Given the current state of retail, and the escalating tensions between retailers and their CPG partners, one strategic move for CPGs that merits consideration is to “integrate forward” and acquire a retailer for direct consumer access. This strategy bucks the trend of merging with other CPGs (such as Kraft & Heinz or Anheuser-Busch & InBev) and relieves the pressure from several important headwinds in the market today.

A prime candidate for such a move would be Procter & Gamble (P&G).

P&G has not had many wins in recent years. It lost an estimated $100M+ proxy fight with activist investor Nelson Peltz’s Trian Partners in December, amidst a narrow vote recount reminiscent of the “hanging chad” debacle of the Bush-Gore election of 2000 and the famous “Dewey defeats Truman” headline from the 1940s – wherein P&G declared victory prematurely. The proxy fight featured big dollars and drama.

In the end, P&G was edged by Peltz, and now management, tail between its legs, will be forced to change. Trian’s $25M campaign – summarized in its 94-slide PPT bludgeon, entitled “Revitalize P&G”– highlights how it believes the company should transform. Analyzing the recommendations, combined with the fact that P&G has lost almost 20% of its revenue over the last five years (with, admittedly, some brand divestitures), acquiring or merging with a retailer isn’t crazy.

Here are the three biggest reasons why:

  1. Rise of private label and increasing retail demands. Retailers’ private label brands continue to take market share from CPG companies – private label now accounts for an almost 20% share of the market. When are CPG companies going to wake-up and realize they’re in a “complicated relationship” with retailers? Combine this private label share increase with retailers making bolder asks of their vendors (i.e. Walmart asking vendors to move from 75% on-time ship to 85%) and one wonders when CPGs are going to regain leverage.

Quick guess: likely never.

  1. Focus on innovation; test & learn. It’s getting harder and harder for CPGs to balance innovation with driving sales – in fact, Peltz made a point to call out P&Gs lack of innovation. Today, more than ever, direct access to consumers is critical. Case in point: Harry’s succeeded, in large measure, due to vertical integration. What better way to innovate quickly than to have a nationwide retail footprint and the data associated with the effort? Why not put Tide Dry Cleaners in retail stores and offer more services? Retail needs more innovation in brick-and-mortar locations, and CPGs, like P&G, would love to have built-in labs where their brands can test new concepts.
  1. Voice-controlled future = bad news for brands. It’s clear a voice-controlled world is here to stay and to thrive. Amazon is ‘doubling down’ on Alexa. Google and Apple are all in on voice as well.

What does this mean for CPGs? As Scott Galloway of L2 has reiterated, this is bad news bears for brands. A move to acquire a retailer helps combat the outcome of a brand-diminished world via voice through direct distribution to consumers. This allows them to manage subscriptions or shape any potential brand loyalties.

The market dynamics are clear. P&G needs to access customers and elevate their brand experience to succeed in the long-run. If a brand, such as General Mills, will spend $8B on a pet food company, why shouldn’t a CPG purchase a retailer to own the distribution and customer data, rather than trot out the same playbook? Said another way: if you’re a consumer goods company, would you have rather purchased Blue Buffalo for $8B or a retailer — such as Whole Foods Market — for $15B this past year?

A couple retailers stick out as potential fits for P&G via acquisition:

  • Target – There’s a healthy overlap between P&G brands’ customers and Target’s (middle-class Moms) – in fact, at one point in the not too distant past, P&G accounted for roughly 10% of Target’s sales. Despite the strong performance in Q4, it seems that Target doesn’t have a clear vision for its future beyond remodeling stores for the next couple of years. An acquisition by P&G could help it get started on a clearer path: an elevated experience hub for Moms and their families – something that’s clearly differentiated from other retailers.
  • Boxed – An ecommerce player which sells household items in bulk, Boxed would be a great acquisition for P&G to get into the retail game at a low price (Boxed is currently valued at $470M). It would give P&G an immediate platform to go direct-to-consumer with a retail value proposition that aligns well to its core portfolio: household items. With Boxed at a relatively early stage, a P&G acquisition would provide the financial backing to continue expanding – potentially even into brick-and-mortar with a different model than club stores.
  • Kroger – Two Cincinnati-based companies that have had their share of recent struggles? Kroger’s national footprint make it a good synergistic target for P&G. A Kroger/P&G merger could help both companies a) develop a more holistic solution for high frequency grocery shoppers through improved in-store experience and a “one-stop shop” for local communities along with b) allowing P&G to get a first-hand look at natural and local suppliers which Kroger has been focused on. On the latter, providing a testing ground for brands – via Kroger stores – paired with P&G’s marketing and trend chops, would lead to a more fruitful pipeline of innovation and relevant assortments for customers. Lastly, Kroger is a relatively good deal with it’s market cap at almost 1/3 of its annual revenue.

The first step for P&G is to acknowledge the changing market dynamics to identify a holistic solution that addresses the issues before it’s too late. At the end of the day, the shift revolves around competition from private label, new consumer expectations, and the rise of technology-enabled convenience. Acquiring a retailer enables P&G to develop new brand concepts by staying on top of changing customer preferences and better control their own destiny.