For the last 40 years leading up to the global financial crisis of 2008-2009, the CPG industry generated the second highest total return to shareholders across industries, topped only by the materials industry. The category was led by CPG giants like P&G, Unilever and PepsiCo., which relied on mass-market brand-building and product innovation and partnerships with mass brick and mortar channels to gain broad distribution. Their dominance seemed unstoppable.
However, over the last decade, the CPG industries performance overall has faltered. Why? One key reason can be explained by the meteoric rise of smaller CPG brands and the subsequent impact on incumbent market share.
Small CPG Rising:
Highlighting a changing marketplace dynamic, one McKinsey study from 2017 to 2019 noted large brands in the U.S. lost volume at the rate of 1.5% a year. At the same time, small brands grew 1.7%.
While this trend existed pre-pandemic, it was accelerated in 2020 as more and more people hunkered down in their homes. Ecommerce sales for CPG grew from 37% to 80% penetration, and 40% of consumers reported trying new brands. We all used everyday products faster than normal, and many added a new brand or two.
Belief Drives Behavior:
Another key trend disrupting old ways of doing business can be explained by a shift in consumer beliefs. Consumers now have access to many ways to learn about brands, and younger consumers want brands they see as different and authentic. Bottom line: Small brands are innovating to deliver on these values and are able to adapt faster than large brands.
CPG giants are taking notice: Similar to craft beers a decade ago, where large brewers stopped innovating and instead acquired smaller craft brands, CPG giants are deciding it’s easier to let these innovative D2C brands hit a point of critical mass and then acquire them. Case in point is Unilever’s and Lactalis’ purchase of Dollar Shave Club and Siggi’s yogurt respectively.
So how should CPG brands ensure success in a changing marketplace? By adopting what works, and what meets the needs of today’s consumer. No matter their size, CPG brands, need to be taking these steps:
1. Employ relevance-led brand building, innovation and marketing. Leverage data and listen to consumers to maintain relevance and grow market share.
2. Partner with all growing channels and embrace digital sales. Successful companies will focus on omnichannel engagement, their digital route-to-market, and e-marketplace management.
3. Evolve the operating model to excel at local consumer closeness. CPGs need to continue refining the new model that looks quite different from the old model. The new model uses scale advantages in marketing spend, distribution, supply chain and back office, but leverages digital to shift from mass marketing/sales to targeted messaging.
The pandemic highlighted how critical CPG brands are to our daily lives, and consumers’ willingness to try new ones. With brand switching nearly doubling since 2019, now is the time for smaller CPG brands to lean into what makes them different.