Over the last 30 years, some of the largest Consumer Packed Goods (CPGs) and brands built powerful businesses that outpaced the rest of the market. Pursuing constant innovation, expanding gross margins, and growing in emerging markets, large CPGs outperformed the S&P 500 index by almost 15% from 1985 through the Great Recession of 2009. CPGs built strong brands that resonated with consumers and products that were widely distributed through thriving retail channels for several decades. As the Q1 2018 earnings call season wraps up however, the rules of the game changed almost overnight after the Great Recession and the recent results of most CPGs stand in stark contrast to overall market and economic performance. What caused the precipitous decline of these once iconic companies and can they turn it around? We believe the problem lies with the legacy wholesale distribution model and dependency on traditional retailers.

 

tweets
Carl Quintanilla, CNBC – Twitter  &  Bill George, former CEO of Medtronic – Twitter

It worked well…until it didn’t

The growth of legacy CPG brands since the 1980s coincided with store proliferation across the United States as trusted retail partners such as Walmart, Target, and Costco invaded every corner of the country. Business was great for CPGs as their products were in every new store and every new shelf in the country. They focused on heavily marketing their products to retailers to gain and maintain shelf-space as well as customers to create a loyal following. Boosted by the high barriers for new brands seeking to get into retail, CPGs were able to grow as retailers grew. As a former CPG executive told us, “Brands thought they had more leverage than the retailers” — due to their brand resonance.

Then the Great Recession hit.

Shoppers were migrating online and the country was deemed over-retailed with almost 23.6 sq. ft. of retail space per capita. Revenue growth for trusted retail partners began to stall since they could no longer employ the same growth playbook: build it (new stores) and they will come.

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“If you build it, they will come” – Field of Dreams
(also, legacy retail model of expanding via stores)

In response to changing market dynamics and online competition, legacy retailers began to focus on increasing their profits as revenue growth slowed. They accomplished this in two ways: 1) taking more of the margin “pie” from their formerly trusted wholesale brands along with 2) expanding private label.

private labels
Total Consumer Report: March 2018Nielsen

The one-two combination of taking away shelf-space (revenue for CPGs) via private label and then continuing to drive down pricing (margin erosion for brands) has left legacy CPGs battered and bruised. So, what now?

The Rebound Relationship (Amazon)

In response, many legacy CPGs have started chasing revenue growth with Amazon to make up the lost sales. As we wrote before, this is nothing more than short-term thinking — at best — given the potential implications of a voice-controlled future and Amazon’s private label surge. Amazon has continued to push further into private label as it now sells more than 70 of its own brands. It’s hard to conclude anything other than moving branded businesses aggressively onto Amazon will result in a poor ending for those brands. CPGs that continue to list more product on Amazon to chase short-term growth – using their brand strength to attract customers to Amazon – do so at their own peril. The customer data and insights that Amazon will gain because of the brands will eventually be turned against them, as seems to have happened to some ecommerce companies that host on Amazon Web Services.

amazon private label
Amazon pushing private label expansion (concentrated today in Apparel & Accessories but expanding in other areas)L2 Inc.

For a corollary case study on what the outcome may look like, look no further than the relationship movie studios had with Netflix. In the early days, Studios were happy to license their content to Netflix to get incremental royalties from users streaming content online. For Netflix, this was a great way to offer more value to their customers and bring new customer to the platform as well as to have existing customers use the service with higher frequency. The dynamics changed, though, when Netflix began producing its own content and competing directly with the studios themselves. This is precisely the cautionary tale that CPGs should heed when evaluating a strategy with Amazon.

So, what can legacy CPGs do to shift the tides? We look forward to sharing insights from our work and research from growing brands in a subsequent post to identify how companies can evolve in this new world.