By Sonja Leskinen
Direct-to-consumer (DTC) and startup brands have been eating away at the margins of long-established legacy brands for years. From belts to booze to Keto snacks, no industry sector is safe from the onslaught, which is just beginning.
Perhaps the brand that really made marketers take notice of this trend was Dollar Shave Club. Launched in 2011, it quickly captured seven percent of the U.S. shaving market and 30 percent of U.S. shaving e-commerce sales by 2016, according to CB Insights.
Dollar Shave Club, a startup subscription razor company, went head-to-head against CPG powerhouse Procter & Gamble (P&G, owner of Gillette), one of the largest CPG companies in the world, and arguably won. In 2016, it was acquired by P&G competitor Unilever for $1 billion. Just three years later, another shaving startup, Harry's, disrupted the industry and was acquired by Edgewell Personal Care, the owner of Schick and other brands, for $1.37 billion.
The story of DTC or challenger brands competing with legacy CPG companies is not of the traditional David-vs.-Goliath variety. Rather, it is about a handful of Goliaths against a veritable bee-swarm of Davids, which crop up fast, grow faster, and then force the big brands to make significant changes quickly — or suffer the fate of traditional retailers that have filed for bankruptcy in recent years.
Established CPG brands are the venerable, hulking sea vessels of the industry, and are constructed specifically so as to not be able to turn 180 degrees at a moment's notice. They are often more risk-averse with marketing/innovation plans and tactics that need to be measured right up to the decimal point. Innovation tends to happen incrementally, such as focusing on new forms or flavors, versus new operating models and methods to get products in the hands of consumers.
By contrast, challenger brands are built on principles such as simplicity, agility, and customer obsession. They innovate faster and, in many cases, cut out the middleman that legacy brands have come to rely on: the retailers.
Against this backdrop, it's critical for longstanding CPG industry marketing executives to act like a DTC brand and consider ways to adopt their startup mindset — from creating opportunities to innovating internally to datamining.
The ABCs of DTCs
With DTCs nipping at their heels, traditional CPG brands are starting to implement marketing initiatives so they can operate like challenger brands. Take The Kraft Heinz Co., which has invested in incubator programs to mentor, build, and scale startup brands.
Launched in March 2018, the company said its Springboard program was "created to turn start-ups with disruptive products and brands into thriving companies in the food and beverage industry." The unit's brands, which include Ayoba-Yo, Cleveland Kraut, and Quevos, can access Kraft Heinz marketing tools and resources to accelerate growth. In March 2019, Springboard rolled out five new brands across Kraft Heinz's growth focus areas, which include natural and organic, specialty and craft, health and performance, and experiential.
P&G launched a similar initiative in 2015, dubbed P&G Ventures. In an interview with Forbes.com in early 2019, Leigh Radford, VP and GM at P&G Ventures, indicated that the group has a fluctuating number of projects, then between 13 and 20, in the portfolio, plus many more seedlings. The unit also introduced the P&G Ventures Innovation Challenge, giving entrepreneurs the opportunity to pitch their product at CES 2020. Such programs enable larger organizations to wed their enterprise tools and scale to the entrepreneurial mindset and agility of challenger brands to infiltrate new categories and gain market share.
Others are going the "if you can't beat them, buy them" route, with varying degrees of success. The big risk in buying the competition is alienating its core audience and leaving the perception that the seller sold out to the mega brands. One of the more successful examples is Mondelēz's acquisition of Enjoy Life Foods, in early 2015. The Enjoy Life Foods team was vocal about maintaining what made the brand so special — its culture and relentless pursuit to reflect the voice of the "free-from" community.
There's no doubt that incubators and acquisitions help legacy brands advance their business models and compete head-on in the new CPG landscape. However, a larger percentage of CPG brands don't have the budget or capacity to acquire brands or cultivate new brands. So what can those companies learn from these startups? Below are a few insights for brand managers to consider.
Data Plus Human Insight Equals Better Engagement
Legacy CPG brands are the originators of data-driven decision making. Sales data, syndicated data, panel data, and proprietary research has long been the guiding force for CPG business and marketing decisions.
Although there are more and more ways to connect with consumers using data that sits behind each of those connections, the data is often housed in siloed areas of the organization. Sales data is owned by the sales team (and sometimes marketing), customer review data sits with a CRM team, social engagement and listening exists with a third-party social agency, and so on. Time and again, brands fail to look at the data holistically, and leave data points isolated rather than get the full picture.
