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Is the Nestlé e-commerce strategy the future of CPG?
Last week Nestlé, the world’s largest packaged food company, posted solid earnings as consumers continued to pivot towards grocery stores amid the pandemic. Overall, the company saw organic growth rise by 3.6%, putting it in between rivals Kraft Heinz (6.3%) and Unilever (1.9%). Much of this growth is due to smart acquisitions and divestitures, recently headlined by its $4.3 billion sale of its North American bottled water business to private equity firm One Rock Capital Partners. What I find interesting is what these acquisitions mean about the Nestlé e-commerce strategy and how it might just be the future of the CPG industry.

The Nestlé M&A approach

In 2017 Nestlé missed earnings estimates and found itself struggling to compete in the U.S. market. Since then, the company has completely revamped its offerings. It sold off non-core assets like Gerber Life insurance for $1.5 billion. Its CPG catalog divested from bottled water, Nestlé skin health, U.S. candy business, U.S. ice cream, and packaged meats. The company entered 75 separate transactions—turning over about 18% of the company’s sales. As the below graphic shows, the major strategy can be summed up as: Get Premium and Get E-commerce.

I went ahead and categorized the company’s recent major transactions across two measures: Premium and E-Commerce Friendly.

You’ll see the Y-axis is labeled Premium. That effectively means, can Nestlé charge a premium price for the product? The answer for almost all the divestitures is “no”. Poland Spring is a budget brand; Herta will always be a convenience option to freshly sliced meats.

The X-axis, E-commerce Friendly, is a bit more nebulous. Essentially, does the product and brand lend themselves to e-commerce? When thinking about e-commerce, ask yourself:
1. Can it be easily stored in a non-climate-controlled warehouse?
2. Does it lend itself to bulk pack sizes?
3. Can buying be personalized via a website?
The answer for almost all the divestitures is no. Dreyer’s is not only a mid-tier ice cream brand—unable to compete against high-end gelato and healthy options like Halo Top—but it’s also a category dependent on in-store distribution. Ice cream requires refrigeration, which does not lend itself to easy e-commerce sales. U.S. candy is almost entirely single-serve, impulse-driven, and often involves refrigeration during transit (prevent melting), making it a tougher sell online.

Meanwhile, nearly all the acquisitions are premium products and/or native to e-commerce. Like Dreyer’s, Sweet Earth is dependent on refrigeration. Unlike Dreyer’s, it offers premium vegetarian offerings priced a dollar or two higher than the competition. Persona offers personalized vitamins through a digitally native sales experience. Starbucks was the first premium coffee brand in America, and Blue Bottle Coffee takes it to another level. Both have product offerings that are easily shipped and sold over the internet.

I should point out that my graph doesn’t include Freshly and Mindful Chef, two digitally native meal prep companies Nestlé acquired.

It also says nothing about PetCare, a category ripe for e-commerce that Nestlé is positioned to conquer.

The Nestlé e-commerce strategy

Mark Schnieider, CEO of Nestlé, talked about its evolution in e-commerce—with an eye towards pet care.

I think the best area to exemplify that is PetCare where, clearly, we’ve been for years patiently building up what I call a PetCare ecosystem when it comes to the total advice around pet ownership, and nutrition, of course, being a big part of that. Then increasingly bundling in e-commerce opportunities including bespoke, such as Tails.com and Just Right in the U.S. So I think this is a major opportunity. PetCare being one example.
I think you’re seeing similar opportunities in other major categories, but PetCare does stand out. So I agree with you that this is a key area of focus for us going forward.

Most CPG companies talk about using technology to build ecosystems or platforms. Honestly, a lot of it is nonsense marketing speak, but Nestlé is actually doing it in pet food. Many manufacturers are selling the same exact products (they may change the pack size) but through Amazon or Walmart.com. When you go to Just Right, you fill out a quick survey about your dog, and moments later, you have a completely custom food blend—priced at a premium, of course—ready to be delivered to your door. It’s the type of product that can’t be sold in traditional retail but perfect for online.

This begs the question, “How much of this infrastructure should Nestlé build and how much should it create through partnership?”

In terms then of acquisitions, I mean, when it comes to just digital enablers, I feel more often, this is about partnerships and it’s about licensing. When it comes to business models, yes, and take as an example our investment in Freshly, where clearly, you have a business model and there’s a strong digital component to it. Or take our acquisition of majority stake several years ago in Tails.com, where you have bespoke pet food, and clearly digital is the way to order pet food and to get into those subscriptions. So,this is where I would see the sweet spot. So,we have a digital model with the business model combined. Just digital tools alone, frankly, I’m not sure we should be the only owner of that. I think there, it’s better to license in or to partner.

Translated — if the core business model is reliant on technology, it could make sense to own–if not, partner.

Later, he described the results.

Let me highlight on top that for a category like pet food that indexes very well in e-commerce; there is frequency of consumption and shopping, it’s bulky, so that’s prone to subscription models. There we grew, in the U.S. last year, 65%, and it is close now to 20% of sales.

Potentially 20% of sales!

It sounds like a winner. It sounds like the future of CPG.

Photo by inma · santiago on Unsplash
February 26, 2021
Kraft Heinz: Earnings boost and a smart sale of Planters

Thursday’s Kraft Heinz earnings call was a quick 31 minutes, but it revealed a lot about the future of the recently beleaguered company. Barron’s Teresa Rivas summed it up best: “What a difference a year makes.” Led by rising sales across all its platforms, the company reported a solid 6% growth from the previous year. The Tase Elevation platform, which features its Ketchup and Mayonnaise brands, saw an increase of 14% in its non-foodservice accounts. “We couldn’t be more optimistic and positive about the momentum that we have in the company right now,” CEO Miguel Patricio told investors, “We have today a very different company that we had just 12 months ago.”

What happened?

Destroying a brand by cuts

Kraft Heinz was formed in 2015 when Brazilian-based private equity giant 3G took ownership of both companies in two deals worth over $74 billion. To drive efficiency and meet its newfound debt obligations management immediately adopted a zero-based budgeting approach.

