July 23, 2017

Why marketing is not enough anymore (and what you can do about it)

By Cesar Perez-Carballada

All consumer companies are dealing with a number of increasingly difficult challenges: political and economic uncertainty, value-conscious consumers with fast-changing needs, and increased cost pressure due to retailer consolidation.

Traditionally, companies have tried to confront these challenges by improving their marketing impact and reducing their costs. Consumer Packaged Goods (CPG) companies are a prime example. Against all the difficulties, they have typically relied on their main strengths: their brands and marketing expertise. However, it seems that those elements are not enough anymore.

Despite large ongoing investments in marketing and brand building, three out of four packaged goods categories have seen a decline in brand loyalty between 2011 and 2015 (1). Among the top 100 consumer brands in the U.S., 90% have been losing market share and 68% have experienced falling sales (2).

Although private labels (store brands) seem to have peaked, they have grown significantly during the past decade managing to capture 18.1 % of total sales in the US (where they have an average price advantage of 11% vs. the national brands) and 47.4 % in Europe (where the price advantage is 36%), all of this at the expense of the traditional brands (3).

Consumers choose store brands for practical reasons such as price, familiarity and availability. On the other hand, they tend to choose national brands for performance and emotional reasons, such as love and trust (2).

And there resides the problem: brands are losing their advantage in performance, esteem and trustworthiness. Consumer reports show that the performance gap between national and store brands is eroding (4) and, even worse, according to Y&R’s Brand Asset Valuator (a database which includes more than 38,000 brands measured on over 75 metrics from 1993 to the present) brand equities have been falling sharply over the years. For example, over the span of 12 years, trustworthiness dropped nearly 50 percent, esteem fell by 12 percent and brand quality perceptions fell by 24 percent. This fall continued, even accelerated, after the Great Recession of 2008 (5). 

Interestingly, the situation is worse for large companies since growth has been particularly elusive for the largest CPG players: according to a study by McKinsey & Co. large food-and-beverage manufacturers—which account for about half of total consumer packaged goods sales—have remained stagnant between 2012 and 2016, growing only 0.3 percent on average per year. By contrast, midsize companies have expanded sales by 3.8 percent and small companies by 10.2 percent (6)

This trend is confirmed by other studies: according to a report by BCG and IRI (7), large CPG companies have lost 2.7 percentage points of market share between 2011 and 2015 while small ones gained 1.1 pp (mid-size companies gained 0.6 pp). This means that more than $18 Bn in industry sales have shifted from large to smaller companies since 2011.


Why are consumers losing their esteem and trust in traditional brands and why are new small CPG companies performing better than the large old ones? 

The answer is “innovation”. Or the lack thereof. Coca-Cola soda (introduced in 1886), KitKat bars (in 1935), and Clorox cleaner (in 1913) are decades, near-centuries old, and the companies that produce those brands still rely on them to generate a vast proportion of their revenues. Just imagine if giants in other industries changed at a similarly slow rate—we might still be listening to music in clunky Walkman’s and watching ‘Games of Thrones’ in bulky black & white TVs. 

As Ryan Caldbeck, sector analyst, writes in Forbes: “Innovation at large consumer and retail companies is dead. Look to consumer giants L’Oreal, Unilever, Coke, or Kraft: the number of new brands they’ve developed in the last ten years is essentially zero. (8)” 

Large brands consistently miss new consumer trends, judging them to be fads or small niche plays not worth pursuing. Or trying to tweak their existing product lines, a new logo here, a new tagline there, to capitalize on a trend. But slapping “gluten-free” and “organic” and “non-GMO” stickers on stale old products and brands hasn’t worked. It would be akin to Motorola trying to sell today the same “brick” phone that they sold 20 years ago but calling it “smart”. 

It’s not that consumer companies don’t launch “new” products. The problem is that what CPG companies call innovation is typically no more than cosmetic changes to existing products. An analysis conducted by CircleUp and the Cornell Venture Capital Club for CB Insights reveals an unambiguous reality of what’s actually “new” in new product launches (9). 

