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Roundtable

Roundtable: The New Model for Driving Growth

Turns out that the leading brands in each CPG category have generated only 25 percent of value growth in the US while small and medium-sized brands captured 45 percent of growth. McKinsey put out a report on what the new model for growth is, and the lessons can apply to any category.  Peter and Rob dig in. 

Register for the D2C Playbook Series featuring Vivian Chang

TRANSCRIPT

Peter:

Hey everyone, Peter Crosby coming to you from the digital shelf institutes Cape Cod office. Rob is in a sweatshirt and knit cap. What are you? Where are you? Are you in the forest?

Rob:

I am in Maine, on an Island and it's cold up here.

Peter:

You don't have heat?

Rob:

Well, I have my body heat. Okay.

Peter:

So if you hear Rob shivering in his voice, you'll know why. So Rob is coming to us from the wilds of Maine and before we dig in, cause we have a great topic today, a reminder that the D2C strategy playbook series continues Vivian Chang, the VP of growth of Nutranext and D2C inside of Clorox is going to be on to talk about building D2C inside of one of the most stories. And certainly during COVID one of the most important brands in the world right now, it's going to be a great conversation on September 24th at 1:00 PM Eastern. And Annie will put the link in the show notes. So, all right, onto today's deep dive, Rob you had shared with me an article from Phoebe Bain at Morning Dive, which is talking about it led off with, as the new brand of paper towels you snagged from a Baron grocery store shelf in March become a mainstay in your kitchen. You're not alone. She's talking about consumers becoming more loyal to the small brands that they were basically forced to try back in March. 39% of respondents in a Bazaarvoice survey said they experimented with new brands during quarantine and 88% of those who bought a new brand said they continue to keep buying those products. How did that strike? I mean, you sent it to me, so it sort of hits you for a reason. What stood out to you?

Rob:

What stood out to me most about this is classic brand, uh, market growth. And, and let me, let me explain what I mean by there, there was an article that is my favorite article on the subject written in the New York times. And I want to say 2014 that said, the target knows you're pregnant before your parents do. And the target and Kroger and others have spent a tremendous amount of effort trying to figure out through analytics when people become pregnant, because that's one of those times when your shopping habits shift, when you get pregnant, when you get married, when you get divorced, there's these life events that are singular and when they happen, they will cause you to go to all of a sudden, you're shopping at target all the time for everything, instead of maybe you were shopping Walmart or stop and shop or whatever it was before. So, those big step functions change moments. If you can catch a consumer right, in those moments and steer their direction towards you, you can get their loyalty for years up until the next major change moment. So they're extremely valuable times to be able to hit somebody COVID is acting as a change moment for everybody, everybody. Yeah. And I hadn't thought about it like that before. And this article really hit me in the face with all right, well, you go to stop and shop and you buy bounty paper towels. And you've done that for the last 10 years. And it's on autopilot either. You just know you're running out of paper towels. Next time you go to stop and shop, you're going down the aisle, you're looking at your phone. Oh, there's the Bounty ones I always buy. And you don't even think about it. You're not into paper towels. You're not interested in trying out all the other paper towels to see what you like best or whatever. You just, you know, you always buy Bounty. And now either due to the store that you shop at being closed or having shifted entirely to click and collect, depending on how the size of the store or the product that you're looking to buy, not being in stock, but you still need paper towels. Anyway, there's a whole bunch of causes that might shop that might change where you shop and what you buy. And what this research is basically showing is that it wasn't just like a one time. I'm going to pick up this other brand of paper towel, or I'm going to go to this other store. It's been sticky. People have picked up new habits. COVID has been going on long enough that it's, it's like getting married. It's like having a kid. And, that it changes your shopping patterns. I mean that is really a damning stat for a lot of brands that were used to these habitual purchases.