Here’s how I described the process:

Traditional corporate budgets are derived from historical information. Imagine that you’re in charge of in-store marketing at Kraft. Last year, you spent $15 million on a variety of in-store marketing events. After analyzing inflation, competitor data, and new item distributions, you estimate you’ll need an additional $500,000 in funding to support the business. Your boss agrees, so you get the budget.
Zero-based budgeting doesn’t work that way. In zero-based budgeting, every single company expense (from in-store food samples to pencils) is classified into a specific category. Each category is assigned a manager who builds a budget from scratch, justifying every single expense. Budgets are analyzed and awarded a cap. Managers are then incentivized based on how much they spend under the cap.

This program resulted in a $1.7 billion reduction in annual spend. Some of it, like private jets, were justified. Others, like promotional and marketing spend, kept the company relevant.

In year one, a cut in marketing and promotional spending may not impact much. Change doesn’t happen overnight. The initial success means the cuts are repeated for three straight years — because why not? The manager is incentivized to cut. Everything is fine until reality catches up. A legacy brand with reduced promotional support in an ever-changing category is a recipe for disaster.

In 2019 Kraft Heinz had to write down the value of two of its biggest brands by $15 billion. That same year it brought in Miguel Patricio as CEO. “Cost-cutting should be a priority for any company.” he told Reuters, “However, you cannot cut costs every year.”

Kraft Heinz reorganized in 2020

Platform Annual Revenue
Taste Elevation $7B
Easy meals Made Better $4.3B
Real Food Snacking $2.2B
Fast Fresh Meals $5.9B
Easy Indulgent Deserts $.9B
Flavorful Hydration $1.5B

A new CEO meant a lot of things. It meant new leadership–Patricio replaced 7 out of 10 Senior Executives. It meant new priorities; Patricio announced a goal of increasing marketing spend by 30%. It also meant a new company structure. Prior to Patricio the company was built around 55 different food categories. That means that Ketchup, Mustard and BBQ Sauce were separate portfolios—with competing promotional and marketing budgets. Now products are reorganized into six “platforms” where Kraft Heinz will jointly plan and manage the products in each region. The terms jointly plan and manage includes all core functions of a CPG firm—which is why the Planters sale makes a whole lot of sense.

Kraft Heinz earnings were boosted by the Real Food Snacking Transformation

According to the official strategy, Kraft Heinz’s Real Food Snacking platform is centered on the idea of unifying the company’s offerings to “leverage insights, drive innovation and meet demand for nutritionally dense, tasty and convenient snacks.” Reading between the lines, it’s clear Kraft Heinz is looking to revitalizing its snacking products through a mixture of healthier options that share production resources.

Lunchables will underpin the platform, which is ironic given its origins. Lunchables were created in the early 1990s to sell excess bologna and processed cheese to a populace that wasn’t interested in either. “People were falling out of love with bologna.” Michael Ross wrote in Salt Sugar Fat, “What it needed was a new vehicle, something other than bread and mustard to draw people’s interest—something with enough pizzazz to overcome the growing hesitancy about the fat in red meat.”

Kraft found it in Lunchables.

Moss continues:

They would help turn the trays into a processed food colossus, one that would break industry records by soaring to nearly $1 billion in annual sales…The trays created an entirely new category of food, one that exposed Americans, especially young kids, to the thrills of fast food that heretofore were the purview of restaurant chains like McDonald’s and Burger King. Back in the late 1980s, when Lunchables were first introduced, food manufacturers—despite their push for more convenient foods and their heavy reliance on salt, sugar, and fat—had not yet realized that they could mimic the fast food chains by making whole meals that were ready to eat at school, on the go.

Basically, it was a new innovative way to sell processed red meat—almost opposite of Kraft Heinz’s current goal of selling “real” snacks.

Today, Kraft Heinz is looking to use the same trays, but to replace bologna with lean protein and other “better for you” options like dried fruit. Lunchables will continue to target children, while P3 will target adults. Combined, this allows Kraft Heinz to drive massive efficiencies across the board.

Planters did not fit into the Real Foods Snacking

The Planters brand did not fit into this paradigm. P3 and Lunchables share common ingredients and packaging–if a new flavor combination takes off in one brand it can easily export to another. Both Lunchables and P3 also face limited private-label competition.

On the other hand, Planters faces intense private label competition and can’t piggyback off of product, packaging and pricing innovations.

Miguel Patricio summed it up:

Look, Planters is a very iconic very strong brand. So this is not something that we took lightly. But to improve our portfolio, we must focus on areas where we see the greatest competitive advantage, the greatest potential and returns. And when I — we look at Planters, Planters is one of the brands that is most affected by private label in our portfolio, it’s also of course affected as a commodity. And so when we looked at that, in order to have more flexibility toward the future on building a portfolio, I think that, we made that choice and we are very happy with that.

Image via Flickr

February 18, 2021
Clorox earnings call reveals a targeted approach to international growth

The Q2 2021 Clorox earnings call revealed more good news for the Oakland based consumer packaged goods company. Overall, organic sales increased by 26%, fueled primarily by 42% growth in the company’s health and wellness division, which includes the namesake cleaning brand. “We’re continuing to see increases in household penetration and repeat rates among existing and new users,” Lisah Burhan, VP of Investor Relations told the group. According to Clorox, COVID and strategic investments were the primary drivers.

Clorox is a deceptively big company with a smart strategy. The company boasts annual revenues of over $6 billion, which puts them between Church and Dwight and Swedish giant Essity. However, it competes in smaller categories—meaning it doesn’t have a whole lot of head on competition and can focus on delivering value through innovation. For example, it its Food Products portfolio contains one major brand, Hidden Valley. Hidden Valley is the clear number one salad dressing in America, but it’s a category that isn’t particularly valuable.

According to IBISWorld, the US Salad Dressing market is about $3.3 billion. By comparison, the ice cream market is about $8 billion, and the overall seasoning, sauce, and condiment market is around $23 billion. The result is a big, advanced fish, competing in smaller ponds.

Now obviously, COVID benefited the company, but its plans for expansion are what I found interesting.

Clorox earnings reveal a targeted international expansion plan

Clorox is organized into 4 operating segments: Health & Wellness, Household, Life Style, and International. International is the smallest segment, but it’s also arguably the largest growth opportunity.

This is common for many CPG companies. Most only start targeting international expansion once they’ve saturated the home market. The reason for this are obvious, but perhaps the most important is that international expansion really hard to do. Today, more than half of P&G’s $71 billion in revenue comes from abroad, but it wasn’t always that way.

Here’s how Alecia Swasy described P&G’s foray into international markets in her book Soap Opera.

