It is no secret that the largest, oldest consumer packaged goods (CPG) brands have not innovated at the pace they should have. New CircleUp data released here illustrates how big brands have fallen behind. Pepsi soda, KitKat bars, and Clorox cleaner are decades, near-centuries old, and still have largely unchanged formulas. Just imagine if giants in other industries changed at a similarly slow rate – we might still be using clunky Newton computers and dial-up phones.
This is finally catching up to big CPG brands, which now find themselves suddenly losing market share to fast-moving startups at an alarming rate. This is thanks to new market dynamics like cheaper marketing through online channels; sinking distribution costs through Amazon, startup-friendly retailers, and direct-to-consumer sales; and widespread consumer demand for more authentic, high-quality goods and services. Small brands are better set up to swiftly grow, and the Pepsis, Nestlés and Cloroxes of the world are struggling to maintain their foothold.
At the same time, the CPG private markets have been increasingly active. While the biggest public companies may be losing ground to smaller competitors, private CPG companies have raised over $8bn from investors since 2012, according to data from CB Insights.
Scramble for shareholder value
This shift is not going unnoticed by these billion-dollar industry incumbents. As people increasingly skip mass-produced preservative-loaded products, giant CPGs are opting for two strategies to create shareholder value – cost-cutting and product innovation.
Cost-cutting is a band-aid solution, providing temporary relief, but not addressing the root of the issue. It usually involves a merger between two big brands and consolidating operations. The problem is, after the consolidation is complete, the big, and now joined, businesses are still left with the same dilemma – people do not want to buy what they are selling.
The second strategy, product innovation, is smarter in intent, even if underwhelming in execution. CircleUp data shows the biggest CPGs invest an average of about six times more in marketing and advertising than they do in R&D, with R&D accounting for a mere 2% or so of revenue investments. In tech, where product innovation is front and centre, the investment shares are nearly the opposite.
The product launch fallacy
Since R&D has historically been an afterthought for big CPGs, it is no surprise that even today, when facing severe external pressures, giant CPGs are not having the easiest time coming up with exciting new tricks. Innovation just is not in their DNA. In fact, new data from CircleUp and JooHo Yeo, Adam Ingber, and Jay Chia of the Cornell Venture Capital Club reveals a stark reality of what is actually “new” in new product launches.
On average, among the biggest CPGs, only 39% of launches are actual new products. The other 61% of the time, the product launch is just an incremental change, such as new packaging, a new range extension, formulation or variety, or a relaunch. Indeed, a brighter orange color for the Frosted Flakes tiger, or the addition of a blue M&M in your candy, are likely to be the “new” products the biggest CPGs are launching.
Shown another way, above is the breakdown of product launches organised by specific subcategories. Carbonated soft drinks, breakfast cereals, bakery and soup are especially stagnant, void of significant new product innovation. Correspondingly, carbonated soft drinks, breakfast cereals, dairy and juice drinks all see a significantly high number of packaging launches, signifying an emphasis on finding new ways to market the same old formulas.
Get ready for consumer M&A
Where do big CPGs go from here? They know they need to be better, and to their credit, they are starting to take this seriously. We applaud Nestlé for its recent sugar reformulation, and McDonald’s for its shift to cage-free eggs. But the widespread demand for authentic high-quality products from small brands is too powerful for big CPGs’ rate of innovation to reverse the erosion of their market share.
That leaves a final, increasingly prevalent solution – M&A. Big CPGs are turning to small brands to bring in-house the innovation they are failing to produce themselves, by buying brands once they have shown some traction and proven themselves in the market. Over the past few years, we have seen General Mills acquire Epic Provisions, the meat bar brand in Texas, Pepsi acquire the natural Kombucha line KeVita, and Estée Lauder snatch up the millennial cult favourite Too Faced cosmetics. As PwC data shows, the volume of consumer and retail M&A has grown steadily over the past few years, with 2016 showing a sharp increase in small M&A deals, illustrated by a higher total number of deals done of lower dollar amounts.
We expect the volume of small M&A deals in 2017, and throughout the following five to 10 years, to climb steadily. Big CPGs have no other choice. In the consumer industry, the age-old saying will be: “Those who cannot do, buy.” u
This is an edited version of an article first published by CB Insights