On average, among the largest CPGs, only 39% of launches are actually new products. The other 61% of the so-called “product launches” are just incremental changes, such as new packaging, a new range extension, formulation or variety, or a re-launch. 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 largest CPGs are launching. 

When looking at the sub-categories, we see that the malady is common across all of them. Carbonated Soft Drinks, Breakfast Cereals, Bakery and Soup are especially immobile, void of significant new product innovation. Some sub-categories over emphasize packaging launches, such as Carbonated Soft Drinks, Breakfast Cereals and Dairy, indicating a focus on selling the same old formula in new ways, without real product innovation.


This reality is more striking when we look at the level of investment in R&D. Data shows that the largest CPG players invest an average of about 6x more in marketing and advertising than they do in R&D, with R&D accounting for a mere ~2% of revenue investments. In tech, where product innovation is front and center, the investment shares are nearly the opposite (9).


This lack of real innovation explains the reason why consumers have turned their back to many brands and lost the trust in them. It seems logical than consumers stop being loyal to brands, it would be illogical if they didn’t. 

It also explains why small CPG companies are gaining market share: their ‘raison d'etre’ is to disrupt existing categories by out-innovating incumbents. People are voting with their wallets, making it abundantly clear that authenticity, value and innovation win—as emerging brands such as Califia Farms and Julep are proving. 

Some large CPGs may argue that they would love to launch new brands and products but retailers have a limited shelf space. That was valid 5-10 years ago but today retailers are now much more willing to put emerging brands on the shelf because consumers are increasingly buying niche brands: they don’t want to eat the same cereal their parents ate; wear the same makeup their mothers wore; or buy the same cat food they grew up with. Go to any supermarket beer aisle today and you’ll see dozens of brands on display. Two decades ago, there would perhaps have been a dozen while four decades ago, maybe six. Consumers are demanding a more personalized offering that meet their unique needs and retailers are happy to oblige. Visit Costco, Whole Foods or PetCo to see this first-hand. 

In addition, alternative models like subscription commerce—BirchBox, Love With Food, Trunk Club (before being acquired by Nordstrom), etc.—are making it ever easier for emerging brands to thrive. Direct channels are also growing fast in many categories. Many of the most successful recent brands have leveraged this approach with excellent outcomes: Bonobos and Betabrand are two apparel companies that gain the majority of their sales directly via their websites and maintain close connections with loyal followers. Own physical stores can also help: Warby Parker has built high-volume, high-sales physical locations to serve as adjuncts and marketing arms for the online business (Warby’s stores drive $3,000 per square foot, more than Tiffany’s or Michael Kors and close to Apple) (2). 

Cutting out the middleman has never been easier: for large and small companies alike, distribution challenges are not a valid reason to get away from innovation.


Thus, what should incumbents do?

Stop being timorous. Stop living off of past glories. Dare to embrace the unknown (after all, the future belongs to those that have the courage to navigate in uncharted waters).

To do so, companies need to spot the right opportunities and then throw the full company’s weight behind them. The problem is that current methods to identify opportunities may not work.

CPG companies typically use two primary methods to spot opportunities. First, they rely on their brand managers to detect and evaluate ‘significant’ trends. However, it’s unlikely that a brand manager of a $500 million brand will find a $2-5 million company interesting. Her focus will always gravitate towards larger brands — even if they aren’t growing, precisely the opposite of a nascent opportunity which is generally small but fast growing. Secondly, companies scout new opportunities by looking at retail sales data from sources such as Nielsen, IRI or SPINS. That’s valuable but it’s only historical data. Sometimes the past is a predictor of future but not necessarily with a substantial shift like what we are seeing from millennials and the personalization of consumer.

Once the opportunity is identified, companies need to develop the brand/product to leverage it. They can do so internally via bold R&D and also externally via M&A.