P&G’s international business took decades to develop. Its first venture outside the States was a plant in Canada in 1915 and the purchase of a small English soap company in 1930. Five years later P&G bought a company in the Philippines, a source of raw materials for its oil business. After World War II it moved into Mexico, Venezuela, France, and Belgium, among other countries.

Despite spending millions, international expansion wasn’t viewed as a priority inside the company. Here she describes future CEO Ed Artzt’s view when he was asked to oversee the company’s European operations.

Those who worked with him recall that he had mixed feelings about the assignment. International posts were the equivalent of getting sent to Siberia. “He wasn’t sure he wanted international,” Bart Cummings said. “It was out of the mainstream.” But Artzt said he took the job willingly because he knew that the company’s long-term growth would come from distant shores.

Part of the management difficulty was political. At that time there was a high amount of regulation around import/exports within Europe. Every country was basically post-Brexit UK. The other part was the technological and business process. They were attempting to stand up new brands without a ton of data on what local consumers did and did not want. That data would feed a supply and sales chain. If it wasn’t correct the money was wasted.

Today, with the benefit of e-commerce, Clorox is going a different direction.

Clorox CEO Linda Rendle explained:

And then as we think about more broadly, the avenues that we have to introduce our brands to consumers have expanded. E-com is now a way that you can enter into a market, learn more about the consumer in a low-cost way. That allows us to get early insights and decide if we want to build more of an infrastructure behind an International business to expand.

Basically, instead of setting up an entire sales, marketing, and supply apparatus, Clorox is going to selectively piggyback off an existing e-commerce platform and build a case to move into brick-and-mortar. Once they identify the winners, they’ll build up a network and sell them in.

February 9, 2021
Kimberly-Clark looks to revenue growth management to combat commodity costs

With its 4Q earnings report, Kimberly-Clark showed that brands still matter—even in categories with intense private label pressure. The Texas-based personal care company, which manufactures various paper products, saw organic sales increase 6 percent for the full fiscal year. “Overall, our results were strong,” CEO Michael Hsu told investors, “and I’m encouraged by the way we executed in 2020.”

One thing that COVID-19 taught us is that in times of crisis, consumers flock to trusted brands. Led by Kleenex, K-C’s Consumer Tissue segment saw organic growth of 13%. Personal Care, headlined by Huggies, followed with an impressive 6%. Meanwhile, the professional segment, which primarily services paper products to offices, struggled, dropping 7%. The year’s success comes with a new set of problems. They’re good problems to have but need to be managed.

Kimberly-Clark is expecting a level of commodity inflation in 2021

Most consumer product companies take simple raw materials and process them into finished goods. The value of the processing is reflected in the overall brand and price premium it can command. However, no matter how great the company is at engineering and branding, at the end of the day, the profitability of Kimberly-Clark is somewhat dependent on raw material prices. This year’s success reduced the amount of raw material available for next year—which could decrease its margins.

Michael Hsu outlined some of the company’s expectations:

So, if I tick through a few things, virgin pulp, we’re expecting inflation, and that follows a year and a half of very low pricing. So virgin pulp, we’re looking for it to be up high-single digits on average. Polymer resin, we’re expecting to be up significantly, 30% or maybe even higher in North America. Nonwovens and superabsorbent will follow that but to a lesser degree. Those dynamics are largely supply driven at this point. Recycled fiber, we’re expecting to be up mid-teens; distribution costs, we’re expecting to remain inflationary, and that’s mostly due to industry’s supply constraints. And other materials such as third-party purchased safety gloves and PPE and KCP are facing significant increases if you — if you look at what’s happening in those markets. So that’s — that’s the assumption for 2021.

How CPG companies have typically handled price increases

One of the easiest ways to handle commodity inflation in consumer goods is to pass the cost onto consumers. However, this isn’t as simple as increasing prices a few percentage points across the board. Manufacturers don’t set the price of their finished goods on shelves—retailers do. Retailers are more apt to pass a price increase along than a price decrease, but they also have category margin expectations. Suppose Kimberly Clark wants to raise prices by 3 percent. In that case, a retailer can maintain their own profitability goals by substituting a portion of K-C’s shelf space to competitors or private label who isn’t raising prices. For seemingly this reason, Hsu explicitly ruled out broad-based list price increases.

Another option is to adjust pack size. If a standard Huggies box contains 124 diapers, K-C could maintain the price, but reduce the count to 96—allowing them to charge more for less. However, this decision has big long-term impacts. Not only from a consumer perspective, but a production and sales. Paying more for less is never a consumer preference, but perhaps equally important is that production lines and sales plans are optimized for the current pack-counts. Determining the specific SKU to adjust is a big undertaking.

Luckily for K-C, there’s a discipline determined to help them understand where to target.

Kimberly-Clark plans to use Revenue Growth Management to manage inflation

Revenue Growth Management (RGM) is a popular topic in the consumer goods world. It’s popular because it’s a proven way to target specific profit areas.

Here’s how I described it last year:

Basically, it’s the ability to analyze consumer consumption data against retailer activity to identify better opportunities for trade spend to “grab those opportunities and to drive your revenues and your profits.” It may sound simple, but it is incredibly complex. Coca-Cola sells to hundreds of thousands of retailers across the globe—each with a different product assortment and level of data sophistication. Coke must not only identify the opportunities but create the right mechanisms to ensure the company executes them with the retailer.

Kimberly-Clark is looking to leverage these same insights. RGM will bring in reams of data that will allow them to understand opportunities. Currently, a 32 pack of Huggies is $8.29 at Target online. Given the current level of online competition, it seems unlikely that the company could increase this SKU price.

However, done right, RGM will allow K-C to understand the true cost of selling at each customer—by SKU. RGM uses a variety of COGS, Transportation, and Trade data to reveal profitability. Maybe they can increase the base cost of a less popular item by 25%, but make up the lost volume with a promotional coupon on the 32 pack.

Hsu explains:

With regard to the pricing, again, we do expect some significant cost inflation in the year. It’s in our plans, and that’s going to affect both the Consumer Tissue side and the Personal Care side. We’re going to take appropriate actions, and certainly that’s going to — we’re going to pull all the levers — and I’ve mentioned already certainly around cost management. But, in addition to that, it’s one of the reasons we’re very pleased that we’ve got a robust revenue growth management capability up and running globally across our regions. And the levers that we are working, I mentioned, Olivia, will be selective count changes, some selective price list price increases and then a lot of work around trade efficiency and managing through promotions.

