Why haven’t CPG giants figured out what makes small brands so popular?

Photo: Dirty Lemon
Oct 23, 2018
Matthew Stern

Titans of the consumer packaged goods industry may be in trouble as they continue to face significant competition from smaller counterparts. In fact, small CPGs are now leading the industry’s growth if not outright market share.

Since 2013, $17 billion in sales have shifted from major CPG players to small ones, according to Forbes. And the fastest growing CPG segment this year was “extra small” brands, defined as making less than $100 million per year, with growth of 4.9 percent. Large players, defined as making more than $5.5 billion per year, lagged behind with only 0.6 percent growth. There is a confluence of factors responsible for the spike in small CPG success and the waning market domination of conglomerates that once had only each other to worry about.

Direct-to-consumer e-commerce has allowed customers to discover and begin buying from brands they’re interested in without needing to visit grocers where big name brands may be more prominent. And with some direct-to-consumer brands, like “active” drink company Dirty Lemon Beverages, offering direct-to-consumer subscription services, the convenience creates an element of brand lock-in that may keep potential customers from trying competitors in the category. 

Large CPGs may also be suffering from an inability to move quickly enough to address market trends. It took a while for big CPG companies to move into areas like coconut water and whey protein bars, which were long dominated by independents.

The widespread use of Amazon.com’s marketplace by customers is also playing a role, as Forbes notes, with small brands becoming top sellers on the platform.

But bigger CPGs have been making moves to get in on these markets, often by acquisition rather than innovation.

For instance, in 2016 Unilever acquired the subscription-based direct-to-consumer pioneer, Dollar Shave Club, for $1 billion.

And last December saw a spate of acquisitions of smaller “better for you” brands by major CPGs. Hershey acquired Amplify Snack Brands, maker of brands like Oatmega whey protein bars and SkinnyPop popcorn, after earlier acquisitions of Krave Jerky, Brookside Foods and BarkThins. Campbell Soup acquired Snyder’s-Lance, owner of Snyder’s of Hannover pretzels, Kettle Chips and other snack brands.

DISCUSSION QUESTIONS: Why do you think small CPG brands are doing so well in today’s shopping landscape? What will this mean for larger CPGs going forward?

Please practice The RetailWire Golden Rule when submitting your comments.
"The real open question at this stage is whether the new demand patterns are compatible with big, traditional CPGs’ business models."
"In today’s post-mass consumption society, scale does not translate well into desirable consumer sentiment and purchase."
"Ubiquity in modern retail can be a death sentence. Supreme drops, Yeezy launches, and limited edition releases are driving retail, and CPG is no different."

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23 Comments on "Why haven’t CPG giants figured out what makes small brands so popular?"

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Neil Saunders

A lot of this has to do with culture. Compared to smaller firms, large CPG companies are nowhere near as good at innovating; they tend to be more incremental than radical in their innovations. When consumers want to be excited by newness, this means they migrate to more niche brands.

From consumer research we have done, it is also the case that while large brands have better recall than smaller brands, those smaller brands are seen as more trustworthy and authentic. This is especially true for younger shoppers.

Aside from how brands make consumers feel, a critical factor in the success of smaller labels is that the retail environment is now more conducive to the showcasing and discovery of new products.

Anne Howe

Your retail environment comment is right on the mark!

Keith Anderson

“Emerging” or “insurgent” brands are simply more responsive to new and fast-growing pools of demand. With nothing to defend, they’re able to invest and act more aggressively.

Large brands actually do understand this. Between 15 percent and 20 percent have even launched brand or technology incubators/accelerators, some as independently operating companies, to try to replicate small brands’ success.

The real open question at this stage is whether the new demand patterns are compatible with big, traditional CPGs’ business models.

Bob Amster

They are probably formed by a younger generation which is, by definition, more in tune with its target audience of consumers. The large CPGs are smart to go on the acquisition path because they can provide certain expertise and economies of scale to the “upstarts” while the smaller CPGs can show the parent how to perform nimbly in today’s market.

David Weinand

As you point out – the barriers to entry for small brands have been eased with the advent of direct-to-consumer options. In addition, consumer preferences are changing to lead with healthier options, more transparent sourcing and more efficient means to acquire. Big CPGs have been stuck in the traditional distribution channels and rely heavily on brand extensions rather than new, innovative products (how many more different kinds of Oreos can they make?). Legacy CPGs, like so many of the large enterprise companies across industries, are stuck in heavily process-oriented cultures where innovation is difficult. As we’ve seen, many have realized this and have gone on acquisition sprees of smaller, more nimble brands. That is the way to go forward for them so that they can start to better understand new distribution channels and new ways to appeal to today’s consumer.

Ralph Jacobson

Whether direct-to-consumer or not, smaller brands have figured out how to “punch above their weight” by trading online and looking like the big brands. Similarly, big brands can also create the perspective of a boutique brand as some have done successfully with the creation of new labels that cater to that audience.

