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    Interview

    How Emerging Brands Survive - and Thrive - in a Downturn, with Karen Howland

    Karen Howard, Managing Director of Circleup, an investment platform for early-stage consumer brands, shares data and insights on how emerging brands should think about surviving, and thriving, in the current environment.

    Transcript

    Peter:

    Welcome to Unpacking the Digital Shelf where we explore brand manufacturing in the digital age. So Karen, thank you so much for joining us. I know that Circle Up deals with a lot of emerging brands and this is an exciting time for everyone. And by exciting I mean interesting and so we would love to just start this conversation off by getting your read of, of what's the current environment for emerging brands? What are you seeing out there?

    Karen:

    Yeah, you know, I think emerging brands and even just brands in general, it's, it's, it's hard out there. And there's such significant variance by category, but one thing that's for certain is there's a ton of fear and there's a lot of unknowns out there. There are brands like hand sanitizers, hydration products, toilet paper, feminine products. They've seen a huge surge in this market. But how long is that going to last? Are we going to see a significant destocking over the course of the next several weeks? How do we appropriately manage inventory and team during this volatile times? Those are all things that are really top of mind for a lot of our brands, even the ones that are doing well. And then there are the brands that are negatively impacted, right? Lodging, airlines, cruises, entertainments, they will come to a halt. You've got restaurants, transit, clothing department stores are fairing a little bit better but still trends down 50% year over year. I actually saw something this morning that showed the credit card usage as far as dollars spent were down 30% this week versus the same time last year. And you have to imagine that actually is even worse than it sounds because people are moving more towards a cashless transactions, right? Especially in today's day and age with fear of touching and physical contact. So those are really scary numbers. I think if I actually think about the businesses though that we're dealing with, it's really the volatility that makes it so daunting. Grocery sales for example, I mean, they were up mid single digits at the end of February, right? Normal, reasonable trends. They were up as much as 45%. The second week of March and now it seems like they're leveling out at like up 10 to 15%. Right now. Managing through that sort of volatility is almost impossible. It's impossible for the grocery retailers. It's impossible for the mass merchants. It's possible for the vendors that supply those companies as far as any sort of inventory control as far as any sort of personnel changes. So there's a lot of uncertainty out there. And, and I think that volatility and those volatile swings is really what is particularly nerve wracking to the brands at this point. If it's a new normal of trends down 10%, people will find a way to adjust and manage to that. If it's a new normal of trends being, you know, in 3% people will adjust. But these huge swings make it really, really complicated. And just that the fact of the unknown, we don't know how long this is going to last.

    Rob: 

    You, you, you invest in a number of emerging brands across categories and, and some of them based on what you're just saying, like for me personally, we bought a few weeks ago at the grocery store and we were stocking up on the key two creamers that you guys invested in. 45 Oh five pork rinds. Those they're delicious.

    Peter: 

    Oh my god, that sounds good.

    Rob:

    Oh, they're so good. And so I just have to imagine that the brands like that are do, are doing really well from from just a purchase perspective. But across, across categories. One of the interesting stats that you had for the last major recession around 2007 to 2011 is, one of the impacts of an event like this is that emerging brands overall, even even it's in the short term, there's a lot of volatility overall. They gained a lot of market share back then. And so do you, do you guys think that the same is going to happen this time around? Like, sure. Grocery is doing good, other places are struggling a little more. Do you think overall though, the story is going to be that the emerging brands do better than the incumbents this time?

    Karen:

    Yeah, I think you will see short term blips where things like milk, eggs, Kraft Mac and cheese comfort foods that people feel, they give people familiarity that give people comfort with, they give people comfort will outperform. But over the longer period and the longer being, let's say six to nine months, we continue to see shifts towards emerging brands. We continue to see trends shift towards more interesting diverse flavor profiles. I mean there's a reason that oat milk was up. I think I saw the statistics like the first week of March was up. The trends were up like 150% year over year. It was crazy.

    Peter:

    That was just me. I don't know what everyone else is drinking.

    Karen:

    But I think, I think the, you might see a slight shift as far as the growth trajectory that these emerging brands were on. But over any sort of a sustained period of time, this is what the customer's looking for. The customers change, tastes have shifted. And the emerging brands will continue to outperform the incumbent brands.

