Over the last few years, leading CPG manufacturers have taken a hit from smaller, more agile brands that are better able to react to quickly changing customer preferences. Since 2009, small and medium sized CPG companies have captured a full two points of market share from the industry’s biggest players, which may seem small but actually amounts to nearly $18 billion in lost sales—this is only the tip of the iceberg. Center store grocers are suffering, big box retail appears to have plateaued, and the industry has been rocked by moves like the 3G Capital/Heinz acquisition of Kraft.
Powerful online tools like social media marketing and direct-to-consumer e-commerce have given smaller firms access to markets previously out of reach. At the same time, the ability to outsource back-end administrative, manufacturing and operational functions further lowers the barrier to entry. Small and mid-sized CPGs are seizing the opportunity presented by empowered customers and the lower barrier to market entry by catering to customer preferences for niche products like artisanal and natural foods and non-toxic cleaning products—the kind of products larger firms have been slower to offer.
Disruption in the CPG industry is driven by a confluence of interconnected factors, including rapidly evolving demographic, attitudinal and retail behaviors. More than three-quarters of Millennials, according to a 2014 brand loyalty study from Adroit Digital, say their evaluation of brands is based on a different set of criteria than that of their parents. With so many options available online and more increasing every day, they aren’t constrained to the same set of choices, nor the same brand loyalties of earlier generations. They are savvy and empowered consumers who seek out products that reflect their own personal values. They are also adept at leveraging the wealth of information at their disposal to compare products across multiple channels before making a purchase.
As an age cohort that grew up as the world went digital, Millennials are comfortable in the growing e-commerce landscape in which small, insurgent CPG firms thrive. In a report published by Deloitte last year, data shows that customers already buying consumer goods online expect to buy 67 percent more in a year and 158 percent more in three years. The CPG executive respondents in the same survey stated that they expect to see 35 percent growth in online sales overall in just one year.
Big consumer packaged goods businesses have responded to the rising tide of competition from smaller brands with three strategies: Sue, Buy or Imitate.
Irritated with advertising claims from smaller players that stretch the truth, some major players in the industry have been taking their frustrations to court. Unfortunately, while legal battles may help keep small firms from making dubious advertising claims, they won’t win over empowered and idealized customers who seek an authentic and personal brand and product experience.
Large CPG manufacturers are also buying smaller upstart competitors in an effort to neutralize their impact. General Mills’ recent purchase of Annie’s and Mondelez’s recent purchase of Enjoy Life Foods are notable examples. Deryck van Rensburg, president of Coca Cola’s Venturing and Emerging Brands division, estimates that the industry will see one-third of its North American growth attributable to disruptive brands in new categories over the next five to ten years. But simply buying emerging competitors assumes the competition wants to be bought. And it remains to be seen if these brands can continue to grow when savvy, Millennial consumers discover their new, more corporate, ownership.
Many large CPG companies are stemming their losses and inciting growth by imitating the very practices that have led to the massive growth of smaller brands, while using size to their advantage. Large CPGs are beginning to engage directly with consumers with greater frequency, striving for enhanced empathy that can be used to create a more authentic consumer experience. They’re simultaneously leveraging their scale to develop tools and processes that enable ongoing consumer engagement and ongoing agile innovation practices. After all, smaller brands have made inroads into CPG market share not only because of technological and demographic shifts, but also because they are nimble enough to quickly respond and adapt to customer preferences, and perhaps more importantly, close enough to their customers to anticipate what those preferences are.
The biggest lesson to be learned from the rise of small CPG companies is that success comes from putting the motivations, needs and desires of customers at the heart of the business. Some might call it “getting back to basics,” or “the customer is always right.” Only by becoming truly customer-centric will big brand CPGs thrive again.
Vision Critical provides technology for understanding and engaging online consumers.
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