Bold R&D means going beyond incremental minor improvements that are easier to undertake and are less risky but that are not very relevant for consumers. This approach doesn’t necessarily require high investments because a smart development process can identify failures rapidly in order to reduce the losses and to re-channel the investment to the most promising opportunities. Bold R&D also means going beyond the internal lab to leverage external resources. This requires eliminating the syndrome of “not invented here” as P&G does with the program “Connect & Develop” which finds the best external ideas and bring them in to enhance and capitalize on its internal capabilities.

M&A can be another opportunity for large companies to leverage a successful small brand by plugging it into their vast distribution channels. High profile acquisitions, such as Walmart buying Bonobos, are only the tip of the iceberg: there have been 1,343 M&A deals in retail and consumer sector during 2016, with an average transaction of $83 million per deal (10). The number of transactions is growing steadily showing that more and more CPGs are using M&A as a way to penetrate new segments. Over the past few years, we’ve seen General Mills acquire Epic Provisions, the young meat bar brand in Texas, Pepsi acquire the probiotic beverages producer KeVita, and Estee Lauder snatch up the millennial cult favorite Too Faced cosmetics.

Some skeptics may argue that new products are risky. It is true that only 15% of newly introduced consumer packaged goods succeeds in the market (11) but risk is an inevitable component of innovation. As Theodore Roosevelt said: “the only man who never makes a mistake is the man who never does anything”(12). In any case, there are many ways to intelligently manage risk. For instance, CPGs can leverage the concept of CVC or ‘Corporate Venture Capital’, which is basically the investment of corporate funds directly in a minority stake of external start-ups in a way that the investment is limited but, if the small company is successful, the corporate investor can fully acquire it to leverage its innovations. Free from its parent and its brand managers, a CVC fund is able to find and delve into truly innovative trends. Some active CVCs in CPG sector are Unilever Ventures (which participated in 18 equity funding deals over the past 5 years), Anheuser-Busch InBev and General Mills Ventures (13).

Independently of the specific approach, companies need to start generating real innovations that will catapult them to the next level by reinvigorating their existing brands with new products and by creating new brands that will capture the consumer’s imagination.


Marketing alone is not enough to solve all your company problems and now you know why. Don’t underestimate the consumer with superfluous changes. And if you still decide to do so because it’s the easy route or perhaps you need something to impact your bonus in the next few months, then do so at your own peril: consumers are not stupid and will continue turning their back. It’s far better to build a sustainable future via real innovation.



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 (1) “The 2015 American pantry Study – the call to re-connect with consumers”, Deloitte, June 2015 (2) “Why Early-Stage Consumer Entrepreneurs Are Having More Success Fundraising”, Ryan Caldbeck, Forbes, May 4th, 2016
(3) “Private Label in Western Economies”, IRI Special Report, June 2016  
(4) “Private-label foods often meet or beat the big brands”, Consumer Reports, August 2013 
(5) “Your Brand Needs Energy!”, David Aaker, Prophet, October 2012  
(6) “Winning in consumer packaged goods through data and analytics”, Kari Alldredge, Jen Henry, Julie Lowrie, and Antonio Rocha, McKinsey & Co, August 2016 (based on Nielsen data)
(7) “How Healthy, Protein-Rich Foods are Nourishing Growth in the Consumer Packaged Goods Industry”, IRI and BCG report, April 2016
(8) “As Young, Startup Brands Flourish, Innovation At Large Consumer Companies Is Flatlining”, Ryan Caldbeck, Forbes, May 19th, 2015  
(9) “The Product Launch Fallacy Of Big CPGs”, Ryan Caldbeck, CB Insights, March 20th, 2017 (10) “US Consumer Markets Deals insights Q1 2017”, pwc, Q1 2017  
(11) “2016's Breakthrough Consumer Packaged Goods: How To Succeed In A Challenging Industry”, Monica Wang, Forbes, June 28th, 2016
(12) “The Person Who Never Makes a Mistake Will Never Make Anything”, quote investigator, December 16th, 2014  
(13) “Big CPG Corporates: Where They’re Investing In Food, Personal Care, Tech, And More”, CB Insights, April 25th, 2016


Author: César Pérez Carballada

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