Peter:

I just first have to say, when you mentioned that divorce was one of those life events, I was thinking like, Oh, so when you're divorced, like you can't go back to Target anymore because that's where your ex where you know will be shopping. Sorry, that just made me laugh. Um, so one of the things that stood out to me too, was the shift in market share, um, of smaller manufacturers, uh, and larger manufacturers pre pandemic, 2020 smaller manufacturers saw market share jumped 0.1% compared with a 0.4% decrease for larger CPGs. Since the end of April big CPGs have seen market share slide 1.6% while smaller businesses, businesses have enjoyed a 0.7% bump. And that made me want to figure out what's going on there. Why, uh, you know, what's below those numbers. And of course that led me to McKinsey. So I found this, this amazing Kendrick Kinsey report, and I'm going to read off the five names of partners who are working on this, cause it really is a great report. Udo cop guy, Elvin, little Jessica molten, Renee Meltzer Schmutzler excuse me, Renee. If I got that wrong and Patrick Simon, and essentially it was a report, they put out consumer packaged goods. What got us here? Won't get us there a model for the consumer goods industry. And I want us to sort of walk through this and I think it can apply beyond the consumer good industries because of the trends that are driving this, um, this shift, uh, I think are applicable across, across categories in one degree or another. So keep listening to CBGs and you'll get something I promise you.

Rob:

Yeah. I just, I want to go back to the first thing you said, which is that prior to COVID large CPGs were already losing market share, albeit at a slower rate and covert is, has accelerated that. I mean, we've said this before on the podcast that my mental model of COVID is that it serves, it has served to accelerate underlying trends, whatever direction the trend was going. It was, it just makes it faster. Yeah, it is interesting though, to think through what the mechanics of that are in particular cases. So in this case, large CPGs are really, really efficient. These are well run companies there. There's not a lot of fat in these organizations and in terms of excess manufacturing capacity. So to the extent that they can, they do just in time manufacturing as close to the order as possible focused on replenishment, they've got very sophisticated demand forecasting algorithms where they can, they can basically to very high degree of accuracy, accuracy, know how many paper towels they need to manufacture next week. And they're not manufacturing more than that because you manufacture more than that. It's more than you can sell and you know, then, then you, then you're sitting on inventory that you haven't sold. Can't sell and people aren't using it.

Peter:

Yeah. And that's showing up, I'm sorry. Go ahead. Rob.

Rob:

Yeah. I was gonna say just to complete the thought here, um, a lot of the smaller brands which are growing already, so they're, they're investing ahead of where their sales are. They're investing in manufacturing capacity, ordering capacity because they're growing, right. So they think that next year is going to be bigger than this year. They're adding manufacturing capacity. They just have more like supply elasticity than the larger, more optimized brands are. And that's allowed them to respond to the empty shelves, better in a lot of categories. And so you see, you know, CPGs, hemorrhaging, I mean over a point of market share losses, just hemorrhaging market share and this in this period of time. And a lot of the small players being able to pick it up through, you know, through having the product available and through having a manufacturing supply chains that have a little bit more Slack in it, the system,

Peter:

And what got my attention to that end in the McKinsey report was they talked about, um, in terms of what's contributing to CPG players, economic profit for the top 30 CPG companies in absolute economic profit, profit growth margin expansion, I E efficiency driving down cost, et cetera, contributed twice as much as growth to value creation. So that's, that's mind blowing to me. And it doesn't seem like that's going to be sustainable business for, I mean, they'll still be around, but for the next five, 10 years, they have to figure out a way to grow, not just cut costs.

Rob:

Yeah. You know, it's, it's funny. So let me, let me tell you a little bit of an aside. So Target released their, uh, the first quarter earnings results after COVID had been live and they absolutely crushed it and they not, not only crushed it from a sales perspective, e-commerce was up a couple hundred percent, which was just incredible. But overall sales were up a lot, their margin doubled, which is just insane for a retailer, right? I mean, targets of well-run retailers, but to double your margins. Incredible. And so, and I was wondering what was behind that and through conversations with other folks, I realized that target in this period, it doesn't have to pay for customer acquisition. They can dial back marketing substantially because people, people are going to their stores. Anyway, this is what you know, you and I had that conversation back in March or April after Amazon had cut their affiliate marketing fees, right at the beginning of COVID same sort of thing. Amazon doesn't have to pay for customer acquisition right now. And so I think what's happened with a lot of the CPGs with people being at home, but, you know, live sports, not being around for months and months and whatnot. I think a lot of the big CPGs cut ad budgets, and you see a lot of the big media agencies doing layoffs in the last few months because, um, you know, the CPGs are not paying for ads the way that they have been historically. So I think, you know, honestly, a lot of the Mark, a lot of the margin from, from I haven't read the 10 case closely enough to know if this is absolutely true, but my guess is if you look at the additional margin that they've driven in the last six months, a good percentage of, it's probably just simply due to reduce the advertising spend. And I mean, that's, you know, that's not the gift that's going to keep it.

