CPGs Face Competition of Biblical Proportions — Part 2

This is part 2 of a 2 part series — CPGs Face Competition of Biblical Proportions. In part 1, I focused on challenges facing the CPG industry specifically because of private label and DTC brands. You can read part 1 here.

With the latest financial reporting on Kraft Heinz, its tumbling stock price and a $15B write-off of the Kraft and Oscar Mayer brands, it’s high time the CPG brands build a robust “offensive and defensive stratgey” against the David’s of the world.

Challenging DTC Brands

If you can’t beat ’em, join ’em, right?

The best way forward for CPGs would be to start building direct relationships with end consumers, evolving their current B2B mindset and developing a sales model much closer to that of their DTC competitors.

But it’s not as simple as setting up brands with their own identity and web presence. Consumers are used to shopping for traditional CPG brands through aggregators — one convenient place where all brands are conveniently located. There is no impetus for consumers to go online and purchase their laundry detergent from the Tide website and then migrate to the Kellogg’s website to buy their cereal.

DTC brands have thrived on their value proposition — a clear and decisive purpose differentiating them from their CPG counterparts along with agility, nimbleness, and rapid speed to market. Did you know, a few years back the average time for direct brands to launch the first product was 7 months, today they can launch a product in 4 months!

Whatever the value proposition for a DTC brand was — be it better for you, cheaper, higher quality — it appealed to a specific subset of consumers and then the entire brand experience was designed around delivering on that offer. Shopping a DTC brand is an experience, not a chore; delivering on that value proposition takes a monumental shift in strategic thinking and a cultural shift from the CPG mindset.

This is why it’s unlikely that any CPG companies are going to open their doors as DTC brands tomorrow and be successful. To view their brands through the lens of a DTC entrepreneur, CPGs should ask two questions: (1) What unique benefit is my DTC website offering that makes consumers feel they need to buy directly; and (2) How do I develop an effective customer acquisition strategy?

In answering the first question, CPGs need to establish what unique value proposition they are offering that will convince customers to deal directly with them. This answer could vary widely from offering exclusive products, much like Warby Parker, to personalization to price. This will establish the value proposition that the entire brand identity and customer experience will be built around.

The second question, how to develop a customer acquisition strategy in line with the DTC operating model, will require a fundamental shift in the way that CPGs think about strategy and growth. For as long as they’ve been in business, CPGs have viewed brand growth metrics as the Holy Grail of product success, valuing the growth of brand awareness over more customer-specific key performance indicators (KPIs). Not the case at DTC brands; they live and die by KPIs like customer acquisition cost (CAC) and Lifetime Value LTV)in a customer-driven operation. The focus shift from brand-builder to relationship-builder will be key for those CPG brands that successfully launch their own DTC channels.

Data, Data, Data

Data is not the key to a successful DTC strategy — the key is being able to analyze the data and create actionable insights that can be executed on-demand. DTC brands have been pioneers in the data industry, dedicating substantial resources to its accumulation and analysis. Positions such as ‘Data Scientist’ and ‘Growth Hacker’ are commonplace in a DTC brand environment, but CPGs typically haven’t had access to consumer purchase data as this resides at the retail level.

To successfully compete in the future, CPGs need to build robust data strategies that incorporate first-party data from multiple streams. Much like their DTC counterparts, CPGs must invest in the resources necessary to build and maintain data intelligence centers.

Buying a Seat at the Table

Of the three traditional investment areas for CPGs — mergers and acquisitions (M&A), venture capital, and private equity — overwhelmingly, CPGs are choosing M&A, accounting for 86% of transactions in the last quarter of 2018.

Don’t let the numbers fool you. Many of these acquisitions have not lived up to expectations as the large corporate brands are unable to integrate these agile, nimble companies into their eco-systems. The acquisition strategy followed by Campbell’s cost its CEO her job and has resulted in continued activist investor pressure on the brand. However, Walmart’s acquisition of Jet.com cannot be seen as anything but successful.

For an acquisition strategy to be successful, the acquirer needs to focus on better integrating the teams that come with their acquisition and extending the DTC’s digital innovation culture to the new parent. The purpose of the acquisition cannot be about integrating functional teams to save cost and inflating the top-line, but an opportunity to bring a cultural change driven by technology and data first thinking, within the organization.

Culture & Technology

To be successful in today’s retail environment, brands must be available whenever and wherever customers are looking. Customers aren’t looking for online or offline brands, only brands that make it convenient and simple to shop. In the retail world of tomorrow, the pureplay companies — be it DTC brands or large CPG — will lose out.

Many of the most successful DTC brands understand this. They have built a culture not just around being an online brand, but around being a brand that can respond to and deliver on its customers’ needs. Technology is then leveraged to deliver the experience its customers expect. To truly compete, CPGs will need to transform themselves into technology-first companies driven by consumer insights.

Who Owns the Future — David or Goliath?

Thanks to technology, CPGs are facing new threats, the likes of which they have never seen. Customer data has made it possible for retailers, who were once CPGs’ most valued partners, to build up their own stable of high-performing private-label brands, competing head-on with national brand names. At the same time, small start-ups have taken advantage of the lowered barriers to entry and built up billion dollar businesses (Kylie Cosmetics) without ever having their products appear on a retailer’s shelf.

As Goliath’s misjudgment of David cost him his life, underestimating the power of these rising forces to disrupt the retail landscape could also mean death for CPG brands. In the future, there will be no ‘offline’ or ‘online’ channels, no name-brand or private-label — there will only be brands who can successfully adapt to the ‘new retail’ model and deliver the exceptional experiences their customers are expecting.

Next time: An overview of the ‘New Retail’ Model and how markets like China are redefining digital commerce.