1/Had a wonderful discussion with some amazing consumer investors last week.
Premise was small brands are gaining mkt share in almost every single CPG category. I’ve never met anyone in consumer that debates that. So just for fun we played off that premise.
What then…..?
Premise was small brands are gaining mkt share in almost every single CPG category. I’ve never met anyone in consumer that debates that. So just for fun we played off that premise.
What then…..?
2/ Hypo 1: I think the Personalization of the Consumer (consumers wanting brands/products that meet their unique needs) will continue resulting in further fragmentation. CPG has never had a Power Law, and the “winners” will own even less of the market going forward.
3/ There will be a great number of successful companies, but the winners wont be as big. More winners at $500m-$1b in exit value, not as many >$1b in exit value.
4/ That’s great for investors that stay disciplined and invest a relatively small amount (i.e. <$10m in growth equity) across a large # of co’s. Horrible for the VC that needs to “put $ to work” and write large checks assuming their condiments company is going to own 90% of mayo.
5/ If Hypo 1 is correct…..tech VCs will get squeezed out in years to come as they realize that writing $50m checks at $400m pre doesn’t work when the exit is $500m.
6/ Or maybe my Hypo 1 is wrong and consumers all buying the same 1-2 brands.
7/ Hypo 2: The top 2-3 players in each market will keep their market share. The remaining market share will become even more fragmented.
8/ The top 2 have the resources and positive brand association to keep their share either by propping up existing brands or by buying emerging brands (it wont be through R&D).
9/ If Hypo 2 is correct……acceleration of an already very strong M&A market in CPG. Analogy = Big Pharma, where incumbents outsource their R&D and acquire their growth through M&A.
10/ Hypo 3: There must be consolidation because retailers can’t sustain so many small brands even though they are trendy right now.
11/ This one I disagreed with, not because physical shelf space expands but because I think shelf space gets even more fragmented. Stores need to compete on something other than pricing (or else you will lose to Walmart/Amazon). Assortment will be part of the answer.
12/ More on assortment (and convenience) here:
13/ I think stores will only compete with each other even more on assortment. Not just between two large chains (Kroger v. Safeway) but on a local level. Meaning the KR in SoCal will sell different products than the KR in Dallas. Thus consumer has reason to shop other than price.
14/ If Hypo 3 is correct…..retailers will sell fewer brands, and barriers to entry will raise for small brands. I don’t buy it but still an interesting concept.
15/ Hypo 4: As small brands kill large brands over innovation, the brand equity of large brands will decline- leaving them even more susceptible to private label penetration.
16/ To be clear I think PL will go up as % of sales for a lot of reasons (retailers want it to, higher quality standards, consumer acceptance, etc).
17/ But one influence on PL penetration could be that the decline in brand strength (effectively reverse network effects) for large brands will be influenced by small brands growth.
18/ If Hypo 4 is correct…..decline of large brands will be accelerated because they are battered on both sides (from PL and from small brands).
19/ There are a lot of fun dynamics to think about. The key point is that there is a ton of interesting change happening in consumer -particularly driven by emerging consumer
20/ I like investing into markets that are changing, and changing quickly.
There traditional paradigms change and there are opportunities to unlock massive value.
There traditional paradigms change and there are opportunities to unlock massive value.