Peter:

No, it's not, because at some point you're going to need to get people's attention again, and they won't be so captive to the channels that you want. Uh, and, and how this is showing up is that in recent years, again, according to McKenzie, the leading brands in each CPG category have generated only 25% of value growth in U S Nielsen cover channels. Meanwhile, small and medium sized brands captured 45% of growth and private label products captured 30%.

Rob:

Yeah. I don't know what to say other than wow. Yeah,

Peter:

Yeah. I know. Right. I mean, those are stark numbers from underneath the headlines and, um, Kinsey did a great chart of why the old model stopped generating growth? And they have 12 trends, you know, in 30 minute podcasts, we won't get through all of them, but I thought it was worth digging in on sort of the top ones.

Rob:

Yeah. Well, can I jump to number three? Just the most hilarious of them? Um, it said, um, so first of all, just to walk you through the chart visually, they are trying to rate the trend impact over the last 10 years of retail. So 2010 to 2020 and what they expect the impact of this to be over the next 10 years, 2020 to 10, 2030. So the number three disruptive trend, which over the last 10 years, they rate at two out of five. And for the next 10 years, they rate it four out of five, which means that it's going to really grow in its impact on retail and manufacturing. They call it the millennial and gen Z effects

Peter:

As I am. Neither. I can laugh at that and mock it, but yes,

Rob:

Well, what's interesting about it is that they, um, I mean, there's a lot of things that I wouldn't have thought would have been included in that. So one of them, for example, which they call out totally separately is conscious eating and living as the fourth, most impactful, disruptive trend, which they rate at a five over the next 10.

Peter:

I've definitely tried to be more conscious in order to eat and live as well.

Rob:

We've joked about this before, but the millennials, like, you know, the, the, the gen X generation or like the opt-out generation, you know, the nihilists in a way the millennials and the gen Zs are like they care about everything. And there is just generationally huge trend with them and their buying patterns where they're their spending is a lot more conscious, you know, whether it's low waste, whether it's, um, uh, pre-pro environmental in some way, shape or form, whether it's paleo, whether, you know, there's a lot of different stability. Yeah. Sustainability. Yeah. I like there's a lot of different ways. They slice the product worlds, but they slice the product worlds on different values than price and availability, um, which, which drove a lot of the previous generations purchasing behaviors. And so, you know, this is basically calling out here, but these are, this is, this is going to become table stakes. If you're not playing this game, if you're not marketing specifically to the way that millennials and gen Z guy, what their value systems are. And by the way, they spend consciously eating and living everything.

Peter:

Yeah. Combination of the two, for sure. And then, uh, dragging our attention up to the number one under this, this category of mass market brand building and product innovation is what they call digital ubiquity. So just data, driving everything, the impact of mobile and the internet of things. And that goes from two in the last 10 years to now a five, um, and particularly disruptive due to COVID. And so that, that's their number one. And I mean, you know, we spend our lives thinking about all those. And so two brands across all categories right now, but covert is definitely intensified.

Rob:

Yeah. I think that the, the, the internet of things, aspect of it, my, my knee jerk is internet of things like IOT has been this buzz word for, geez, I don't know well over a decade at this point. And it feels a little bit like blockchain, big data, internet of things like buzzword. And I rolled my eyes. I have to admit when I saw that as McKinsey's number one and, you know, it's, it's only part of the whole data ubiquity, but, but as part of it, and then I realized actually in the last couple of years, there's been really amazing IOT, um, rollouts such as like the sensor nets within stores that track foot traffic via the lights that are installed, which have actually seen a lot more retail penetration over the last couple of years. And in some of the calls we've had on the DSI exec forum, people have actually mentioned this from the manufacturer side, getting data back from retailers, from, you know, the IOT center nets that are, that are based in the light bulbs and the retail chain and the retail is sharing some of that back with the manufacturers test to attract foot traffic. And like, I guess, like, I'm just saying that for somehow it's just IOT has become a thing in retail and the data from it is really important and is getting increasingly driven.

Peter:

Yeah. And, and I, I do wonder if the internet of things is more the, the quote unquote sort of boring stuff like that, rather than sort of the chip in every everyone's brain kind of internet of things, but, but rather, you know, actually adding to the data that we have to make choices to figure out when things need to be replaced brand. You know, I think that's where a lot of it's going to be interesting and actually have an impact.