Kimberly Clark is hoping that RGM will help them understand what leverage they have at the SKU level and bring the results to retailers—to create a more worthwhile partnership.

It will be interesting to see how it works out.

Image via Flickr

February 2, 2021
Proctor and Gamble looks for a Trade Reset

Despite a decrease in Trade spending, Proctor and Gamble saw another successful quarter fueled primarily by COVID-19 related buying patterns. Organic sales increased 8 percent, with all top 10 global categories seeing growth.

The Homecare category, which includes cleaning brands like Cascade, Dawn, and Swifter, grew by 30 percent. Oral and Family Care, headlined by mainstays Crest and Bounty rose double digits. E-Commerce grew at a rate of 50% and now accounts for nearly 20% of its total sales–more than Walmart.

“We created strong momentum well before the COVID crisis.” COO Jon R. Moeller told investors. “We strengthened our position further during the crisis. And we believe P&G is well-positioned to serve the heightened needs and new behaviors of consumers and our retail and distributor partners post-crisis.”

Coronavirus impacted Proctor and Gamble’s Trade Promotion Strategy

Earlier in the year, I wrote about how National Beverage established the sparkling water category with LaCroix but lost the advantage with a poor trade promotion strategy. Trade is a tricky part of the consumer goods world. Retailers expect that manufacturers will pay for prime shelf placement and other advertising activities. Manufacturers pay because a) they don’t have a choice and b) the activities drive volume that is greater than the cost of the promotion itself.

Here’s how I defined the scope.

Outside of the cost of producing a good, Trade is often the largest line-item on a company’s income statement. A typical CPG firm will spend between fifteen and twenty percent of gross revenue on Trade spend every year — with hyper-competitive categories spending upwards of thirty percent. For a company of National Beverage’s size, that’s potentially tens of millions of dollars transferred directly from their pockets to the retailer’s bank account.

We don’t have much data on Trade spend across companies and categories. That’s because Trade spend is a strategic driver for a company—it’s somewhat of a black box. In 2017, P&G disclosed about $15 billion of advertising and promotional spending on $68 billion in sales. That’s about 22%. A blinded University of Chicago study across nearly 50,000 products and 17,000 stores found two key trends with volume and spend. About 29 percent of all CPG volume is sold on promotion, and 20% of revenue is spent on Trade.

Last week’s call revealed a bit of P&G’s past trade strategy and management’s plan for the future.

Jon Moeller explained:

Promotion levels which you’ve mentioned have returned from about the lowest points, which was about 17% of products sold on promotion, up to about 26%, so a significant amount of that promotion return is already in the numbers. And that compares to a pre-crisis range of, call it, averagely 33%.

He continued:

A strong support for our brands is part of our model and will continue to be part of the model going forward. If you look at the quarter we just completed, just in the marketing side of the equation, we increased marketing about 7% year-on-year. I think our levels of support, as witnessed by both our share of progress and our top-line progress are appropriate. I would not want to dial those back by any means. But, I expect they’ll pretty much move in line with sales with some efficiencies potentially available to us.

Translation. COVID-19 allowed P&G to cut back on substantial trade investments with no impact to sales. They’re looking to increase investment as the world returns to normal.

Expert endorsements are a key to P&G’s future

Proctor and Gamble was one of the first CPG companies to understand the power of academic endorsements on product quality. In 1960, P&G’s Crest became the first toothpaste to gain an endorsement from the American Dental Association as an effective tool against tooth decay. According to Rising Tide, the HBR book-length study of P&G’s success, the day after the official announcement, the stock opened 90 minutes late because of the onslaught of buy orders. Investor optimism was warranted. In 1960 Crest controlled 13 percent of the toothpaste market. One year later, it led the market with 28 percent. Today, Crest is still the category leader.

Rising Tide explains the impact of the ADA endorsement:

Accepting external ideas and cooperating with outside authorities became the driving force behind the development of stannous fluoride, then a central aspect of the brand’s subsequent marketing campaign. Crest’s success hinged on P&G’s ability to negotiate and learn to work with outside partners.

Expert, science-based endorsements are a core of P&G’s overall product and marketing strategy. According to Moeller, that’s not going to change. They’re the industry leader in it and they’re only going to do more.

Claim supports, developing claims are essentially communication that we can back up with laboratory research that highlights the benefit of our products in many categories to serve these needs. For example, hygiene that’s a benefit as a result of use of some of our laundry offerings. It’s a long answer, but it was a good question. And I want to just reiterate the point again that — the question, behind the question and all of this, I suspect today will be, are you — what kind of shape are you going to come out of this in? And I think, we think, we’re going to be in great shape coming out of this.

P&G believes that the company is well-positioned to capitalize on the new normal

The impacts of COVID-19 on the world are immeasurable. Within the retail world, we’re seeing shifting consumer habits. P&G is well-positioned, and is ready to move.

And then there are the mid to long-term impacts of the crisis, which may be accelerators of top and bottom-line growth. The relevance of our categories and consumers’ lives potentially increases. We will serve what will likely become a forever altered cleaning, health, and hygiene focus, for consumers who use our products daily or multiple times each day. There may be a continued increased focus on Home, more time at home, more meals at home, with related consumption impacts.
The importance of noticeably superior performance potentially grows. There is potential for increased preference for established, reputable brands that solve newly framed problems better than alternatives, potentially less experimentation. Potential for a lasting shift to e-commerce, both e-tailers and omnichannel. Our experience to-date makes us believe we are generally well-positioned in this environment. We’re discovering lower-cost ways of working with fewer resources.

With the success in e-commerce and the focus on expert driven marketing in key categories, it’s hard to see where he’s wrong.

Image via Flickr

January 24, 2021
Conagra Brands invested in innovation and it’s working. Will it last?
Conagra Brands had its Q2 2021 earnings call on January 7th. The results were like the packaged goods industry at large—pretty good. The Chicago-based company, which owns various food brands across the frozen, snacks, and staples categories, posted organic net sales growth of about 8 percent. Even better, the company’s innovation initiatives accounted for about 17% of growth. “Our business remains strong in the absolute and relative to competition.” CEO Sean Connolly told investors, “And we expect Conagra to be in an even better position post-COVID as a result of our ongoing disciplined approach to investment and innovation.”

