring). Do yourself a favour and learn to enjoy the slightly bitter taste of natural yogurt on top of a bowl of real strawberries, ideally grown locally and in season.

  • Gary Dyck 10/02/2016 11:35am (5 years ago)

    A fellow worker who lived in the country told me once that he went to a cauliflower grower next door to ask to buy a head. The neighbor went to a small patch behind his garage to get it instead of a large field. This puzzled him and he asked why would you with all these acres of cauliflower would you pick something from this small patch. The grower gave him an answer that was troubling. He told him that he grows the large fields commercially and treats them with chemicals to make them look good but the grower has this small patch for personal consumption that was not treated with chemicals. The grower did not think that chemically treated food was healthy to eat. Unfortunately, a lot of commercially produced food is grown and processed to only look and taste good but the rates of cancer do not indicate that this food is always healthy.

  • pablo 14/02/2016 11:43am (5 years ago)

    I bought strawberry yogurt in the form of the Mawer Balanced Fund and also own the global small cap which is like buying the strawberries alone.... it would be helpful if Mawer could provide sample portfolio's made up of their funds for investors in different phases of their life...

    I like the idea of buying the 'strawberry yogurt' from the store, just good quality ones ...

    • Sean McHugh 17/02/2016 3:11pm (5 years ago)

      With reference to the last comment regarding strawberries alone, I too would like a sample portfolio on line so that I can buy the appropriate mix of Mawer funds. I am wanting to shift all my investments into your funds but am shy of the 1 mil required for portfolio management. thx

  • Lester Goh 24/12/2016 9:34am (4 years ago)


    Other keystone models you might want to check out would be:

    Paint - Sherwin Williams, Axalta, etc
    Agrochemicals - FMC, American Vanguard, Platform Specialty Products
    Electronic Chemicals - Atotech (division of Total which is gonna be sold), MacDermid/Alent (both part of Platform Specialty Products)

    I share your view that such business models often possess durable competitive advantages and hence are a great thing to look out for when prospecting for ideas.

  • 10/05/2017 10:49pm (3 years ago)

    Good day! This post couldn't be written any better!
    Reading this post reminds me of my good old
    room mate! He always kept chatting about this. I will forward
    this article to him. Pretty sure he will have a good read.

    Thank you for sharing!

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