Rob:

Yeah. I think that the big challenge on that, number one, if we're going to stick with it, let's just reread the title again, data ubiquity, parentheses data, mobile, and the internet of things we've been at the big challenge a lot of brands are gonna have is, uh, you know, how do you actually use the data? How do you, how do you store it? How do you report against it? How do you use it? There aren't systems that do this very well. Um, you know, CRM systems are not, not built for this type of stuff out of the box. We've seen people stitching together, um, big data reporting systems using some of the new technology from Google and Amazon web services and, and just sort of hacking it out there. But there's, you know, each brand at this point is experimenting with how to incorporate data as part of their operations in a way that that's new to everybody. I mean, what do you do with foot traffic data from IOT? I mean, how do you incorporate that into your trade spend planning and all this type of stuff? I mean, this is, this is really, basically McKinsey is saying, some companies are going to get good at this, and it's going to give them significant competitive advantage and other companies who, who just don't want to get good at it are just going to keep hemorrhaging market share because this stuff matters.

Peter:

Yeah. Every executive that I've talked to in the DTC strategy, playbook series, and most recently last Thursday, a Byron curve from a Serta Simmons came in through the, um, the Tuft and needle acquisition. And it's so important to see that you have to have a data science team of some kind, because otherwise you're just, you're wasting your money on DTC. The important stuff that they're seeing coming back and using that as a signal throughout from the product ideation process all the way through it, you know, how are we talking to our customers? And what are they saying in ratings? We like all of that has to be done through a consistent approach to data and driving insights back out in the organization.

Rob:

Yeah. I want to, I want to just, I want to drill into that man, cause that is so important. If you go further on in the report, there's a section on the new model and a chart that says getting on the right side of trends, revamping where to play and how to win. And the first thing in the chart on the new model is relevance led brand marketing innovation and brand building, and the required capabilities in order to succeed at that our occasion and purpose led portfolio innovation and design and data driven marketing. And, you know, it just, I know there's a lot of buzz words in there, but it just gut instinct fuels absolutely obvious that the future of brand building is not this one, too many mass markets. I'm going to send the same message to every single person movement. It's going to be a lot more tailored to context. And the context is a combination of individual and timing and environment, and what's surrounding the message and all this type of stuff. And there's no way to do that without using data very effectively. You can't, you can't creative your way out of that problem.

Peter:

Yeah. I mean, your whole argument around sort of from masses of markets, to sorry, from mass market to masses of markets, where ultimately you're getting down to a market of one that you've figured out and are going to market to, uh, that that's where it's going and, and McKinsey underlies that here. And one of the things to sort of go back to sort of the old model sort of stopped generating growth. The, the, the biggest shift that they're seeing coming over the next 10 years is the meteoric rise of III marketplaces. That goes from a three in the last 10 years to five. And that's cross category. I don't care who you are listening to this, like figuring out what your marketplace strategy is. If you're a distributor like what's going on, like, how are they competing with my business? If you're an industrialist, you know, how are your new buyers changing the way in which they search and buy your products? So, yes, it's happening in CPG, but it's also happening otherwise. And, and, uh, McKinsey calls that out on to get on the right side of that trend. You need precision revenue, growth management. You need to know how you're managing your ear, marketplaces, building omni-channel and DTC businesses, um, digital route to market, and customer contact, again, a ton of buzzwords, but the right things. Right? Yeah, totally. I mean, I just found that marketplace topics specifically, remember I went to an Amazon

Rob:

Hackathon in Seattle in 2017, I want to say. And the overall topic that colored every single conversation at the hackathon, this is with all the digital leaders from basically, um, the top 500 manufacturers in the USA. It's just a, just a heck of a hackathon. And the, uh, big conversation that everybody was having is how do you go hybrid? And when do you go hybrid and what is it going to cost you to go hybrid? And how do you convince your CSR to go hybrid? And what hybrid meant there was that you need to be able to be both a first-party wholesaler to Amazon and a third party seller to the Amazon marketplace. And there's, there's a lot of reasons for it, you know, controlling bap, having, having a backstop in case of stockouts, um, controlling, better control on branding. There's, there's, there's a lot of really strong reasons to do it, but the vast majority of companies were not operating in a hybrid model at that point. And couldn't see a line of sight to doing it over the next year. Um, so, you know, we're in 2020 now, still, if you look at the top 500 manufacturers, for example, in North America, uh, I haven't done a survey, but I would just based on my own personal conversations with them, I think probably less than a third can operate in a marketplace world. Most of them are still even for, um, e-commerce pure plays like Amazon still operating in a wholesale model where they're selling to Amazon and Amazon selling to the consumer. And, um, that's, that's, I don't think that's going to get you there. You know, everybody's going to have to be hybrid and everybody's going to need that ability to ship to consumers and sell through new digital channels or, or you're just gonna lose share.