Conagra has certainly capitalized on investments, but I think it’s fair to say a good chunk of their recent success is due to COVID-19. People just aren’t eating out anymore, and that means almost all food processors are doing well. Sure, the company spent the last few years building out innovation and branding capabilities, but COVID-19 helped drive adoption.

Connolly seems to agree:

We believe that what we are experiencing right now is the acceleration of product trial that in normal times would take years and hundreds of millions of dollars. Now, as for what’s going to sustain it through 2022 and beyond, in a nutshell, it is our people and our playbook.

The playbook he describes is effectively a modernized marketing mix framework. Conagra Brands sells the right product, at the right price, at the right place, with the right promotion.

He summarized it as follows:

[The playbook] works, and it will continue to work. And it’s why our growth rates, our innovation performance, our trial, our repeat — our depth of repeat metrics are often outpacing our competitors. So, you know, in the simplest sense, what we are asserting here is that modern, high-quality products with great online and in-store presence, supported by provocative and targeted messaging, will beat outdated, lower-quality products with weak online or in-store presence but lots of broadcast media every single time. And then lastly, the last part of your question, our total brand investment already is — it has been at a strong level and it remains strong.

So the big question here is, is Connolly, right?

An analysis of the categories Conagra competes in reveals that it isn’t as simple as Connolly describes.

Conagra Brands is a legacy packaged food company

Conagra Brands is a branded packaged food company. They take raw commodities and turn them into a variety of food products. They’re pretty good at it. They’re the fifth-largest packaged food company in America.

Packaged foods is an incredibly competitive area. Almost every single one of these companies is a household name. Each has massive war chests to spend on advertising, sales promotion and product development.

In US Retail, the company is organized into three portfolios. The following table includes Conagra’s major portfolios, brands and % of revenue.

Portfolio Brands % of overall revenue
Frozen Banquet, Birds Eye 41%
Snacks Slim Jim, Duncan Hines, Dukes 25%
Staples Hunts, Wishbone 34%

I call Conagra a legacy packaged food company because all three of their portfolios are built on practices, assumptions, and limitations constructed over the last eighty years. Note – I’d consider most food companies legacy food companies.
- Frozen – Highly perishable requires costly refrigeration at retail and transportation level.
- Snacks – Low cost and impulse driven. Sales centered around check-out purchases and promotional activity.
- Stapes – Low margins.
From a strategic perspective, management views the Staples line as a cash generator. They’re going to run it like a commodity and use the cash to invest in higher-margin segments: Frozen and Snacks.

The good news for Conagra is that they are pretty good in both Frozen and Snacks. With brands like Banquet, Birds Eye, and Healthy Choice. They currently have the second largest Frozen retail business in America. The snacking business, which contains Slim Jim, Duke’s and Angie’s, is the third fastest-growing snacking portfolio in America. Overall, their recent innovation activities are off to a good start. The bad news is the categories are constrained by forces largely out of their control.

The Five Competitive Forces that Shape Strategy

In my opinion, the Porter Model is the most effective way to analyze an industry. Here’s how I described it earlier:

The most common way to analyze industrial competition was first popularized in Michael Porter’s classic 1979 paper “The Five Competitive Forces That Shape Strategy.” According to Harvard Business School, Porter’s article has been cited over 6,000 times, making it arguably the most influential management paper of all time. The general crux of Porter’s argument is that five disparate forces drive competition within any industry. The forces continuously change based on advances in technology and policy. It is a manager’s job to position the company to compete where they are the weakest.
In his 2008 update, Porter explained how the five forces drive profitability in the airline sector.
Rivalry Among Existing Competitors: How incumbents compete. For the vast majority of consumers, airlines aggressively compete on price.
Bargaining Power of Suppliers: There are only a few plane and engine manufacturers — giving each one additional leverage over airlines.
Threat of New Entrants: It’s a high-profile industry that new flight providers continuously enter. Some succeed (JetBlue) and some fail (Virgin and Hooters)
Threat of Substitute Products or Services: Train and car travel are always options
Bargaining Power of Buyers: Limited customer loyalty (except business travelers).
I would add a sixth driver to the list: political economy. Essentially, political economy is how the government decides to organize the economy.

Analyzing Conagra Brands through a modified Porter Model.

For the sake of this analysis we’re going to concentrate on the US retail segment only
- Rivalry Among Existing Competitors: High. Dozens of companies compete have billion-dollar war chests and compete over a fixed amount of shelf space. Competition is primarily based on a consumer’s perceived brand value.
- Bargaining Power of Suppliers: Mixed. The agricultural production has shifted to larger farms resulting in increased bargaining power for the remaining firms. However, some food processors have engaged in illegal price-fixing to counteract.
- Threat of New Entrants: High. Small and mid-sized food companies are continuously bringing new products to market. They’re offering interesting niche choices to consumers.
- Threat of Substitute Products or Services: High. Conagra’s main value-added frozen food brands are already facing an onslaught of competition from other convenience meals, including grocery store meal kits, mail-order meal kits, and seamless. Their main product lines (snacks and frozen) are not conducive to new distribution channels like e-commerce.
- Bargaining Power of Buyers: High. Extreme retail concentration limits manufacturer borrowing power.
- Political Economy: Mixed: Renewed political interest in antitrust after a decade of non-enforcement.
The “Conagra Playbook” is a traditional brand-building exercise. It’s built on maximizing their success with existing competitors and potential new entrants. It’s been successful in the short term, but a Porter Model analysis makes me skeptical if it’s truly built to last. Their innovation initiatives have seemingly worked, but they’re also within the existing framework. I question if it’s a real moat. Nearly all cited examples are more incremental brand extensions than transformative ideas. Frozen foods seem to be incompatible with the long-term grocery trend towards health and freshness. It will be interesting to see what happens once the COVID-boost that all food processors have benefited from is removed.

Image via Flickr
January 14, 2021
Constellation Brands looks to e-commerce and DTC

Constellation Brands is one of the more interesting major food and beverage companies operating in America. It was started 75 years ago in upstate New York, where it acted as a wholesaler for the Finger Lakes Region’s many wineries. In the last twenty years Constellation underwent a series of rapid acquisitions, and today it owns a variety of brands across the wine, beer and liquor industry.

