The imminent unraveling of CPG giants
In May 1913, five San Francisco entrepreneurs (a banker, a wood and coal dealer, a bookkeeper, a lawyer and a miner) invested $100 each to set up the first commercial-scale liquid bleach factory in the United States, on the east side of the San Francisco Bay. The firm was first called the Electro-Alkaline Company and ran into difficult times during the first 3 years.
So, investor William Murray took over the company as General Manager. His wife, Annie Murray, saw the potential in a less-concentrated liquid bleach for home use. She built customer demand by giving away 15-ounce sample bottles at the family’s grocery store in downtown Oakland. The product was called Clorox and the rest, as they say, is history.
The early days of Consumer Packaged Goods involved products that helped people stay clean — bleaches like Clorox, shampoos and soaps. And, since people didn’t know they wanted these, the CPG giants invested heavily in advertising. And, since advertising follows user attention, the early part of the 20th century involved finding ways to get in front of people watching radio. So, these CPG companies began sponsoring serial dramas on the radio — thus giving rise to the soap opera.
Investopedia’s definition of CPG is: “Consumer packaged goods (CPG) are the type of goods consumed every day by the average consumer. The goods that comprise this category are ones that need to be replaced frequently, compared to those that are usable for extended periods of time.”
Since these are daily use products, they are generally low margin. This means there are big benefits from having scale. And, so, the most successful of these companies (P&G, Unilever, Nestle, General Mills, Coke, Pepsi) became household names around the world.
The CPG Giant success formula
The CPG giant success formula involved 2 important steps -
- Invest heavily in advertising to build the product’s brand and make customers want to buy it
- Invest in retailer relationships so customers can find the product easily when they go shopping
This 2 step formula had many beneficiaries. The advertising step involved advertising agencies.

Advertising agencies fulfilled 2 functions. First, they used their know how and understanding of the consumer to create advertising that resonated. Second, they used whatever little data they had around performance to deploy this advertising across the various channels of distribution — newspapers, radio, retail, TV, billboards, etc.
The other main beneficiaries were retail stores. Since they were the gateway to the customer and given store space was finite, the various CPG companies fought for prominence. For example, companies that sell cold drinks and liquor pay a lot of money to be featured in the front row of the refrigerator in store.
That made sense because the retailer was the final customer touch point. And, retailers who managed to scale very quickly began running powerful businesses with sufficient negotiating leverage to sway CPG giants. WalMart is the obvious example. Of course, we are all about Amazon right now — but, we shouldn’t forget how similar the trajectories of the retail businesses of both companies are.

(Thanks @BenedictEvans for sharing this)
So, as a CPG giant, while WalMart and a few other retailers were powerful, everything was mostly going great. You had a strong grip on distribution, paid for lots of advertising and generally enjoyed years of positive growth.
Then, the internet came along.
The internet created or accelerated 3 important consumer trends.
I. E-Commerce cut retailers and removed barriers to entry
With e-commerce,customers didn’t need to go to retailers to buy stuff. This is a huge problem if you are a CPG giant as that is how you distribute your products. Additionally, cutting our retailers meant cutting out distributors as well. These cuts made it possible for pure play internet retailers to cut costs significantly. So, glasses on Warby Parker and diamonds on Blue Nile could now be much cheaper.

The other side effect of e-commerce was that there were no barriers of entry any longer. Previously, if you were a brand of dog food, for example, you were fighting with P&G for store space in all major retailers (good luck). But, now, you could just register dogfood.com and you had your store front.
Of course, over time, most retail in the Western internet began consolidating under Amazon. This meant Dogfood.com could just show up on Amazon, deliver great products, get rated high and begin showing up higher on searches for dog food. Of course, it isn’t as easy as that. But, it is nowhere as hard as it is used to be for a CPG start-up.
Then, smart online retailers realized that relying on “one shot purchases” isn’t all that smart as it simply ports a business model from the physical world to the online world. The internet enabled subscriptions (4 core online business models below) and they needed to get in the game too. By this time, very few could compete with Amazon’s incredible infrastructure to create a service to compete with Prime.

But, they could leverage subscriptions to attack all sorts of niches. It could be following the Dollar Shave Club model (much cheaper and convenient) or the Birchbox model (fashion/clothes/shoes/comics/fish hooks in a box).
II. There has been a growing trend toward healthier food.
Unlike e-commerce, this trend was just accelerated by the internet. But, suddenly it became easier to find great (and questionable) advice on healthy eating along with tips, tricks and plenty of recipes. There sprung websites that could explain what went into the packaged food that people were consuming. And, videos. Lots of videos. The internet generation looked to influencers and gurus on social media for food choices and healthy food has officially been “in.”
I’m not an expert on health trends — so, this section will be shorter than usual. But, it was telling that top food executives from Campbell Soups, PepsiCo and Quaker at Fortune’s conference toward the end of last year all admitting that interest in healthy food is hear to stay.
“The new food consumer is moving toward fresher, cleaner labels, and transparency is king,” said Suzanne Ginestro, chief marketing and innovation officer at Campbell Soup’s C-Fresh division.
Any move toward transparency is typically code for the impact of the internet. Over time, access to information has chipped away at any and all information asymmetries that old world industries relied on. Just ask car salesmen what the likes of KBB and Edmunds.com have done to them.
3. As people spent more time online, digital advertising became important.
Digital advertising caused all sorts of issues to CPG giants because their agencies weren’t set up to do digital. The digital advertising ecosystem was complex (below) and agencies needed to get smart about leveraging the various players In the ecosystem.

