Let’s face it: the world today feels like it is changing faster and more aggressively than any other time in recent history. If you work in the Consumer Packaged Goods (CPG) industry, you already sense that your professional life is not insulated from this extreme environmental change. Everywhere you turn, iron-clad brands and retailers in the CPG space are now showing cracks in their armor.
This is especially true for mass or legacy CPG brands. These brands are feeling the squeeze from all angles, but particularly from their biggest retail customers that are starting to directly compete with them by launching private-label brands.
Gone are the days of generating a reliable, perpetual growth trajectory through mass-market brands. The previous value-creation sales and marketing models that fueled industry success now face great pressure as consumer behaviors shift and the channel landscape changes. To win in the coming decades, CPG brands need to reduce their reliance on mass brands and offline Food, Drug, Mass and Convenience (FDMC) channels and embrace an agile operating model focused on brand relevance rather than synergies.
What has changed?
If you read that introduction and thought this private-label problem is nothing new, think again. It’s true, FDMC retailers’ private-label brands are nothing new to the CPG industry. Mass/legacy brands have shared shelf space with them for decades.
The main difference is that these private-labels brands are now seen less as “trade downs” and more as huge revenue and profit drivers for retailers. Because of that, retailers have heightened aspirations. As more FDMC retailers invest in diversifying and improving their private-label offerings, Kantar Retail’s grocery analysts have predicted that private label growth between now and 2022 will outpace the previous five years.
Let’s look at some recent industry highlights:
- “Albertsons Companies is on pace to introduce nearly 1,400 new Own Brands products to its family of stores in 2018, a more than two-fold increase over 2017 that further demonstrates the company’s confidence in developing exclusive products across all categories.” In the official press release, Geoff White, president of Own Brands (Albertsons’ private portfolio), said the company has “a lot in the pipeline.” Earlier this year, its O Organics label became a $1 billion brand.
- According to Barron’s, “Last year, Kroger’s sales of private-label goods totaled $20.9 billion, or 26% of total sales, one of the highest penetration rates among traditional grocers. That includes $2 billion for Simple Truth, a natural and organic brand launched in 2012, which is growing at a double-digit clip.”
- After the Whole Foods Market acquisition, Amazon.com sales of the 365 Everyday Value brand totaled $10 million in just three months, according to One Click Retail.
I could keep going, as almost all publicly-traded retailers have noted this trend in their recent financial reports, but I assume you get the point. So, why is this happening?
Why are these changes happening?
My theory is that when the Great Recession hit its peak in the second half of 2009, consumers (especially millennials coming into the economy) were left with less discretionary income. Because of this, they were more willing to give private-label brands a chance, despite growing up consuming or consistently buying mass/legacy brands. After the trial proved acceptable, these consumers were more willing to trade down to private-label brands.
According to an IRI Consumer Connect survey, private-label items are most popular among two demographics: lower-income and millennial shoppers. 89% of lower-income shoppers and 90% of millennials are buying private-label items to save money.
Despite the economy strengthening over the last eight years, FDMC retailers saw this emerging trend and doubled-down on the product and brand development pipeline of private labels.
Today, this competition clash between mass/legacy brands and retailer-owned private-label brands seems to be at an all-time high. This competition has stressed the normal CPG value-creation sales and marketing model. No longer can big brands focus on pushing the 4Ps of marketing:
- Product: Have you tried private labels lately? They are usually just as great as name brands because many of them are made at the same contract manufacturer.
- Price: How do you compete with a private-label brand that has similar COGs as you but doesn’t have the added cost from wholesale buying?
- Promotion: Store shelves are now packed with choices, so normal push marketing will not gain the attention that it once did.
- Placement: Private-label brands are now being offered across all categories and channels at the retailer, so there is less white space.
So, as a mass/legacy CPG brand, what should you be doing to combat this trend?
What should big CPG brands do?
Think like a media company.
First and foremost, big CPG brands need to take ownership over their communication with customers. At the same time our country was hitting peak Recession, social media companies were rolling out feature sets that allowed businesses to have a presence on their massively growing platforms. This shift in communication was arguably the biggest since television in the 1940s. For almost 70 years, brands had to pay large amounts of money for national television advertising because they did not have the means to self-distribute content. Today, they have the same access to distribution as any media company. A global audience awaits to connect with your brand’s story on social media platforms like Facebook, Twitter, Instagram and YouTube.
"For almost 70 years, brands had to pay large amounts of money for national television advertising because they did not have the means to self-distribute content. "
Reduce retail channel reliance.
As stores push private labels more aggressively, CPG brands will increasingly seek to control their own points of sale. One of the biggest and broadest shifts is with big CPG brands growing their direct-to-consumer e-commerce websites. This allows brands to control the buying process and offer experiences that are best delivered without wholesalers and third-party retailers. Additionally, some brands are vertically integrating themselves by opening their own stores. One creative example is how Kellogg’s opened a cereal cafe in Manhattan late last year. Instead of making it like any other “café,” Kellogg’s focused on creating a unique experience that also considered marketing trends like Instagram food postings.
Seek rich customer data.
The shift to focusing on direct-to-consumer e-commerce websites and social media has provided a great deal of opportunities for mass/legacy CPG brands. Arguably the biggest opportunity is the ownership of a massive amount of rich customer data that can be analyzed to make stronger business decisions. This is a huge shift from the past, as brands used to rely on their FDMC retail partners to report customer information back to them. This information was often vague or hard to manipulate for various needs.
Alternatively, a brand can now get as much customer data as they need. L’Oréal, for instance, discovered that ombré hair color was trending on social media. The cosmetic company responded with a new product and backed it up with a dedicated consumer marketing plan. This customer and market data can sometimes be only seconds old, and this speed can give you advantages of being first to market on trends.
Expand your portfolio.
The quickest way to separate your product from private-label offerings is through innovation. While private-label brands may attempt to emulate innovative products, consumers will likely first associate those unique products with mass/legacy CPG brands.
If your brand’s core competency is not innovation, use mergers and acquisitions (M&A) to fill your pipeline with offerings from emerging product categories. On the other hand, don’t only look at lateral M&A targets. As an example, Nestlé invested in direct-to-consumer startup Freshly last year.
Finally, look to diversify big M&A targets by taking little product or brand bets through a venture fund or incubation unit. This will allow you to “peek under the hood” at different concepts without committing the bulk of the company’s creative and product development resources to internally build.
Joshua Schall, MBA has an 11-year background in the emerging and intersecting CPG/FMCG categories of functional food and beverage and nutritional products.
He currently is the owner of J. Schall Consulting, an Austin, TX-based boutique management consulting company that focuses on digital growth strategies for CPG/FMCG brands that range from pre-launch to portfolio companies with $500M in yearly revenue.
Joshua enjoys an active healthy lifestyle but still finds himself spending way too much time scanning social media and digital grocery aisles for new consumable brands.