How Tiny Startups Like Hello and 800Razors Are Stealing Share From CPG Giants
Craig Dubitsky may represent big packaged-goods companies' worst nightmare, but there's a good chance they may not have even noticed him. He's a small part of a big movement -- an insurgent group of digitally enabled entrepreneurs gnawing away at the dominance of multibillion-dollar brands and their giant marketing budgets.
The former commodity trader has been nosing around their turf for over a decade. Mr. Dubitsky, age 47, became a board member and adviser to Method, maker of green cleaning products, when its founders were still working out of their apartment in 2001. Later he co-founded lip-balm marketer Eos (Evolution of Smooth); joined the board of alternative over-the-counter drug marketer Help Remedies; served as chief marketer of snack startup Popcorn Indiana; and most recently founded Hello oral-care products.
Individually, none of those brands pose an existential threat to the behemoths of packaged goods. Collectively, they and many more like them are having a big impact. Small and midsize firms took 1.6 share points, or nearly $10 billion in sales, from the packaged-goods behemoths over three post-recession years from 2009 to 2012, according to a report from IRI and Boston Consulting Group. The smaller the players, the bigger the impact: Companies with sales of less than $100 million gained the most and the share shift accelerated over time (see chart).
"Almost all the largest companies across food, beverage, household products and personal care lost share in measured channels," said Jeff Gell, senior partner and managing director of Boston Consulting Group. "It has never been that pronounced in what I've seen before." And the data don't include e-commerce or other emerging classes of trade, like national specialty shops, that are friendly to smaller players.
That the little guys are making a big impact in an industry long dominated by giants like Procter & Gamble Co. and Unilever is puzzling to say the least. After all, bigger companies have major scale-based cost advantages in manufacturing, distribution and marketing.
Much of the credit for smaller brands' ability to break through goes to digital disruption in media and retailing, though a host of other factors also figure in, according to industry executives and observers. Those range from the natural agility of small players to changing consumer tastes and the tendency of the massive CPGs to cut off their smaller businesses.
It's common to hear executives in packaged-goods startups to credit digital media with "leveling the playing field," as Phil Masiello, president of 800Razors, one of the pure-play e-commerce retailers looking to slice into Gillette's dominant market share, puts it.
But Rex Briggs, CEO of analytics firm Marketing Evolution, argues that "digital and social media actually tilted the playing field in favor of the new entrant who doesn't have the legacy ways of doing things" when it comes to marketing. Social media in particular tends to generate strong returns on investments at low spending levels, which benefits the little guy with the little budget. In evaluating its impact on large brands, he found social media flattens and reaches a point of diminishing returns faster than other media, so sizable budgets don't necessarily help there.
An even bigger digital disruption in packaged goods may be through e-commerce, still a relatively small business segment for big marketers but quite significant to many startups and niche players.
A Sanford C. Bernstein analysis last month found e-commerce accounts for 5% to 9% of sales for some packaged-goods categories and around 1% of sales for many and household products. Yet for some smaller alternative CPG players, such as Method and Seventh Generation, e-commerce accounts for 25% or more of sales, according to people familiar with the matter. Bernstein expects e-commerce in CPG to grow quickly, reaching 25% of category sales overall, or $222 billion within 10 years, as Amazon and others increase their focus on the business and roll out grocery delivery. This represents an opportunity for large players, but there's no limit to shelf space in the online world that gives them an advantage in stores, meaning the fight might be a little fairer. Consider that Amazon's top-selling cereal right now isn't the supermarket leader Cheerios but a gluten-free brand of rolled oats called Bob's Red Mill.
The democratizing effect of social media and the impact of e-commerce likely play a role in smaller players gaining ground. But other changes in the retail environment can't be discounted.
Take beauty-only retailers such as Ulta and Sephora, each with sales of more than $2 billion annually and growing far faster than the rest of beauty retailing. Several industry players say those chains, whose data aren't included in IRI numbers, are far friendlier than others toward startup brands, frequently adopting and merchandising them aggressively under exclusive deals. Even big retailers like Walmart and Costco have warmed to smaller players in the past decade as they search for growth and innovation, Mr. Gell said.
A small brand getting that kind of national distribution "is a model that also didn't exist a decade ago," he said.
K.K. Davey, managing director of IRI Consulting, said increasing competition is leading retailers "to differentiate themselves by working with smaller manufacturers and having something on their shelves very different from the large brands."
For Mr. Dubitsky, Hello oral care's earliest major partner was Walgreens. But it also got distribution through Walgreens' affiliated e-commerce site, Drugstore.com, and Amazon's Soap.com, along with limited distribution at Target and a national rollout last month at Kroger Co. Mr. Dubitsky says he was told by Walgreens that after just five months on shelves, Hello has claimed a 22% share and accounted for all the growth in the breath-freshener category at Walgreens.
