SKU’d Thoughts 38: How have startups changed the CPG space over the past decade?
The consumer packaged goods (CPG) industry is one of the largest sectors in North America, valued at almost $2 trillion and led by a few well-established companies like Coca-Cola, Procter & Gamble, and L’Oréal. These CPG powerhouses rose to dominance because of an operating model focused around mass-market brand building, deep-rooted distribution partnerships, cost-reduction and scale oriented M&A activity. However, over the last decade, startups have shaken up the traditional operating model of the CPG landscape.
Here are three ways startups have disrupted the space:
1.Meeting customer expectations
Digitally native startups like Bonobos and Dollar Shave Club (DSC) started selling directly to consumers without a retailer as an intermediary and were able to build direct relationships with customers. Bypassing traditional retail infrastructure meant that brands can tailor the experience and go above and beyond the customer’s expectations. Larger CPG players like Procter & Gamble have into customer preferences because of their indirect relationship, which in turn hurts these companies because they produce products somewhat blindly. As DTC upstart brands emerged across various CPG categories, high customer expectations became a real value driver. As an example, P&G’s Gillette razor brand has lost about 15% market share since DTC razors brands, DSC and Harry’s entered the shaving space in 2011 and 2013, respectively. Further evidence of the importance of customer expectation is both brands going on to be acquired by larger CPG companies. Unilever bought DSC for $1 billion in 2016 and Edgewell Personal Care Company acquired Harry’s for $1.37 billion, earlier this year.
2.Challenging what healthy means
For years, consumers have said they want to eat healthier foods and live healthier lifestyles, but only recently have their needs been met. Large food and beverage companies’ past attempts at health and wellness were to provide consumers with a less sugary and calorie version of their existing product set, stopping short at completely developing products aimed for this health-conscious group. Upstarts like Beyond Meat, Halo Top and others entered the industry solely focused on producing healthy and tasty products for those consumers. They have redefined what healthy means, by feeding the demand for more organic products that are free from sugar, gluten, pesticides, and other additives. And it’s paid off for some. Beyond Meat went public earlier this year and the Halo Top brand was acquired last month by Wells Enterprises, makers of Blue Bunny ice cream and other frozen treats. This level of disruption by startups can also be seen in the personal care and household goods categories of the CPG space.
3.Redefining how M&A is approached
Traditionally, established CPG companies used M&A to consolidate markets and create a basis for organic growth post-acquisition. With the success of startups who are providing an elevated customer experience in mainstream categories or establishing new and niche categories, larger companies have moved towards approaching M&A for the purposes of scope. As I detailed in SKU’d Thoughts 34, focusing on scope “enables an acquirer to enter a new market, product line or channel.” This type of approach is more consumer-focused because consumers are not only focused on scaling to double down on their already existing portfolio of products. This scope approach to M&A requires companies to examine the broader consumer landscape in an effort to generate real value for the consumer. The benefit of M&A in CPG still allows the acquirer to deploy their superior distribution to grow new brands and reach more consumers.
Consumer goods startups have been able to capitalize on millennial preferences and digital marketing to grow rapidly. The impact startups will have in the CPG space has not yet been fully realized. Watch this space.
Cross posted on Medium