How CPG startups can navigate retail complexities while scaling
At P&G Ventures, we’re committed to helping startups and entrepreneurs succeed because we share a mission of creating products that make consumers’ lives better. That’s why we looked at the CPG startup landscape and want to offer you some perspectives from the industry that we hope will guide you toward success.
While all startups are exciting in their own way, there’s something extra exciting about one in the consumer-packaged goods sector. It’s fun to know that your CPG startup is selling something that will be in stores and online where people are going to buy, use, and love.
What’s less exciting is the extra complications within the CPG sector. The path from your product to customers can be a bit more complicated than other startup spaces like technology or software. Whether it’s competing for shelf space, navigating different sales methods, determining the proper marketing spend, or even exploring the world of valuations and acquisitions, CPG startups have a lot of retail complexities to consider.
For many CPG startups, a direct-to-consumer (D2C) approach seems ideal.
It’s simpler than partnering with wholesalers or retailers. It has a higher profit margin thanks to cutting out the middlemen, and it feels more connected to customers—which is especially appealing to young, independent brands. Doing it without the retail stores appears to have a lot of advantages.
It’s perfectly true. You don’t necessarily need retailers, but they do offer advantages. Once you’re on their shelves, you automatically have an audience—lots of audiences in lots of locations. Plus, they have powerful marketing departments already, and they want to sell your product just as much as you do.
If nothing else, it’s a question to consider. But there’s even more to it, and this is where it starts to get tricky.
D2C requires many different investments
Before you can get sales, you have to put certain pieces in order, such as production, advertising, e-commerce, point-of-sale systems, fulfillment networks, distribution methods, etc.
Putting those in place takes time and effort (which is effectively a cost, even if you’re doing it all solo), but you also can’t do it without paying. In other words, you’ll have to spend a lot of money before you can make any at all. It’s a risk.
A few hard questions you’ll need to answer about D2C.
Would you rather have future profits or a lower-risk present? Can you afford to make a lot of initial investments and ride it out until revenue makes up for them? Do you have the marketing strategy and tools to attract customers? Or would your product benefit more from taking advantage of a pre-existing audience? In other words, even if D2C seems simpler, it has its own batch of complexities.
One of those complexities is how advertising is evolving.
Because D2C has so many up-front costs, it’s natural for you to want to minimize as many as you can. You don’t want to cheapen your product or make customers wait for slow shipping, so maybe there’s some inexpensive advertising or marketing you can do?
Social media used to be an answer, and once upon a time, you could even get organic advertising by posting your own content. However, that game has gotten crowded. You could try partnering with influencers or paid spend, but those costs are rising too. Advertisers have recognized how effective these tactics can be, and so the market has adjusted—and not in the direction that you’d prefer.
As costs are rising, so are audience expectations.
It’s no longer enough to get your name in front of a bunch of people. You need to create ads or content that stands out and ensure they’re very well targeted. Simply ask people what they do when they get irrelevant ads—you won’t see very many positive reactions.
What about an alternate route?
Some of those complexities and costs go away if you don’t go down the D2C road. Not entirely, but they can be significantly simpler.
Retailers mean other challenging issues, like competition.
Retailers who want to sell your product will be selling other products from your direct competitors, or they may even have their own label and brands.
These different brands compete for limited shelf space and shoppers’ attention. Every brand, including yours, must deliver against the retailers’ essential business metrics like sales per square foot, gross profit, and net profit. You can see how the retailer’s own brand has some inherent advantages compared to yours. So, you do get benefits in retail, but you have to balance them against the challenges.
You’re competing against an increasing number of brands.
In recent years, new CPG products have skyrocketed—in many cases from CPG startups like yours. As consumers are starting to prefer independent brands and brands that have demonstrated sustainability or other social good, the market for new, emerging ones is growing.
Maybe that’s part of why you’re in that market in the first place! After all, it’s good to be catering to consumers who are shifting toward your type of company. It’s just getting tougher since you’re not the only one entering that market.
All of this means that you’re competing for shelf space not only with the retailer’s brand but a lot of other smaller brands. On a purely mathematical level, this lowers your odds of being chosen. On a pragmatic level, it raises the pressure to prove that your brand deserves a prime location.
Beyond those complexities, there’s the added burden on you.
Whether you try to differentiate your product in some new way, try to ramp up your marketing, or consider the switch to D2C, the competition among retail brands is a constant battle.
With all these retail complexities, you may choose to sell your CPG startup.
You’ve probably heard about some pretty enticing acquisitions of brands like Kind, Chobani, or Noosa. You might not have started your company just in hopes of selling it, but at some of those prices, it’s very tempting.
First, venture capitalists have an impact.
They also can create unrealistic expectations. There are two factors for this. First, there’s the venture capital issue. Because venture capital isn’t invested only into the CPG sector, it puts CPG startups in the position of potentially being compared to other startups that don’t face the same retail complexities like manufacturing or supply chains.
As a result, CPG startup growth can look weaker than a business-to-business software startup that can deploy rapidly thanks to no physical limitations. This puts a lot of pressure on CPG startups to grow faster than is realistically sustainable.
The second factor is the way valuations have been rising.
The high-dollar sale prices that make the headlines only encourage bigger and bigger numbers. That might seem good because if you’re going to sell, you’ll want to sell high. But if there’s a disconnect between that early valuation and the tangible results, it can stall the process, make investors draw out, and potentially even tank the entire issue. Then, that option of selling is gone, along with all the work you put in to make it possible in the first place.
Finally, the most fundamental retail complexity of all: customers!
They may be leaning toward smaller, more sustainable brands—for now. While that could work in your favor today, it could shift tomorrow.
Even if you have the advantage of being nimble and agile, it’s still a risk. At best, it means you have to pivot and figure out how to connect with customers wherever they turn next. At worst, you’re in a position where you just can’t make it work.
But take a step back. Because you are making it work, right? If your startup is gaining traction or even considering scaling, that means you’ve figured out what people want. And that’s the greatest complexity of all. So if you’ve cracked that proverbial nut, you can handle the rest of these.