    Rob:

    One of the theses that I have about crises in general, but, but in this crisis in particular is when there's, when there's a major crisis, it tends to accelerate already existing underlying. So the last 10 years for CPG in particular, I'll just, I'll just pull it out. IRI has data that shows that the CPG incumbents for the most part lose a little bit of market share every single year as as purchasing goes online. And when, when a consumer goes online, there's more choice. And to your point there, they're able to express their desire for a strong flavor, for example, more effectively online than they can in the aisle. And so they tend to, they tend to go to an emerging brand that might, might have a stronger flavor profile. So the one, one potential outcome of this is the shift of market share exchange. Big picture between the large multibillion dollar incumbent brands that own the aisle and these emerging brands is actually a durable one. It's an acceleration that packs maybe the next five years of market share shift into, into five or six months. Do you have, when your portfolio companies are folks talking about it this way, do they see this as the moment to shine the moment to just take an extra five point a share? What's, what's, what are the conversations, how aggressively bullish are people feeling?

    Karen:

    You know, it. It really depends a lot on where the product is as far as the stage of their placement on the shelves. Because you are seeing increased demand through Amazon, you are seeing increased demand through Instacart, but the majority of the shopping that's going on in the majority of this stockpiling of product is happening at the re, at the, at the grocery retailer. And so a brand like four or five Oh five that you mentioned, you know, they've recently gotten into, in the last year they've gotten into Costco. They're getting a lot more trial as people are walking by and just saying, you know what, I need everything. I need to get everything off the shelf. I need to throw things in my, in my pantry because I don't, the world's coming to an end, so I don't know when I'm going to have a chance to come back here. And so you're getting a lot of trial, but you have to actually have the product on the shelf. And that's something that we're seeing quite a few companies talking about now is retailers who had confirmed that they would be putting a product on the shelf, they might even have the purchase order and there has been, you know, contracts that have been signed are now saying, you know what, we were going to put your product on the shelf in June. It can't come on until September. And I think that is one thing that's different than the last time we had a significant slowdown is this is actually a very different looking potential recession than what we saw back in 2008. 2008 you didn't see a run on groceries, right? You didn't see destocking like you're doing now. You saw the consumer, you saw the financial institutions pullback, early. And so it was a initially a much more affluent pull back and then you saw as the housing crisis, crisis that subsequently followed. But it felt very different than the environment that we're in today. I think that long term shift certainly will continue. I think the products that actually, the brands that have products on the shelf, we'll see that bump. I think though the emerging brands, a lot of emerging brands that had new products that were planning on launching an expo that they were planning on introducing to the retailers in the middle part of this year. Unfortunately that timing is just going to be pushed back.

    Rob:

    Yeah. So I mean this is, if the retailers are pushing off POs for new products, I gotta imagine that unless you're a direct to consumer brand right now, it's probably a bad time to launch a product. What are the other things that now is a bad time to do for this?

    Karen:

    You know, I think, I think you're right. I think bringing new product introductions is challenging right now. For a couple of reasons. One if you are planning on launching the product at retail you're not able to get the product on the shelf, which it's easy to look at the retailers and say, Oh, they're not supporting the brands. This is a terrible time. In reality, they are so strapped right now. You think about the, the ability for an employee at a Kroger or a Safeway or a Walmart to make, to allocate new space on a shelf for an emerging brand versus restocking toilet paper. It's, it, it would make sense that they're, that they're postponing those product, product launches. Their warehouses, their warehouses can't, can't hold them right now. Right? Because of just the flux in the volume of product that's been shifting through. So I think launching new products right now is a, is unfortunately pretty challenging and it's going to be challenging until the fall. So I mean, when we're thinking about what the brands should be doing at this point, given that the new product introductions probably aren't going to be able to be happening, a lot of the kind of revolves around the digital side of things, right? It's focused on reallocating those marketing dollars that you were originally going to put into field marketing. And thinking about social and digital, right? Get creative on the content side. I'm stuck in my house. I'm not going to lie. I've been spending probably more time on the internet than I normally do, scrolling through Instagram and various other social media feeds. Talk to me in an authentic way. Show me ways that I can use your product for cooking programs. Show me ways that I can use personal care products or a home spot experience. Show me ways that I can use a sweet gave with my children. That I can use this new oatmeal product to make a different type of Mac and cheese that my kids are going to love, that I can actually entertain them for an hour. So finding ways to actually digitally engage with your customer in a very authentic way that is real to what is going on now I think is really important for these brands. And one of the great things about these emerging brands is they can do those things very quickly, right? We've had some of the CE, we've had CEOs that have been doing webcasts from their homes. They don't need to have the beautiful backdrop, they don't need to have the perfect lighting that a lot of the larger CPG brands would want to do. And because of that, you can actually make it off more authentic and you can really connect a little bit better with your customer.