The 3Q 2021 financial results were a victory lap. The Wine and Spirits business saw revenue rise 10 percent. Beer, led by brands Corona and Modello, saw a 28% increase. The company is making investments across a new array of channels, including direct-to-consumer and more traditional e-commerce. “Our business remains extremely healthy,” CEO Bill Newland told investors, “and these strong results are truly a testament to the strength of our team and our brands.”

What else did we learn?

Constellation Brands is looking to dominate subscription shopping

Retail, specifically food and beverage, is undergoing massive changes. Today, so many consumer purchases are made in store, by impulse. Think about the last time you purchased beer from a store. If you’re anything like me, you headed towards the craft beer section and started looking through the selection. Maybe you were in the mood to try something new, so you went with the new local six pack with a cool logo. Ten minutes ago, you didn’t even know a Munich Lager was an option! That entire aisle experience, where you’re evaluating a variety of different products at once, is at risk with e-commerce. Retailers and manufacturers are pushing customers into subscription or auto-replenishment models where decisions will be made based on past purchases biased by algorithms and previous purchases. The company that figures out the magic mix of branding and discounts will find itself with an incredible first mover advantage.

Bill Newland explained:

In fact, our wine Power Brands competing in the e-commerce space are outpacing the overall wine category as our early investment in the category is providing us with a meaningful first-mover advantage. During the quarter, we became the first CPG company to partner with Instacart to feature our products on Facebook ads, propelling Constellation to the next level of three Tier e-commerce media by enabling us to refine and optimize our ad creative and targeting based on real-time data. Furthermore, it is important to our growth and margin profile that we continue to invest in this space, since DTC is heavily weighted toward the higher end of the wine category as wines priced $20 up, make up nearly 90% of total DTC sales.

Premium is a good price point

Constellation Brands recently sold off a number of low-end wine brands to Gallo. Today it is almost exclusively a premium company. Last quarter is started to experience the benefits.

Bill Newland:

Fortunately, the robust demand that we’ve seen in many of our Power Brands above $11 where we had lots of double-digit growers, our demand has been very strong and that has been the single biggest driver of our improved wine results is the sheer demand for our products and the fact that the consumer is looking for brands and products that they have great faith in, especially as their shopping patterns have changed some.

Direct-to-consumer CPG may work with premium brands

I’ve been fairly negative on direct-to-consumer CPG. The customer acquisition costs are too high. Alcohol may be the exception. Constellation purchased Empathy Wines, a direct-to-consumer wine brand founded by Gary Vaynerchuk. At the time of the acquisition, Empathy shipped 15,000 cases across America. Constellation is expanding that operational model across its portfolio.

Since our acquisition of Empathy Wines, we have continued to make significant progress in leveraging their unique platform and capabilities across our portfolio within the DTC and three Tier e-commerce space. We have launched several new DTC sites, leveraging the Empathy platform, including The Prisoner Wine Company, Double Diamond and Simi.

Constellation Brands has a de-facto Monopoly on the Hispanic market

Latinos are perhaps the biggest undeserved segment of the US consumer market. The Latino population has averaged about 2% population growth over the last decade—while the rest of the population sits around .5%. The buying power is phenomenal. A study cited by CNBC found that U.S. Latino GDP now hovers around $2.3 trillion a year—up from $1.7 trillion in 2010. To put that in context, Italy’s GDP is around $1.8 trillion.

Constellation holds an effective monopoly on the beer market for this group. Ironically, they purchased the Corona and Modela brands due to concerns about an In-Bev monopoly.

According to Beer Marketer’s Insights the top selling Mexican beers in America were:

Brand Barrels Sold (millions) % of US Market
Corona 8.7 4.1
Model Especial 7.2 3.3
Dos Equis 2 .9
Corona Light 1.2 .6

Constellation owns three of the four brands: Corona, Modelo, and Corona Light. Additionally it owns Pacifico and Victoria.

What’s interesting is that in their own estimations it isn’t taste or culture that is driving demand.

Via Investor Report

Constellation Brands are using their existing Space and Distribution networks, built up via acquisitions, to drive placement and sales.

Photo by Raphael Nogueira on Unsplash

January 10, 2021
Proctor and Gamble 2021 Q1 Earnings Call – E-commerce and the battle for shaving
On October 20, 2020, Proctor Gamble held its’ 2021 Q1 earnings call with financial analysts. Overall, like many CPG companies, P&G had a fantastic quarter. Organic sales grew 9% across the company, with 9 of 10 categories experiencing top-line growth—led by Homecare, which grew 30%. The progress was seemingly sustainable, with the Cincinnati based manufacturer adding a point of mix and price.

Jon Moeller, Vice Chairman, COO and CFO of Proctor and Gamble, summarized the quarter:

A very strong start to the fiscal year, strong volume, sales and market share trends, strong operating earnings, margins advancing, strong core earnings-per-share growth. We’ve built strong momentum heading into the COVID crisis and have been able to maintain this through the most recent quarter, supporting the guidance increase for all key financial metrics, organic sales, core earnings per share, cash productivity and cash return.

What else did we learn?

1. Proctor and Gamble believes long-standing consumer preferences are changing.

COVID changed everything within the CPG world. Companies that spent decades building brands suddenly saw themselves in prime position—as customers flocked to trusted partners. To keep up with the influx of demand, management reduced SKU counts. E-Commerce exploded—both changing the relationship between manufacturers and retailers. According to Jon Moeller, that change may be permanent.

We do expect that there is some stickiness to new habits that are being formed and new awareness that’s been raised. It’s hard for us to see in our interactions with consumers that we’re going to snap back and revert to the same attitudes and the same behaviors that we had collectively pre-COVID. Even things like the amount of inventory — pantry inventory I keep, and in some way, this is analogous that some of us remember our grandparents. For example, having survived The Great Depression, and they continued to hold on to more brewed and canned items that I could never understand. But it was because of what they’ve been through.

2. E-commerce is growing, but retail is still king at Proctor and Gamble

There was an interesting question by an Evercore ISI analyst. Essentially, P&G has 22 billion-dollar brands who are leaders in traditional brick and mortar retail, but that hasn’t translated to across the board e-commerce success. Crest dominates online, but the company is struggling, even losing, with diapers and bath tissue. How does P&G think about that the market?

Moeller’s answer pointed to the bigger picture.

