One of the biggest sectors of the economy today is going through massive disruption through innovation. This isn‚Äôt something to be taken lightly.
I don‚Äôt mean banking and fintech; it‚Äôs not Detroit and electric cars; it‚Äôs not even media and online streaming. It is so pervasive that many people seem to forget it even exists, because it‚Äôs happening constantly right before our eyes.
It‚Äôs consumer products and retail.
The various categories of consumer are some of the largest segments of the economy: Packaged foods is a $2.14 trillion industry globally; Beverages is $1.24 trillion; Apparel is $1.2 trillion. By comparison, enterprise software is a $317 billion category. Internet advertising? A meager $121 billion.
Consumer and retail is huge, and it is making tremendous progress that is completely transforming the landscape. The large, once-dominant players are stumbling. In the 12 months ending June 2015, 90% of the top 100 consumer brands lost market share. This has some of America‚Äôs most iconic brands terrified.
There have been many missteps that led consumer and retail players to lose share while young brands in almost every consumer packaged goods category have pulled ahead. But, when we closely observe the disruption happening in this industry, we see three primary forces driving this change. The personalization of consumer, democratization of distribution, and emergence of new growth levers have shifted the powers from the legacy consumer brands to millions of newer, small brands.
High fixed fees create barriers for smaller companies. This system meant that only the big, slow-moving incumbents could afford to pay the fixed fees, resoluting people to redundant, poor quality products. This is why, for decades, people were stuck with the same candy bars and home cleaning solutions. These retailers, with their slotting fees, artificially constrained competition, resulting in a long legacy of boring, stale products on the middle grocery aisles.
But a lot has changed is distribution over the past 5-10 years.
Many distribution channels that facilitate, and often celebrate, small consumer product companies have emerged. Online sales, propelled by online brand building, have matured to offer various powerful models: direct-to-consumer sites, such as Warby Park and Bonobos; subscription models, such as Trunk Club, Birchbox, Stitch Fix; and third-party ecommerce, like Amazon‚Äôs Launchpad. None of these online options really existed ten years ago. But they‚Äôve becoming so important in driving new, better product experiences, that now the smartest big retailers are dropping slotting fees to give consumer the product they want. Whole Foods, Sprouts and even larger retailers like Costco allow smaller brands to sell without charging huge fixed fees. A bonus side prediction: those that still do charge them will soon cease to exist.
At the same time that huge fixed slotting fees started disappearing, the big costs to market and publicize new consumer products vanished. Social media, Google AdWords, SEO and SEM, more broadly ‚Äì thesevariable-cost (or even free) tools changed the game when it comes to spreading the word about new products. As a consumer entrepreneur, you are no longer forced to pay huge fixed fees to be in a national weekly magazine, a TV spot or a Sunday circular, a relic from 60 years ago that was still popular as recently as 2005. Instead, smart young consumer brands can become known and drive sales by being scrappy and taking advantage of new channels. Remember Dollar Shave Club‚Äôs original hilarious Youtube ad? Dollar Shave Club now owns 5% of the shaving market and recently sold to Unilever for $1 billion.
The transformation in consumer and retail has created a phenomenal opportunity for innovative entrepreneurs in the sector. The odds of success have shifted dramatically in their favor. Numbers tell the story. As large brands rush to add fresh products that appeal to millennials, consumer M&A ‚Äì the most common exit for smaller consumer companies ‚Äì is booming. In 2015 alone, consumer M&A was valued at $238 billion.