    Peter:

    Hey Karen, when you think about you know, we obviously, in our industry, a lot of industry events have been canceled and pretty much every week we get an email from someone saying we're having ours in the fall. And I think about how all of those events are going to compete with each other in the fall. I'm assuming there's some sort of parallel to be drawn with all of these products. These new products that have gone, have been pent up through this period are all going to want to launch in the fall. Is there a way that you advise for emerging brands to sort of position themselves best to cut through in that period when everything's sort of coming to market?

    Karen:

    You know what, it's a great question and it's one that I'm going to put top of mind to think about as far as, as far as advising. Cause you're, you're absolutely right. The merging of expo West with expo East, fancy foods, all of the other trade shows, they're going to be very noisy. And anybody who had a pipeline of products that they were going to be launching throughout the course this year, they will all be consolidated into that very small period of time. So to actually get noticed in an appropriate way will, will be challenging. Very good point. We've actually at CircleUp we've been trying to do a program called virtual expos where we have different categories where we'll get a bunch of buyers online. We'll have 10 brands come and present. We just did one on nutrition bars the other day. We did one on new age beverages. Just try to get the brands that unfortunately had such a significant outflow of capital that they had initially planned on spending an expo West access to the buyers. It's been interesting though. We've gotten a really great reception from the buyers. We've gotten really good reception from the retailers, from the brands, but there's been some additional follow up afterwards, but I don't know that there've been that many purchase orders that I've have actually been placed on the back of that. And I think it's in part because of what we were talking about as far as just not being able to allocate additional capital to these new emerging brands at this point. I think it still makes sense to do it right. It gets them top of mind for the retailers when expo East comes along and when fancy food comes along. But it is a challenging, it is challenging to cut through some of that.

    Rob:

    So Karen related to what Peter's question and what you were just saying with regard to new product launches potentially moving to the fall and new product launches being delayed and marketing mix is having to shift, CircleUp, one of the big advantages that you guys have for your portfolio companies is you've got a tremendous amount of consumer and analytics and insights and AI that can help drive decisions right now. I mean, the world is really volatile. How important is data and how important is data analysis in making the right decisions over the next six months versus simply being reactive to what's happening in the market?

    Karen:

    You know, it's a, it's a great question and it's something that we've actually been focused on when the advocating a lot of our brands to look at. Even before this shift has happened. I think if you've got a direct to consumer platform, omni channel or a pure direct to consumer platform, now is the time to really allocate additional time and resources to understanding your products and your customers. Use the data to help drive some of the decisions that you're making. It's more cost effective if there's an upfront cost associated with hiring somebody to do data analytics or to invest in the data itself. But it is going to be, it's going to drive better decisions over the longer period it’s going to make smarter decisions, better informed decisions as far as where products are being launched, what product profile of flavor profiles are going to be using, price positioning, all sorts of different things that we've been trying to advise our brands on for quite some time. Understanding who your most loyal customers are, who are the ones that are giving you referrals, who are the ones that are trialing everything that you put on the shelf, take some of the resources you were originally allocated to marketing on the shelf to really understand that consumer when you know was loyal, passionate, influential consumers are, you'll know who to get the product into the hands up for demoing even if it's not the traditional demoing that you would do in a store.

    Rob:

    Do emerging brands in general have us like a customer or CRM data advantage versus the big incumbents. And one of the things that we haven't seen from especially is a lot of CPG companies is building a relationship with their end shoppers and getting end shopper data in developing real consumer insights be, you know, besides the traditional panel work that they've been doing for a long time. So is this a scenario where emerging companies have an advantage?