And we don’t see a lot of — there is some, but we don’t see a ton of differentiation between our ability to succeed in an e-commerce format and a offline format, when we execute our strategies and when our products in categories where performance drives brand choice are truly superior. So that’s our focus. We look carefully at overall share progress online versus offline and margin progress online versus offline. In an aggregate, which is always dangerous of course operationally, we move to lower levels of aggregation, we’re indifferent between online and offline shopping, which is exactly where we want to be. I mentioned we grew e-commerce sales 50% in the quarter that we just completed, e-commerce sales are now probably 11% to 12% of our total. So they are important and we’re just as focused on being successful in that channel as we are the others.

Essentially, e-commerce is important, but it’s just 12 percent of P&G’s total volume. Proctor and Gamble wants to be wherever household products are sold. I’m very curious to see if this statement “When we execute our strategies and when our products in categories where performance drives brand choice are truly superior. So that’s our focus.” holds true. I’m not convinced that brand power is as vital in a land of online monopolies as it is in traditional retail.

3. P&G is keeping an eye on DTC, but it’s a balancing act

Direct-to-consumer (DTC) is a huge push within the fast-moving consumer product’s world. One of the issues is that it is really hard to be profitable within the space. P&G should know. Earlier this year Proctor & Gamble purchased female-centric shaving company, Billie. Much of the coverage was about the exciting DTC possibilities.

I disagreed.

I wrote after the official announcement:

You’ll notice that there isn’t much here about Billie’s direct-to-consumer capabilities, a major talking point of early coverage and the whole reason Unilever acquired Dollar Shave Club. Instead, Moeller describes the benefits of plugging Billie into P&G’s established manufacturing and sales organization. In fact, the only reference to online distribution is about P&G’s own established abilities (The company’s Venus brand has a D2C service.) Apart from individualized marketing, he talks about it as he would any other brand acquisition… With P&G to buy Billie, the plan isn’t to build an online direct-to-consumer giant, it’s to add a young digital native brand to its traditional brick-and-mortar line-up.

In my view, Moeller confirmed this thinking in his comments of DTC.

Within that, DTC clearly can play a role. As you mentioned, in some of our businesses, it’s already a significant part of the operating model. It’s – it allows us to get closer to consumers to understand, to have an even better understanding of their needs and their habits, including their purchase habits, and that all can be very complementary and important in the broader context. So, you will see us continue to increase our DTC presence, but again, not at the preference of – or the de-prioritization of any other channel of trade.

Notice how there wasn’t anything about it being a growth driver, but rather, ancillary benefits.

4. P&G is preparing for a coming battle for razors

Gillette has long-been a cash cow for P&G. An influx of hip, and low-cost competitors have entered the market. It saw its market share drop from 70% to around 50% in just a few years. Earlier this year, Unilever announced that Dollar Shave Club, perhaps the biggest challenger, was pivoting to an omnichannel brand—with Walmart as its first major retail distribution. P&G didn’t address the competition specifically, but it outlined how it would combat the move to brick-and-mortar.
1. Product Innovation: SkinGuard line of shaving aids for men with sensitive skin.
2. Moving into the premium space with King C. Gillette.
3. Expanding into dry shave.
Image via Flickr
October 21, 2020
Book Review: Break ‘Em Up by Zephyr Teachout

Early in her newest book, Break ‘Em Up, Zephyr Teachout retells the story of an Amazon air hockey seller. The seller, whose air hockey table was one of the top-3 search results until Amazon introduced sponsored ads. Coincidently, despite years of sales and popular reviews, the product dropped off the search charts with their arrival—even the free organic results. Potential buyers in the America’s largest online market could no longer find the product. In a desperate act to regain volume, the seller decided to spend $5,000-$10,000 a month on Amazon sponsored advertisements. As if magic, a product that mysteriously dropped off Amazon’s organic search results, found its way back to the top after it bought thousands of dollars of advertisements.

Zephyr Teachout explains:

The resulting system is the opposite of a competitive market — it’s a kickback regime. Amazon sets up an allegedly neutral system , and then charges fees to game that system, calling those fees “ advertisements. ” Sellers compete over how much they can pay Amazon to get access to consumers.

This example speaks to the heart of Break ‘Em Up. Teachout argues that large private monopolies are forms of tyranny that destroy our economy and democracy. The small air hockey seller is not free to conduct business if they’re forced to purchase thousands of dollars of advertisements from the only online market that matters. According to Teachout, the only way to combat the tyranny is to target the heart of the issue: the business model itself.

About Zephyr Teachout

In my opinion, Zephyr Teachout is one of the most important figures within the modern progressive movement. She’s a lawyer, law professor, author, and multiple time candidate for public office. Unlike a lot of her contemporaries, her arguments and solutions aren’t driven solely from a moral standpoint. Instead, she provides a moral vision with a fierce defense of competitive markets and cost-savings—something every business minded person should hold dear to their heart. Take the popular progressive position of Medicare (universal health care). Zephyr supports it, but wants to move past the discussion of universal coverage and into the structural issues driving health care cost: private monopolies.

Here’s the rub: driving down prices is much harder when the government is negotiating with a powerful monopoly than when it is negotiating in a competitive market. Healthcare expert Phillip Longman has written several persuasive articles about consolidation in the drug market, and the healthcare industry more generally, and the risk that this consolidation poses to nationalizing plans. If a single payer plan was enacted without additionally addressing the monopoly problem, he argues, government could end up effectively subsidizing big pharma, and big hospitals, and keep paying enormously high prices. Those costs would shift back to the public—in the form of taxes.
Single payer care is necessary for humane reasons, and for the extraordinary reduction in administrative costs. But why not demand both single payer and breaking up drug monopolies?

Basically, Zephyr Teachout has the courage and the moral conviction of Ralph Nader, but the vision to see the structural issues driving our society.

Private Taxes

Break ‘Em Up is structured into two parts. The first argues that private monopolies have destroyed a lot of what we consider society. The second is what to do about it. One of my favorite things about this book is how she frames business taxes. The earlier $5,000 to $10,000 ‘advertising’ fee that the small business pays every month isn’t advertising. It’s a private tax, imposed by Amazon in order to access the market. Unlike public taxes, which go to fund roads and schools, this goes straight into the pocket of Jeff Bezos—who is current worth around $200 billion.

