Thread by @ryan_caldbeck

1/ The concept of a Holding Company in CPG to be the @ProcterGamble for the 21st Century is the worst kept secret idea over the past 24 months.

Kind of a lot of people are trying to build this.

2/ I personally get pitched on it 5x-10x a month. And those are only the emails/calls I respond to. Here is why people are excited about it and the challenges they are discovering to date.

TLDR: I’m bullish on the concept but lots of kinks to be worked out.

3/ The basic idea being kicked around is to acquire (or start) many different consumer brands under one Holding Company. Likely then have some shared “back office” (**murky alert**). Shared marketing/finance/sales as an example.

4/ What drives the excitement about Holding Co’s:

About 97% of people that live/breath consumer think large brands are getting slaughtered by small brands.

5/ A key reason is fragmentation of the consumer (we call it the Personalization of the Consumer). Consumers tastes fragmenting. Consumers expressing their preferences more clearly both in terms of product attributes and brand affiliations.

6/ As fragmentation occurs, companies naturally will plateau at lower revenue ranges today than they did 10 years ago. Those plateaus I think will get smaller over the next 5-10 years.

7/ There won’t be billion dollar revenue winners. They will tap out at lower levels as their consumer base continues to fragment. Call it $200m-400m.

[That’s fine if you were in early as an investor and the brand doesn’t need to raise $100m+]

8/ But that’s a big problem for large strategics. Strategics want to believe their acquisitions can impact the mothership.

They want to think the brands will be billion dollar brands for them.

9/ If they can’t convince themselves that a billion dollar impact is realistic- it just doesn’t move the needle for these strategics. Imagine running a $67B revenue company and the best your M&A team can do is suggest $100m revenue companies that might go to $400m?

10/ But now imagine you are an enterprising investor/operator in CPG and you are seeing this. The trends are clear. These smaller brands are winning. They need an exit.

11/ Why not pull together 10-30 brands and build a multi billion dollar CGP conglomerate that spits out cash and actually addresses the needs of today’s consumer? Maybe use that cash to buy/invest into others…. Didn’t someone in Omaha once do this?

Still there are issues....

12/ Issue 1: Incentive alignment. Buying out the founder/CEO usually means that person that had an irrational passion to run through walls is cashed out.

13/ If you start the brand from scratch you basically have the same issue. It’s one, of many, reasons why internal corporate innovation is rarely successful. Who is going to treat the brand like its their baby after it is part of the holding company?

14/ That issue is less important when you’re dealing with, say @Clorox bleach. The thing is basically a cash cow. But when it is $25m in revenue and you want to grow it to $400m in rev? Someone needs to run through walls.

15/ Issue 2: Brand… .confusion? The most important asset in CPG is brand equity. What does that mean if you’re combining a bunch of brands together. What is the shared benefit on the marketing side?

16/ What brand-related network effects are you building when you combine a popcorn company with a functional beverage with a color cosmetics brand?

17/ Issue 3: Distribution….conflicts? If the products are competitive, then you fight over shelf space (virtual or physical). If they aren’t then the buyers are different buyers- so you don’t have network effects.

18/ Sometimes I hear the Holding Company GM talk about leveraging a DTC approach, then using the data on consumers of one brand to sell them another brand. I’m fairly skeptical of that approach.

19/ Try to think of non-competitive products where you would feel great about proactively sending emails about product X to consumers who bought product Y.

I worry about getting flagged for Spam at worse and having a leaky funnel at best.

20/ Issue 4: Product development. Often, not always, product development in the beginning happens at a CPG co. the same way it happens at a tech company: visionary founder(s). They think about problems to be solved in the shower or at 2am or while on a date.

21/ If you take out the founder mentality do you take out the soul of the product development process? Certainly there are companies (i.e. @Google ) that have solved this. I think its solvable, but its an issue to be solved.

22/ Issue 5: Are there really any shared resources? Maybe you’re saving on some accounting/marketing back end? But if the brands and products are different- do you really save on any synergies in marketing, distribution, product dev? Maybe mgmt talent…..but then....focus.

23/ Despite those issues above, I’m bullish on the concept. After about $10-20m in revenue consumer companies can be absolute cash machines (it’s why consumer PE has averaged a 22% IRR for 15 yrs according to Cambridge Associates, w/ half the standard deviation of tech VC)

24/ So a portfolio of several brands may give you at worst a series of cash machines that should generate consistent cash streams. At best you may have a few call options on future growth.

25/ You might even be building the #BerkshireHathaway for the 21st Century. After all, one of his best investments ever was a CPG brand- @seescandies.
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