    Karen:

    Some do, some do that actually put the time and the resource behind it. They given their size, the nimbleness of the brands, the, the fact that they don't have a huge lead time as far as any sort of marketing spend as far as any sort of advertising campaign that they can be faster. They can be they can be more agile than these larger brands. They should have the ability to actually access this data, see what's resonating, see how consumers are responding to different flavor profiles, different product launches more quickly. It's the question if they actually are willing to do that or not. It's something that most of the PR, most of the companies that we're a data, we are a financial institution, but we are also a data platform. So most of the brands that we partner with really appreciate the data, right? They seek it out. They want to use data to help make informed decisions. Some brands haven't, haven't prioritized that when thinking about the different options. We think shifts like this in consumer, in the consumer behavior. Shifts like this as far as understanding the importance of every dollar that you spend in a more stressful financial environment, will continue to highlight the importance of data.

    Rob:

    Yeah, it's, it's, I, I'm, I'm really interested in the data aspect because I think a lot of companies, a lot of people are out there looking for what a durable advantages for an emerging brand of various kinds. We've seen a lot of, a lot of brands struggle lately, like outdoor voices. Their CEO left and they downsized. Brandless is effectively shut its doors. There's a, there's a bunch of others and it's become vogue on medium and other places to say that, that the whole model is busted. And that, you know, dollar shave club was a bad acquisition for Unilever and isn't going to pay for itself and you know, blah, blah blah, blah, blah. And I think some of the criticism is probably right, like outdoor voices seem to have, you know, they, they just, they made pastel leggings, right? It was how durable of an advantage is that. But then, but then others maybe have a more durable advantage. So the data might be an angle where it gives a brand enough of advantage to build enough scale or what are, what are other angles here? I mean, you mentioned earlier the targeting stronger flavor profiles or being able to target consumer interest more directly. I mean, w what's your, what's your guy's thesis on how a brand becomes great and stays great and doesn't fall by the wayside like some of these others have?

    Karen:

    I think it's using your direct to consumer channel in the most effective way you can. I think a lot of these brands especially some of the ones that you highlighted. Look, I, I often joke with our entrepreneurs that if I, if their budget requires that they raise $3 million and I give them $10 million, they will spend $10 million. I, I have an extra couple of bucks in my wallet. I will find a way to spend it, it's human nature. You will try different things. You will, you will sample different ideas. You will test inefficient campaigns that you know better than to do, but Hey, you've got the money and you might as well try. I think, and I think a lot of those brands that you mentioned fell victim to that. That it looks, the numbers look really bad because the absolute amount of money that was raised and the amount of spend, the spend, it's because they, a lot of these brands raised above and beyond what they actually needed to survive and to thrive. We always advise our brands that direct to consumer is an amazing channel. It’s an amazing channel for getting to your customer. It's amazing channel for getting to understand who your customer is, what they're looking for, trialing new products. There is not a faster way of getting a product on the shelf. You know, Winky Lux is a beauty brand that we work with that does a phenomenal job as far as new product introductions, constantly coming out, constantly going to the hands of their consumers and then they get to know what products are actually selling, which ones are causing higher average basket size, which ones are showing better margins and they can then use that information to go back to the retailers and say, these are the products that you actually really need to have to better inform them for the longer period of time. I think that's an amazing opportunity for DTC. I think using DTC exclusively to grow your business and scale your business is really challenging. Maybe we're going to see some shift right now with how customer acquisition costs and trended and Instagram costs and Facebook trends. I've seen a lot of really volatile information that's come out in the past couple of weeks as far as how those are. How those are trending. Maybe we'll see some seismic shift on the back of this, but I, I think for the near term we certainly kind of continue to advise, like get to know your customer and then get to know what products really work. It's a great place for trialing and iterating your product.

    Rob:

    Yeah. Even coming to the events like McCormick launched their old Bay hot sauce direct to consumer on mccormick.com before try it, before going in store and I, I, it's sold out almost immediately. I thought that was a, that was cool. I mean it's a, it's a cheap, cheap way to run an experiment on a small batch without having to commit to a national launch.

    Karen:

    And it gets, if you actually do sell out of it, it gets viral, it gets people to get excited about it, there's more demand for it. And then you're able to go to the retailers and show, Hey these are the five reasons why you want to allocate shelf space for this product.