Mr. Dubitsky said that having worked with those retailers on other successful startups helped get his foot in the door. He added that slotting fees aren't the daunting factor many people believe for small players. He finds retailers more often look for brands to offer attractive margins and spend to support their products in store rather than just buy shelf space.
Public relations from FleishmanHillard, New York, have been the cornerstone of early marketing for Hello, netting placements in Fast Company, USA Today and Yahoo, along with extensive reviews and giveaway promotions through bloggers.
Hello is active on Facebook, Twitter, Instagram and Pinterest. But its most novel approach to brand conversations is a button on Hello-Products.com that lets people Skype Mr. Dubitsky directly. And some do.
But maybe the biggest advantage for small brands is a willingness to zig away from the strategic and creative zags of category titans. In oral care, "the big brands are all about fighting this and fighting that," he said. "We're about being friendly." As in many categories, he said, the big oral-care warriors wear red or blue. Hello opted for white, pink, lime and cinnamon.
Hello products feature curved designs from BMW Group's DesignworksUSA with offbeat flavors such as pink grapefruit and mojito mint. A lot of people may not like them, Mr. Dubitsky has heard, via Skype and elsewhere. But he can live with that, because capturing even a sliver of the $31 billion global oral-care market isn't bad.
While defying the logic of the mass market, he's also leaning on a formula for success he's used before. The similarities between Method, Eos and Hello are obvious. They're natural products focused not on green claims but on superior design, novel flavors or fragrances and improving user experience rather than using efficacy claims like bigger competitors. Help Remedies takes a similar approach, but with an added emphasis on simplification, convenience and humor -- and without significantly reformulating the over-the-counter drugs or other products in its line.
The other common factor is that his brands look small, quirky and accessible, rather than big, slick and mass-produced. That plays right into changing consumer tastes, at least in the U.S. and other developed markets, according to anthropologist and author Grant McCracken, part of the Massachusetts Institute of Technology Convergence Culture Consortium.
Evidence craft beer, much of which is sold by the glass or outside IRI-measured channels by more than 2,000 small breweries in the U.S. Crafts have been taking share from big brewers for years (see story, P. 10), adding 2.1 volume share points in three years to hit 6.5% of the U.S. market in 2012, according to the Brewers Association. Craft beer and the insurgent success of other smaller CPG brands are symptoms of a deeper shift in consumer tastes favoring small players, Mr. McCracken said.
He points to the number of farmers markets in the U.S. more than doubling to over 8,000 since 2004. That's a sign consumers are favoring small scale and locally produced goods over mass-produced products from big corporations. The markets are conduits for numerous makers of artisanal soaps and beauty products, along with specialty packaged foods.
All it takes to make a difference even in a big market is to persuade a consumer segment -- particularly a higher-income one -- to care. Say each of those farmers markets (more than double the number of Walmarts) does $3,000 a week in packaged-goods sales across all its vendors. That adds up to more than $1 billion in annual sales and another dent in a $700 billion-plus industry working hard to eke out single-digit percentage growth.
What's happening in CPG today with smaller brands doing more business seems to bear out the theory Chris Anderson first put forward in 2004 in Wired and in his 2006 book "The Long Tail: Why the Future of Business is Selling Less of More." It also flies in the face of big CPG players who've spent the past two decades moving the opposite direction. As TV has gotten more expensive, and for the sake of distribution efficiency, the bigger players have divested or discontinued smaller "tail" brands and products; focused on building their core existing brands rather than starting new ones; and erected eight- and nine-figure sales-goal hurdles for new product lines and brands.
None of the brands Mr. Dubitsky has helped launch would likely have hit the first-year sales hurdles at big CPG companies. Yet by paring their offerings, big CPGs may be opening more opportunities for folks like him.
"Big companies want big products," said IRI's Mr. Davey, who said many of the major players he works with won't bother with a launch that doesn't project to $20 million in first-year sales. "Smaller companies have less invested and can incubate [a product] longer."
Nearly all big companies have internal groups aimed at getting nimbler and identifying external or developing internal innovation, such as Coca-Cola's Venturing and Emerging Brands group, an investor-incubator hybrid.
But former Revlon CEO and Johnson & Johnson executive Jeff Nugent, now an investor and adviser in beauty startups, said even if huge corporations fit smaller opportunities into their financial models, their compensation systems don't provide the potential payoffs startups can dangle.
That's why the CPG bigs can end up training the executives who then seek bigger rewards and less bureaucracy working at startups -- like Mr. Dubitsky's.