While agencies struggled in this era, their problems came to a head when the media ecosystem in the internet began consolidating among two companies — Google and Facebook.
All of this hit creative agencies hard. Suddenly, a large chunk of them were spending energy cutting staff (“efficiencies”) and fighting to prove to their largest clients that they were adding value. And, in the meanwhile, innovative start-ups were showing them how creative digital marketing was done. Dollar Shave Club was one among many that rode this wave with smart digital campaigns on YouTube and Facebook.
Power of all forces combined.
Any one of these trends would hit the CPG giants hard. But, in combination, they’ve made life very difficult for them. If you’ve been following the news, you’ve probably seen headlines like “So Long Hamburger helper, America’s venerable food brands are struggling” that speak to these struggles. And, firms like Campbell Soups, General Mills and the like have all reported disappointing results in recent quarters.
In response, CPG companies have been doing what large companies do — buy and sell. McCormick & Co. agreed to buy Reckitt Brendiser’s food division. Nestle is reportedly exploring a sale of its confectionary, frozen foods and cereals businesses. Kraft Heinz tried to buy Unilever (the world’s second largest CPG company). P&G (the largest CPG company) is also facing lot of activist investor pressure and is aggressively trying to cut costs and reinvigorate growth.
The chasm — revisited.
I wrote about the growing chasm between old world companies and companies built on technology just recently. This idea is key to understanding what the CPG giants are going through. Successful companies have cultures that support their key value propositions. For example, most successful technology companies tend to either be engineering driven or product driven. That is expected given it is their competitive advantage.
CPG giants were built around their traditional marketing prowess. And, their cultures are a reflection of that. But, while marketing matters (perhaps more than ever), it doesn’t matter in the way CPG companies understand it.
But, like all companies, they’ve had to get over organizational inertia and ask themselves how they ought to compete in a technology driven world with different assumptions. So, their focus in the long term has been to buy assets that have “synergy,” sell others that don’t fit in and, mostly, lay off staff.
And, all this while Amazon is making it easier for people by simply asking their talking virtual assistant to do so.

The anti-CPG giant success formula
Let’s go back to the CPG giant success formula.
The CPG giant success formula involved 2 important steps -
- Invest heavily in advertising to build the product’s brand and make customers want to buy it
- Invest in retailer relationships so customers can find the product easily when they go shopping
The formula for building successful e-commerce companies turns out to be the opposite -
- Sell direct to consumers online and cut out all middle-people and costs
- Choose to either build a brand using smart digital advertising or build a subscription based relationship
Away and Brandless
Two recent companies that were in the news that demonstrate this formula are “Away” and “Brandless.”
Away sold 100,000 suitcases by combining a phone charger, an unbreakable exterior and maximum packing space. And, it didn’t waste time trying to find space in retail stores. It sold them all direct to consumer. They have $50 million in revenue run rate, great unit economics and are on track for profitability this year.

But, what’s also interesting is that Away plans to become a lifestyle brand with a new podcast and magazine. This makes sense — they can build a following on the heels of a successful product and, maybe, sell their audience a subscription in the future. But, I would back them to win even if they only picked the brand route — their founders are Warby Parker alums and understand this path better than most.
Brandless, on the other hand, is hoping to change the way consumers buy essentials. Brandless has all the essentials that make up a grocery store at the same amazing price — $3. A couple of interesting excerpts from Techcrunch —
By stripping away what it likes to call the “brand tax” — i.e., all the costs related to the traditional consumer packaged goods distribution model — and going straight to the consumer, Brandless can offer its goods at 40 percent less than comparable products on average.
Another key difference is Brandless packaging, which seeks to highlight the important details of each product. That means pointing out what’s non-GMO, organic, fair trade, or kosher, as well as which things are gluten-free or have no added sugar.
But the biggest difference between Brandless and all the major CPG players is its business model: Rather than sell through traditional retail stores, the company is offering its goods online.

Brandless beautifully encapsulates the key themes we’ve covered in this note — direct to consumer, cheap, transparent and an internet focused business model.
But, there’s another interesting point that Brandless co-founder Tina Sharkey called out — “Most CPG companies don’t have any relationship with consumers,” Sharkey said. “If you think about how products are distributed today, their customers are the stores, not the end consumer.”
Tina Sharkey’s quote illustrates why Amazon is the most important company of our time. Jeff Bezos, earlier than most, understood how the internet changed what it meant to be a customer centric company. Cut costs, sell direct and focus intensely on the customer. Away and Brandless have clearly learned a thing or two from Amazon. Their success is not guaranteed — it never is. But, they are at least starting with the right assumptions.
And, therein lies the single most important reason for why I believe the consumer packaged goods are in trouble . The internet has provided businesses an incredible opportunity to build relationships with their customers. Customer centricity in the age of the internet requires a change in their business models and cultures that they’ve not shown themselves to be capable of — yet. Given their size, the CPG giants will not unravel in the next year. No, we’ll see more consolidation, more activist investors and more cost cutting for the time being. I’m also certain we’ll see a few exceptional companies evolve and become leaner, meaner versions of their current selves built around internet assumptions.
But, for all those who fail to evolve, the stage has been set for their unraveling in the coming decade.
Links for additional reading
- America’s venerable food brands are struggling — on WSJ
- Fresh, healthy food is not a trend. It’s a movement — on Fortune
- CPG consolidation fever heats up as Kraft Heinze pursues Unilever — on MediaPost
- P&G under activist investor pressure — on CNBC
- Away luggage — on Techcrunch
- Brandless — on Techcrunch
- Crossing the technology chasm — on Notes by Ada :)
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