In contrast, within challenger and startup organizations, the person engaging with consumers via social media physically sits next to the person responsible for sales who, in turn, sits across the aisle from the individual managing and monitoring website traffic. Physical space and proximity enhances collaboration and cross-functional learning, as data and insights can be shared across teams at will. Which is to say, collaboration must be a way of corporate life — not an annual or quarterly occurrence.
With an ongoing, holistic view of the numbers, encompassing consumer sentiment, sales data, and engagement, challenger brands have the ability to respond quickly, capture opportunity, and course-correct (if necessary).
While it may be unrealistic to fully break down the silos of legacy organizations, it should be possible for various departments to collaborate and communicate more openly. To gain full understanding of what is happening within myriad business units, upper management must commit to fostering a climate of collaboration
Personalizing the Message
During the past five to 10 years, there has been no end to the number of project briefs agencies have received from CPG companies listing millennials or, more recently, millennial moms, as the primary target. According to the U.S. Census bureau, millennials total 78.6 million of the population, with $3.1 trillion in spending power, so it's a big pond to fish in and makes perfect sense from a growth perspective. Yet, in a post-digital age, in which consumers expect marketing messages to speak to them personally and consider their lifestyle, "millennial moms" is far too nebulous a group to reasonably target.
Consider the drastic lifestyle differences between older millennials and younger millennials. Or the inclusivity of millennial dads. Urbanite millennial families shop and consume much differently than suburban millennial families. What about the multigenerational influence on millennial households, and specifically among multicultural families? True success in delivering the personalization that consumers and shoppers expect requires a deeper understanding of the people behind the targets, and more important, what they value.
On the other hand, the rationale behind most startups is creating products that more easily fill a need for a more specifically targeted group of people. When executed correctly, a company's values, products, and services, centered around a core target audience, should earn a place in customers' lives.
Chubbies, the apparel brand, provides a solid example. Founded in 2011 by four Stanford graduates, the company's clothing line inspired colorful shorter shorts and swimwear designed for frat guys, aka "bros."
The brand's values are a reflection of its target audience, along with mottos such as: "We believe in the weekend" and "We believe in the right your quads have to a life of freedom and sunshine." Indeed, from its viral social content, e-commerce experience, and customer service, the brand embodies the "bro" philosophy.
While its tone is humorous, Chubbies' numbers speak for themselves: Since its inception, the company has grown into a formidable force in the apparel business, garnering $5 million in venture funding and generating $40 million in revenue, according to CB Insights. The company has also started custom collaborations with celebrities, such as country music star Thomas Rhett in a promotional YouTube video.
Country music star Thomas Rhett partnered with Chubbies to design the "Rhettro Collection," a line of apparel catering to the "bro" crowd — Chubbies' sweet spot. Chubbies Shorts/YouTube
Larger brands should practice setting aside a portion of their marketing budget to test and learn strategies focused on subsegments of their larger target audience, in a meaningful, authentic way. This yields the largest potential for brands to reach the right consumers with the right message.
Foster New Distribution Models
Legacy CPG brands are built around models for mass distribution, whereas DTC and challenger brands have found success within e-commerce and nontraditional distribution models. They are digitally native brands that began by cutting out major retail distribution. Inherent in this model, however, is a problem: What happens when a brand grows big enough to need mass distribution? Some DTCs are finding success in brick-and-mortar locations (e.g., Warby Parker) while still catering to their loyal, online followers. But they also are finding other methods for distribution outside of traditional retail outlets.
For example, protein bar company RxBar started by selling its products via the fitness regimen brand Crossfit. Cargo, a startup that enables rideshare drivers to sell their wares to Uber passengers, has partnered with legacy brands like Kellogg's, Starbucks, and Mars Wrigley Confectionery, according to TechCrunch. Meanwhile, the popular travel and lifestyle brand Away is selling products in hotels. Taking a cue, legacy CPG brands could allocate portions of their budgets to test and explore nontraditional distribution methods that don't begin with "Wal."
The more venerable CPG brands can rival their more agile competitors — those chomping into their profit margins — by leveraging the support and resources they possess for testing and learning. This is by no means a panacea for CMOs and brand managers, who face a severely fragmented business landscape, and a retail revolution spurred by digital media and private label incursions.
Nevertheless, if CPG companies harness the power of a full data picture, focus on a well-defined target audience, and craft new models for distribution, they can make strides in defending their brand's territory, maintain their market share, and maybe even pull ahead of those scrappy startups.
Sonja Leskinen is the associate director of business intelligence at Blue Chip, a partner in the Brand Activation Partner Program.