Legacy Consumer Packaged Goods (CPG) companies saw CAGR of 2% between 2011 and 2016. This may look good on the surface, but when you consider that the global average rate of inflation was 3% during that time, the situation starts to look a little less rosy. The consumer vertical is actually in decline. From 2009 to 2014, 68% of all large CPG brands had declining sales and 90% had lost market share.
The truth of the matter is, dollars are simply not flowing to the biggest companies. Founder of 500 Startups Dave Mclure notes that, ‘The next bubble is not in tech where innovation and capital are never in short supply. Rather, the real bubble is in far-too-generous P/E multiples and valuations of global public companies, whose business models are being obliterated by startups and improved by orders of magnitude. As more Fortune 500 CEOs recognize and admit their vulnerability to disruption, expect them to hedge their own public valuations by buying the very same unicorns that keep them awake at night.’
The root cause of this is that the way we once looked at the consumer vertical is dead and legacies have failed to keep up. Retailers, manufacturers, tech companies, and service providers are all one and the same now. This is seeing the challenger brand dominate the market, eating the lunch of legacy organizations. Adam Simons, Head of Emerging Brands at The Clorox Company, discussed the issue at the recent Brand Strategy Innovation Summit in San Francisco.
Many years ago, legacy companies recognized they had a growth problem. Their solution was to work with startups, whose growth rates were far better. However, Simon argues that this was not a simple proposition. The competitive barriers that they had built up around them were just too great, holding them back from working with the hot new startups no matter how welcome they may want to make them feel.
These barriers have been growing steadily since the dawn of consumerism. In the 1850s, marketing came down to little more than men like PT Barnum and Richard Sears travelling the country by train with trunks full of goods for consumers to buy. Demand outpaced supply, and Barnum would famously sell goods he didn’t even know if he could make. It was a land grab, and the barriers came up. In the 1960s, demand still outpaced supply but it was getting harder for brands to differentiate from one another. This led to the rise of ad men like Leo Burnett, who invented the romantic concept of what it means to be a brand. In the 1990s and 2000s things changed again, with supply and demand beginning to reach equilibrium. However, manufacturers got involved in an arms race to innovate. Retailers were also contracting though, which led to them having too much inventory yet less space to put it.
In this world, retailers essentially held the consumer captive. They were able to do this because they were the sole source of distribution of consumer products. Communication to the consumer was also done through mass vehicles and was homogenous. Brands talked at consumers rather than with them. The relationship between the consumer and the retailer was largely transactional, no matter how good the brand.
Today it is a different story because supply so far outpaces demand. People are no longer competing in the products they provide, whether they be digital or physical as there is simply too much stuff out there. Brands are instead competing with their business models. There now are myriad ways to gain direct access to consumers for both communication and selling. Sophisticated tools exist to help brands understand consumers as individuals and tailor messages and products directly to their needs, and they are getting far smarter about the tone of voice they employ as a result, rather than just mass marketing. Thanks to social media, consumers are also now powerful influencers and selling agents for manufacturers. This all brings down the unit economics of commerce, which will largely be at the same levels as bricks and mortar - a terrifying proposition for the likes of Walmart.
Another issue driving the rise of challenger brands is that the supply chain has been democratized. It is now open to smaller challengers, who are able to access supply chain in ways they weren’t before as there are no longer such high barriers to entry. Co-pack manufacturers have emerged with terms and MOQ requirements more favourable to smaller companies. Use of asset-heavy SAAS technologies also makes inventory management easier, and increased distributor options open up a variety of different go-to-market models.
Access to capital is also enabling the challenger brand revolution. Challengers are able to gain investment from other sources than large manufacturers and retailers as before, preventing it from being a means of preservation. Capital is being looked at completely differently from challenger brands of yesterday. It is used for topline growth rather than just infrastructure.
So how can the challenger brand today succeed? Firstly, they need a strong story. Why do you do what you do? This is a hugely powerful concept and challenger brands are a lot better at this than legacy brands. Stay true to your story and your principles as this is the number one differentiator between challenger and legacy brands. Next, you need to ask yourself whether you are on trend? Do you meet a need? Most of the minor innovations of the nineties that so flooded the market did not fundamentally meet a need for consumers, and they went broke as a result.
Incubator channels are also a positive for challenger brands. You need to think carefully about where your brand sits. Talk directly with your lead adopters at the front of the innovation curve and let them become the evangelists for your brand. Learn what people like and don’t like and hone your brand identity before you start trying to get on the shelves at major retailers.
The most important thing, though, as it is with legacy organizations, is the people. However, employees at challenger brands require different qualities. They need to be mission-driven. They need to know why they get out of bed and go to work every morning and they need to be passionate about the problems the company is trying to solve. Being a maverick is also of far greater importance at a challenger, the opposite of at a larger organization where dissent is considered a flaw. Employees need to ask the provocative questions and not just take risks themselves, but also to be tolerant of risks that others might take.
In order to participate in this revolution, legacy organizations have to do three things. They have to stop trying to be entrepreneurs. They are the bank. They fund startups, they shouldn’t try and copy them. Secondly, they need to expand the ecosystem and collaborate with companies they may have once considered competitors. They can’t close it off as it will mean less business for them too. Thirdly, they must carve out low-risk parts of your large portfolio as use cases for partnering with challengers. Be wary of corporate venturing though, as there are many risks involved. The challenger brand revolution is happening, and legacy companies need to be prepared or they will be left behind.