Peter:

Yeah. The McKinsey sort of, uh, what, why has it stopped modeling? You know, I won't go through the rest of them, but you know, there's a steady rise of discounters, mass merchant squeeze. Um, so the final category that they talk about is mergers and acquisitions, and they sort of say the jury is out on it. Uh, but they definitely call that out in the new trends that you really need to sort of focus on programmatic, mergers, and acquisitions. And you, you still see it happening just, uh, just this past week Edgewell acquired, um, grooming brand Cremo for $235 million, you know, sort of, oh, I see what Harry's been doing over there and dollar shave club, I guess, I guess I better get one, um, is, is sort of how it feels, but it does feel like there that's going to be part of the mix is figuring out, you know, what you're going to do with these digitally native brands.

Rob:

Yeah. I mean that man, that's awesome. There's a whole conversation. Cause I mean, as we've talked about the VC model for creating emerging brands is probably not the correct one for the vast majority of emerging brands, just because of just the, you know, the the growth in the margins and unit economics don't really support it. Um, and the VC back emerging brands with high valuations are to be less of an M and a target for a lot of the larger manufacturers. Uh, but there are a lot of emerging brands that haven't taken VC money that is smaller, that have smaller growth rates, but that have, um, you know, that might be profitable or might be, you know, at least, uh, operating cash flow profitable. Um, but they're smaller, right? And I think that the M and a strategy that the large folks are gonna have to take over the next 10 years is going to be likely different. Like you look at a Cremo you look at, um, I mean, dollar shave club, you look at, uh, any of the big acquisitions over the last 10 years in manufacturing. I think the future is fewer of these, you know, multi-hundred million billion-dollar blockbuster D to C pickups and possibly a lot more 20, 30, 40, $50 million pickups to expand the portfolio into more niche segments. That's my bet.

Peter:

And do you think that there's also an element thereof, of just like we see in tech sort of acquiring for skills as sometimes as much as you do, maybe even the particular products you're requiring that you, that people just want digital teams, performance marketing teams that they can pull into their organization?

Rob:

I'm more skeptical of that. I mean, I mean, we had, we had a great conversation about that, where we talked about hackathons at, um, uh, I want to say Montclair was doing a premier digital hackathon. That was company-wide. And this was maybe six months ago on one of the podcast episodes. And we said, we were talking about, um, is a hackathon, a way to grow talent internally. We had a conversation with Sony at Bosch about mixing the brand team into the digital team and the digital team into the brand team and moving people around in order to spread DNA internally. And I think I'm more bullish on a company's ability to grow these skills. Now there are enough people that are out there that are in these large businesses that get it, that have leadership roles that have experienced that. I don't think that Aqua hire is going to play as big of a role going forward, but, um, and it's also an expensive way to get this, this type of talent that's in there. I think it's going to be far more about brand expansion and, uh, uh, market segment expansion into places that are harder for an existing brand to reach with their existing brand portfolio.

Peter:

Yeah. That makes sense. Let's close out here. I think we've, we, you know, we've covered this in pretty good detail and again, I want to reinforce, and I hope, you know, the listeners who are in other markets. I think the things that we're talking about here, the digital ubiquity value, price, sensibility, meteoric rise of E marketplaces, you know, steady rise. I mean, the these are happening across categories and, and so, uh, the takeaways here I think are good. And just closing out with how McKinsey talked about the new model on where to play and how-to, you continue to scale advantages and marketing spend distribution, supply chain, and back office, but you use digital to move away from mass marketing and sales and toward targeted commercial execution. I think that's pretty clear.

Rob:

Yeah, I'm mean here, here.

Peter:

So with that agreement from Rob and me along with the five folks at McKinsey, um, thanks for, thanks for being here, Rob is a great combo. Appreciate it.

Rob:

Yeah. Good to be here.

Peter:

And a reminder, and I hope you get warm at some point over the weekend, a reminder to look for the next DTC session that I mentioned with Vivian Chang, from Nutranext, Clorox, annual, as I said, Annie will put that in the show notes and please follow us on the digital shelf institutes, LinkedIn page to stay on top of all these things. Um, and thanks as always for being part of our community.