Dr. Stephen Needel

A couple of points here. First, it’s much easier for a small brand to grow, on a percentage basis than for a large brand. If my math is right, you’re looking a 5 million in growth for a small brand, 33 million in growth for a large brand. Scale matters. Second is that small brands can appeal to niches and don’t have to generate the revenues and profits that a larger brand does. They tend not to advertise or to advertise inexpensively and they don’t have to deal to the trade as much. What does it mean for large brands? Not much.

Anne Howe

Culture and nimble action are the markers of success for small brands. And consumers can’t help but chase new! In a big CPG, new means line extension. Not sexy enough to turn on a shopper’s innate desire for something really different or innovative.

Adrian Weidmann

Many consumers want to discover something new and innovative for themselves. We want to have a sense of being unique, different, individual — as opposed to simply buying a commodity that everyone can get at Walmart. These small brands cater to that mindset. As they get acquired by these mega brands and are absorbed, they’ll lose that edge that made them attractive to their customers in the first place. These small brands want commercial success but get there through hard work, innovation and wanting to bring their customer something unique. The CPG giants are just driven by numbers — period.

Zel Bianco

Some have commented that it is a good thing that big CPG has acquired the smaller brands because they will show them the ropes and help them grow. To some degree, this may be the wrong approach as the founder of Function of Beauty has stated, “if we were to partner with Sephora, we would become just like every other shampoo brand.” He knows that what makes his brand special is that it remains independent and laser focused on the personalized manufacturing process he has created. Yes, it makes sense from a financial perspective for the smaller brands to sell out to the large, but will they be gaining wealth and losing their “special sauce” in the process?

Brandon Rael

Smaller CPG brands are simply more agile, innovative, and increasingly connected to the local communities. They are far more responsive to the changing consumer tastes, industry trends, and willing to experiment. These local community-based CPG brands go out of their way to keep their customers happy, across both physical and digital as well as social media channels.

Simply put, larger more established firms are far more focused on economic scalability, distribution and efficiencies. Some larger brands have made incremental changes to improve their offerings. Yet more significant innovations seem to happen via acquisitions, especially the smaller CPG brands. The larger brands are adjusting their strategies with their own internal incubation and creativity labs.

Ryan Mathews
Part of the problem is that, in today’s market, David is seemingly always more popular than Goliath. Today’s consumers see their personal values reflected better in boutique, entrepreneurial brands. Part of the problem centers around the willingness to embrace risk. If I, as Rasta Ryan’s Coconut and Chia Seed Wellness Pops, fail I go on to my next project. If Coca-Cola takes on a similar product and fails — they fail very publicly, at scale, in front of the analysts, upset the shareholders, etc. While entrepreneurial companies might have everything they own on the line, “everything” is generally measured in terms of sweat equity and cash. Big brands simply have more ways to fail — loss of reputation, impact on existing portfolios, the size of investment needed for a national run, etc. And there is the issue of return on investment. If I’m an entrepreneur and I clear say $300,000 a year, I’m ecstatic. A big brand offering that generates a return of 1 percent on a trial product may be great in terms of… Read more »
Ray Riley

Ubiquity in modern retail can be a death sentence. Supreme drops, Yeezy launches, and limited edition releases are driving retail, and CPG is no different. Scarcity is a powerful factor.

Mohamed Amer
Mohamed Amer
Independent Board Member, Investor and Startup Advisor
8 months 24 days ago

Size and scale are extremely powerful in driving product and delivered cost per unit as low as possible. In today’s post-mass consumption society, that scale does not translate well into desirable consumer sentiment and purchase. Today’s perceptions expands the “small is beautiful” adage to small is simple, clean, healthy, and in tune with nature.

What once was an enviable advantage, size and scale have become a liability unless the titans of industry can change the narrative through deliberate actions along tangible dimensions such as ethical products, transparency of ingredients, higher nutritional value and better environmentally-sensitive packaging.

James Tenser

Large CPG brands have always leveraged scale to achieve returns and market power. Huge ingredient orders. Long manufacturing runs. Car-load deliveries to the distribution centers and truck-load deliveries to thousands of stores. Mass advertising and promotions.

You are quite correct, Mohamed. We are in a “post-mass consumption” era where these sources of market power may be devalued. I think the advent of digital commerce has had a relatively small amplifying effect.

Start-up brands have long leveraged their creative advantages by appealing to niche market segments that are often overlooked by mass marketing. The goal is to build enough of a brand following and profit story that the giant CPGs feel the need to buy them out.

A notable success story in this regard is Annie’s Homegrown, an organic packaged foods business that was acquired in 2014 by General Mills. Its founder, Annie Withey, had previously created the Smartfood snacks business, which was sold to Frito-Lay.

Camille P. Schuster, PhD.

Small CPGs are offering alternatives that appeal to consumers. With e-commerce small CPGs have been able to make themselves known to consumers. If large CPGs are responding by purchasing small, successful companies rather than introducing new products themselves, they do not understand their consumers well and will be also-rans with consumers rather than leaders in the category.