She walks us through a variety of industries and the monopolies that impose private destructive taxes on each: Tyson and Farming, Facebook and Journalism, Amazon and Retail. The stats are particularly damning in farming. In 1985 farmers were paid about 40 cents for every dollar Americans spent on food. Today, that number is down to 15 cents. The money has shifted from small producers, to large manufacturers and retailers.

The first part of the book is well written, but unless you’re new to the anti-monopoly thought, it isn’t particularly groundbreaking. In my opinion, The Curse of Bigness by Tim Wu (who she ran for governor with) and Matt Stoller’s Goliath do a little bit better job explaining the evolution, history, and impact of the rise of private monopolies. Where Break ‘Em Up really shines is in the second part—what to do about it.

Break ‘Em Up!

If you regularly read this blog, you know that I write and work at the intersection of politics, technology and consumer products. I’m generally partial to the plight of consumer products companies—this isn’t to say they’re blameless—but most are effectively powerless against large retailers. The reason for this is quite simple–we quit enforcing free trade laws.

For most CPG companies, two retailers (Walmart and Kroger) constitute 30-35% of sales. If one of them says an item’s price needs to be lowered—it’s going to get lowered—and the manufacturer is going to take the margin bite. They simply can’t risk getting their item take out of the store. The only way they’re able to negotiate is if they have a large portfolio—either raising prices elsewhere or making it up in overall volume. Either way, the underlying structure pushes companies towards consolidation—like the mega-merger of Kraft-Heinz. Break ‘Em Up is one of the first books that I’ve read that gives concrete framework to stop the structure from happening.

1. Open, competitive markets, working together with publicly provided services and neutral infrastructure, are necessary for economic liberty. There is no one-size-fits-all answer to every industry, but unregulated private monopoly poses a unique threat. Private corporations with too much power raise prices for consumers, depress wages for workers, choke off democracy, and regulate all of us.
2. To preserve rough economic and political equality, we should make it easier to organize people and harder to organize capital. It should be as easy to unionize, or to create a cooperative, as it is hard to merge goliaths.
3. It’s better to err on the side of decentralized private power. Democratic governance is messy and will lead to mistakes, but corporate government will lead to tyranny.

To me, some of her most powerful writing is when analyzes Michael Sandel’s What Money Can’t Buy, a book that argues the typical progressive line on capitalism—that it’s bad and needs to change for moral reasons. Her response is phenomenal and I think shows a viable path forward to popularizing progressive policies across the ideological spectrum.

Sandel’s approach is dangerous because it closes down an arena of moral action and redirects activism away from breaking up big corporations. It makes us ignore market – structure problems. If we treat markets as a kind of necessary infectious disease that one must cordon off, instead of institutions that can be wonderful or corrupt depending on how they are structured, we stop trying to fix them. And while a few people think the state should make shoes and grow carrots, most people — including myself — imagine most of economic life happening through private exchange.

Zephyr’s solution isn’t to regulate out markets. The solution is to regulate markets in a way that works for people. She then provides a framework that isn’t just theory, but practical and proven.

All in all, Break ‘Em Up is a nice addition to the modern anti-trust movement by one of its most important practitioners.

Image via Flickr

August 22, 2020
Will Coronavirus Destroy Small CPG Companies?

Three months into the coronavirus lockdown and results have been mixed for major CPG companies. Companies that have diversified product offerings and sell through a variety of channels are doing moderately well. P&G, the Ohio based conglomerate, saw consumers stock up on paper goods and cleaning products. Fear of stock-outs led to panic buying and fear of the virus meant people washed their clothes more—and P&G owns Tide and Charmin. The result was a rise in revenue of 10 percent. Companies whose products decline in value during quarantine–beauty, luxury, travel–were not as lucky. Unilever saw flat sales, but with $58 billion in annual revenue, they will be fine. But what about small CPG companies?

Earlier this week Bloomberg Businessweek published an article on the coronavirus’s impact on the specialty coffee producers.

For the time being, consumers are buying more coffee to get their fix at home, aiding producers like Nestle. In the 13 weeks ended May 17, U.S. retail sales at supermarkets and other outlets rose 15% from a year earlier, according to data from Chicago-based market researcher IRI.

But “at-home increases for coffee will never compensate for food-service loss,” according to Judy Ganes, the president of J. Ganes Consulting, which follows the industry. “Recovery won’t be quick.”

Before the virus hit, Chris Nolte and Paul Massard sold about 2,000 pounds a week of their Per’La Specialty Roaster to Miami-area hotels, restaurants and in the single coffee ship they ran. They started the roaster operation in late 2015, mostly focusing on hotels, and added the coffee shop two years ago.

Once the closures began, bringing the city’s tourist season to a brutal halt, that number dropped by 85%, according to Nolte.

It is hard to comprehend how any business can survive a spontaneous collapse. General Mills, the $17 billion food giant, stemmed the impact by transitioning supply and distribution lines to focus only on retail. They were able to accomplish this because it had a generation of time to diversify its offerings. Today, food service accounts for about 12% of the company’s revenue, retail accounts for sixty. For Per’La Specialty Roaster it is 85%.

How is the small CPG brand able to compete?

“We are using mostly Instagram and Facebook,” Nolte said in a phone interview from their roasting plants just outside Coral Gables.

Initially, the company had nine employees, but Nolte and Massard are the only two left working.

Now the two men, who met during their first semester in business school back in 2001, have pivoted to social media and online sales to overcome at least some of the sales dearth.

Internet or direct-to-consumers is always trotted out as the silver bullet for struggling companies in the coronavirus era. It’s basically the business version of telling unemployed people to ‘learn to code.’ It’s an unserious idea for a structural issue.

Food service involves selling and delivering one fifty-pound bag of coffee to one customer, retail involves selling fifty one pound bags to fifty customers. They have entirely different cost structures and operations.

Let’s take customer acquisition. A quick test reveals that it cost about $4.00 to run a targeted Google add for ‘Coffee’. If a pound of specialty coffee cost $5 to produce and sells for $16, that’s already 36% of the margin on customer acquisition—and that’s assuming every single person who views the add purchases the product—which is an asininely optimistic assumption. It also fails to factor in that every small coffee manufacturer is faced with the same dilemma—driving the advertising cost as demand for eyeballs increases.

The end result here isn’t good for anyone but large coffee producers—who already have a large retail business to offset the food service. I am not sure what the solution is, but it is going to be painful.

Photo by Nathan Dumlao on Unsplash

June 6, 2020