Crossing the CPG Growth Chasm

^{I want to use this tweet from John Craven over at BevNET to frame the conversation we are going to have today around why it is so difficult for CPG brands to cross the growth chasm. The growth chasm to me is when your brand hits escape velocity.}

Escape velocity is the point in a company’s life cycle when it is growing exponentially faster than it has previously at any point.

This sounds great! Let’s all hit escape velocity and cash out. The issue is that most brands although portraying an upward and to the right curve in their investor decks, don’t achieve this. Instead, they slowly grow or grow to a point and stay flat.

There is nothing wrong with either of these outcomes, but they aren’t necessarily venture-fundable outcomes. Most of the brands that I speak with on a weekly basis are seeing either slower-than-expected sales growth or flat growth. Very few have reached escape velocity yet and it does make it harder to hit if you have experienced several years of being in either the bucket of slow growth or flat growth.

This important tipping point from my perspective usually happens between $3-5M in annual sales. The brands that can get out of that range the fastest are usually going to continue to break through and hit future growth targets.

These are the brands that are going to get funding and these are the brands we hear constantly about on Linkedin. We can use the beverage category as an example where brands like Super Coffee, Lemon Perfect, Poppi, Liquid Death, and Olipop are crushing it. They are raising every 12-18 months, opening new distribution, and capturing new consumers daily.

These brands are headed towards large acquisitions and it can be easy as a brand to look at those brands all the way on the mountaintop and think, what am I doing wrong?

The other side of the coin comes back to the original tweet from John, that if your mindset is to get rich in CPG, it’s probably the wrong game for you.

Most CPG brands are acquired for under $100M. This is still an amazing outcome and I think there would be more outcomes like this if brands adjusted their mindset from the start.

The three things I see that lead to this type of sustainable growth mindset, which all brands can follow, are the following:

• Healthy Gross Margins - figuring out how to get your GM above 40% at a minimum should be a focus from day one. We spoke to Sarah Delevan about this last year and you can watch the pricing workshop we did below.

• Deep Not Wide - The best brands go deep with their retail distribution and not wide. They focus on increasing velocity instead of new doors for their sales growth. They do not move into a new market until they have mastered the playbook for their current one.

• Market/Timing - Some of this is out of your control, but timing is one of the biggest reasons that a CPG company experiences success. Their product is timing with a need in the market and they are serving that need perfectly. I don’t think founders should ever trend spot for hot categories and markets that are ripe for disruption. Instead, you should be crafting the narrative around your brand from the onset about how the market is ready to embrace it and have your marketing reinforce that.

If you stick to these core tenets and establish them early, you're most likely going to build an acquirable brand. It might not be $100M+, but it can still be life-changing to sell your business for $10M-$20M and I don’t think that those sized outcomes are discussed enough in this space.

If you have already launched and are in that $1M-$5M range and are either experiencing slower growth or flat growth, you will tend to throw stuff at the wall to kickstart growth again.

Many of these brands are in what Gartner’s Hype Cycle (below) would describe as the trough of disillusionment. Gartner’s Hype Cycle is usually reserved to explain tech startup cycles, but I think it works for CPG as well.

Trough of Disillusionment: Interest wanes as experiments and implementations fail to deliver. Producers of the technology shake out or fail. Investments continue only if the surviving providers improve their products to the satisfaction of early adopters. - Gartner

We have all seen the brand that comes out hot, they have an army of early adopters, seems like they are everywhere, and eventually stumble into the abyss of being forgotten by consumers.

Most CPG brands experience the peak of inflated expectations, it doesn’t matter the size. You are getting highlighted on Snaxshot and Thingtesting. You are getting meetings and opening doors. It’s happening, you have created a rocketship brand that can’t be stopped. Until it slows…

Unless your brand has ample capital and has truly hit product market fit, you're going to enter the trough of disillusionment at some point. When most brands get here, they make two common mistakes, they look for growth from new doors or growth through new SKUs.

You don’t want to be doing either of these if your brand feels stuck.

Looking for growth through opening new retail doors when the ones you are currently in are underperforming, is just taking a bucket of water out of an already sinking boat. Instead, as mentioned above, you need to go deeper with your current accounts.

The second mistake is looking for growth through new SKUs. If you are under 20-30% ACV in the market with your current product set, do you really need to be making new products for potentially different categories?

Increasing your product set and introducing new items, is a luxury for brands that have already hit escape velocity with their current product set.

You are not going to grow or save a business by launching a new product. In most cases, the answer is pairing down your current product set and getting hyper-focused on your original product.

The thing to remember when you are in this stage is that there is still a positive outcome to be had, and you want to be optimizing your brand for that outcome and not making bad decisions that increase your burn and decrease the likelihood of a positive outcome.

If you’re a brand that is just starting out, this post is a reminder to check in on your fundamentals and the why behind your decision to launch a brand.

If you’re a brand that is in the $1-5M annual sales range and are finding it difficult to break out, this is a reminder to check in on your fundamentals and the why behind your decision to launch a brand.

Success doesn’t always look the same, which is why I wanted to draw attention to John's tweet in the beginning.

Growing a CPG brand is a difficult journey and many won't cross what we have defined here as the growth chasm, but if your intentions from the start are to create a great product and business, you will find a positive outcome.