CPG Needs New Brands and Business Models
By Carlos Castelán
Over the last 30 years, some of the largest consumer packed goods (CPGs) and brands built powerful businesses that outpaced the rest of the market. Pursuing constant innovation, expanding gross margins, and growing in emerging markets, large CPGs outperformed the S&P 500 index by almost 15 percent from 1985 through the Great Recession of 2009. CPGs built strong brands that resonated with consumers and products that were widely distributed through thriving retail channels for several decades.
As we draw into the latter part of 2018, the rules of the game changed almost overnight after the Great Recession. The recent results of most CPGs stand in stark contrast to overall market and economic performance.
What caused the precipitous decline of these once iconic companies and can they turn it around? We believe the problem lies with the legacy wholesale distribution model and dependency on traditional retailers.
It Worked Well…Until It Didn’t
The growth of legacy CPG brands since the 1980s coincided with store proliferation across the United States as trusted retail partners such as Walmart, Target, and Costco invaded every corner of the country. Business was great for CPGs as their products were in every new store and every new shelf in the country. They focused on heavily marketing their products to retailers to gain and maintain shelf-space as well as customers to create a loyal following. Boosted by the high barriers for new brands seeking to get into retail, CPGs were able to grow as retailers grew. As a former CPG executive told us, “Brands thought they had more leverage than the retailers” — due to their brand resonance.
Then the Great Recession Hit
Shoppers were migrating online and the country was deemed over-retailed with almost 23.6 sq. ft. of retail space per capita. Revenue growth for trusted retail partners began to stall since they could no longer employ the same growth playbook: build it (new stores) and they will come.
In response to changing market dynamics and online competition, legacy retailers began to focus on increasing their profits as revenue growth slowed. They accomplished this in two ways: taking more of the margin “pie” from their formerly trusted wholesale brands along with expanding private label.
The one-two combination of taking away shelf-space (revenue for CPGs) via private label and then continuing to drive down pricing (margin erosion for brands) has left legacy CPGs battered and bruised. So, what now?
Rebound Relationship (Amazon)
In response, many legacy CPGs have started chasing revenue growth with Amazon to make up the lost sales. As we wrote before, this is nothing more than short-term thinking — at best — given the potential implications of a voice-controlled future and Amazon’s private label surge. Amazon has continued to push further into private label as it now sells more than 70 of its own brands.
It’s hard to conclude anything other than moving branded businesses aggressively onto Amazon will result in a poor ending for those brands. CPGs that continue to list more product on Amazon to chase short-term growth – using their brand strength to attract customers to Amazon – do so at their own peril. The customer data and insights that Amazon will gain because of the brands will eventually be turned against them, as seems to have happened to some e-commerce companies that host on Amazon Web Services.
For a corollary case study on what the outcome may look like, look no further than the relationship movie studios had with Netflix. In the early days, studios were happy to license their content to Netflix to get incremental royalties from users streaming content online. For Netflix, this was a great way to offer more value to their customers and bring new customer to the platform as well as to have existing customers use the service with higher frequency. The dynamics changed, though, when Netflix began producing its own content and competing directly with the studios themselves. This is precisely the cautionary tale that CPGs should heed when evaluating a strategy with Amazon.
If Amazon is a cautionary tale for so many consumer goods companies, what options exist? This is a difficult question for many today with news of iconic companies, such as Campbell’s, exploring strategic sales of brands and struggling to adapt to the new world. That said, a primary focus for these companies should be to explore alternative business models and methods of distribution. Consumer goods companies have built successful businesses on a high volume/high margin model and those days are now behind them with the purchasing power having made its way back to the customer.
Instead, CPGs should seek to identify markets and categories ripe for change. Build new brands – with different brand promises – before someone else beats them to it. Imagine designing a biodegradable straw for consumers that has the same properties as today’s plastic straws? Or trash bags that are compostable? There are endless opportunities in the market that require a different business models, but present great potential.
For these companies, though, it will mean an operational emphasis on developing new brands and products, rather than relying on sales and marketing.
Carlos Castelán is Managing Director of The Navio Group, a retail and consumer goods business consulting firm.