    Peter:

    And it's interesting to go back to the question we were discussing about how do you prep to stand out in the fall with the larger retailer channels you might want to sell through. It does feel like the consumer, like you say, spending more time scrolling through Instagram, being exposed to new products, et cetera, that this might be a time really to test these products that you are interested in launching in the fall. Even ones you already had you had commitments for because you can use that time to get smarter about which ones you actually want to shine through in the fall. And others you may go, we know now enough to know that we should put more of our investment behind this one cause it worked in the consumer channels, the direct channels over the last few months because consumers are, it seems like are online more are open to discovery. The, the new flavor profile that they may not be able to find through their more traditional channels.

    Karen:

    I think that's right. However, I think that comes down to knowing your data and understanding who your customer is because I think there's a real opportunity to do that with your loyal customers. I don't know that you want to be doing that on a broad scale right now. I think there's a reason that when you go to a local grocery store, there is no ground beef. There is no ground chicken, but you can get impossible burgers right? There is this move right now for comfort and familiarity and trialing those new products with your most loyal customers, I think. Absolutely makes sense. I think spending money to get them out to the broad world right now probably isn't the best use of capital.

    Peter:

    So Karen, just to close, I would love to, you wrote a fantastic blog post on your LinkedIn channel with the, the title being surviving a downturn in CPG. I would love it if you would just kinda run through your top level advice to emerging brands. And in this time,

    Karen:

    Yeah. Would, would be happy to I think, you know, it's the, the first thing that we have been trying to talk to our brands about. It's, it's don't panic and focus, right? Things are shifting. Things are shifting in a material way. Sit back, look at your business, figure out where there are opportunities to push your business forward. Think about where there are opportunities to cut back but do it in a rational, logical way and don't just make broad cuts to make broad cuts because things are scary right now. I think cash is super important. You know, we've, we've been really advocating for all of our brands to look at their budget and say, okay, how do I make this work for the next 18 months? And a lot of these, these are venture backgrounds, right? They are supposed to be or often are unprofitable losing money and are typically raise capital every 12 to 18 months. If you actually need to make your cash last for 18 months, what do you need to do to make that happen? The fundraising process is going to be harder. There's a lot of people out there who say they're open for business. Unfortunately I think that probably is not the case right now. So really focusing on the cash is, is important. Similar to what we were saying as far as you know, allocating capital really focus on what is going to generate the highest returns for you. You know, what is the marketing that you should be spending, should he be spending on new product introductions online or should it be focused on spending marketing dollars on your most loyal customers that love your product and buy it regularly? Do you need to make new hires. Thinking about how you could optimize your cost structure to the best of your visibility in this environment? Focus on your supply chain. You know, not just, I think about like the, you know, the some of the wellness shots. Almost all those products are made in the United States except for the bottles, right? How does that, how does that come into play? And I think a lot of it goes down to really, really connecting with your consumer. We're all going through, and I myself entirely included in this, we're all going through something new right now. We're all going through a scary time being a voice of comfort, being a voice of understanding and trying to really connect with your consumer in an authentic way. I think right now, given everything that's going on, it's actually a really great opportunity for brands to be able to do that.

    Rob:

    I have one final final question. Every investor has the one that got away story. I kind of wanted to ask you which of your, which of your investments is your favorite, but that's, you know, which kid is your favorite kid asking that, but what is, what is the one that somehow got away that you think back and say, man, I wish I had gotten in that deal.

    Karen:

    So the largest conference room, we name conference rooms after brands and the vast majority of the conference rooms in our, Oh all. But one of the conference rooms and circle up is named after a brand that we've invested in or that was, I'm a credit borrower except for one, which is a smarty pants. That is the brands that we looked at and we analyzed and couldn't get there as far as understanding what it was that was different and how it was going to matter to consumer. And so that's the one that we named our biggest conference room after that for the constant reminder of taking your heuristics out of it. Don't let your bias come into play, look at the data, look at the business, and then make a decision.

    Rob:

    That's amazing. That's the largest conference room. Maybe there is something about like the biggest misses hurting more than.

    Peter:

    It's very Catholic of you. I would say. Karen, this, this just the scale of advice you've given here across this this conversation has been truly valuable and we really appreciate you making the time to provide some knowledge and inspiration to emerging brands. Thank you so much.

    Karen:

    Peter, it's my pleasure. Stay healthy, stay sane. And hopefully we'll speak again soon.

    Peter:

    Thank you so much.