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.
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