Andrew Blatherwick
There are two major factors that play a part in small brands becoming more popular and seeing higher growth than major CPG brands. First, the internet has opened access to startup brands that could never have hoped to get on the shelves at major retailers because they did not have the required investment in sales forces and marketing. Second, consumers are looking for their own identity moving away from the aspirational me too generation where mass market was appealing. People rarely watch TV in real time now so the massive advertising campaigns employed by the large CPG companies are less relevant. What will happen as these small CPG companies grow and become large? Will they lose their appeal? Will customers look for new brands again? One thing that is for sure is that not all brands can go direct to the public or we will not have enough room on the planet for the vans needed to make deliveries, nor the oil to keep them on the road, not to mention the damage that would… Read more »
Lisa Goller

Since 2015 I’ve collaborated with a company that connects huge retailers to small, popular brands, so I see this trend firsthand. Smaller brands excel at listening to consumers, pinpointing market opportunities CPG giants ignore and quickly adapting to changing consumer trends. Smaller brands aren’t encumbered by stagnant legacy systems and obsolete mindsets.

Such adaptability makes money. Consumer demand has evolved from CPG leaders with a mass-market mindset to smaller disruptors who adapt to fragmented consumer tastes (e.g. local, organic, free-from, sustainable and keto vs. foods laden with sugar, salt and fat).

To remain competitive, CPG leaders continue to acquire smaller brands (e.g. Kellogg bought RXBar for $600 million) or launch new product lines that address these new niche to stay relevant.

Doug Garnett

That Fobes article overstates the situation. As we see many other places, the digital information and sales channels allow niche players reasonable success but the costs to scale are so massive that the big players continue to dominate.

For example, P&Gs latest numbers show revenue AND profit growth.

My sense is that there are investors who want the myth of anti-brand to be true and are funding the ability of these small brands to appear more successful than they are.

Michael Decker
This one’s pretty easy when you start to analyze TODAY’s burgeoning consumer marketplace. Today’s shoppers (especially Millennials) have a voracious appetite for “what’s new” and they have a lightning fast social media apparatus to research and find out what’s “hot” today! Large CPG’s are not set up to innovate. They are set up to produce vast volumes of product and to collect on what we used to call “Cash Cows”. They are generally slow and risk averse (because of their monolithic production and distribution investments). And they still make most of their money through traditional retail channels (chain grocery stores secured with paid shelf allowances). Once a disruptive, independent product proves itself, it behooves a behemoth CPG brand to simply acquire it. Once it’s acquired though, it’s probably not new anymore and so the growth cycle continues to favor the latest category disruptors. This phenomenon gets compounded when savvy Millennials drop the new “corporate brands” simply because they are suddenly “bottom-line corporate” and no longer true to the causes that attracted them to begin with.… Read more »
Craig Sundstrom

With all respect to Matt, the main point — small brands have higher growth than big brands — is a “duh!” moment: it’s not hard (relatively speaking) to reach more people when you’re currently reaching almost no one then when you’re reaching everyone … or at least a large fraction of everyone.

So are small brands doing well? I’m not sure. Certainly there are success stories that we hear a lot about, but I’m sure there are plenty of failures too (that we don’t hear about), and there are lot’s of old, established, but small(er) brands that fade away … even Ivory soap, by some accounts, is on the ropes. My thought is, it’s just the ole (product) cycle-of-life at work.

Mike Osorio

It’s a perfect environment for the rise of small CPG brands, and frankly for all small brands as well in areas of fashion, technology, etc. The public has built up a basic distrust in large enterprises including government and large companies. The consumer is easily exposed to the latest trends via digital platforms and influencer recommendations. Technology has enabled small companies to immediate act as if they were large in everything from supply chain, finance and product development and marketing. Investors have turned their attention on the outsized returns available in fast growing startups, thus giving these companies significant leverage to invest in quick ramping up of sales and profits.

In the end, all this leads to today’s reality: consumer demand and a plethora of small companies ready to deliver against those demands.

The large CPG companies are indeed investing in incubators and acquisitions, but it remains to be seen if that strategy can create returns that slow drawn the trend of investment in more and more small brands.

Jeff Miller

Large CPGs have just been way too slow to react to change. The food, beverage and skincare verticals are probably the most impacted. There are still smart people leading these huge CPG companies who assume that the 3% historical growth rate will continue, even though the opening of new retail stores which created the lion’s share of this growth is now heading in the other direction. Small CPGs can now use easy-to-use platforms (Shopify), marketplaces (Amazon), media (Instagram) to build to a decent size without spending massive investment on TV media, inventory to stock 1,000 doors, and in-store marketing.

"The real open question at this stage is whether the new demand patterns are compatible with big, traditional CPGs’ business models."
"In today’s post-mass consumption society, scale does not translate well into desirable consumer sentiment and purchase."
"Ubiquity in modern retail can be a death sentence. Supreme drops, Yeezy launches, and limited edition releases are driving retail, and CPG is no different."

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