CPG- and retail-focused startups have an opportunity to capitalize on shifting consumer preferences.
The following is a guest post by Sophie Bakalar (@sophiebakalar), a principal at Collaborative Fund.
Consumer goods startups are having a moment. A number of articles highlighted the growing opportunity following Dollar Shave Club’s $1B exit in July, but if a picture is worth a thousand words, then these six charts effectively articulate why it’s never been a better time for consumer goods startups.
1. Values matter
Consumers have long preferred products from companies that align with their values, but thanks to an increase in discretionary income and more shopping options, they’re finally willing to pay up for those products. Two-thirds of global consumers are now willing to pay a premium to companies with positive social and environmental impacts, a 21 percentage-point increase in just five years. This shift to social value over cost value has opened the door for smaller startups, as consumers become more skeptical of big brands.
2. E-commerce leveled the playing field
E-commerce sales are still relatively low at around 8% of total sales, but some sectors, like electronics and clothing, are soaring. By selling straight to consumers online, startups gain direct feedback from their customers, slash overhead costs, and increase margins so they can better compete with more established players. This shift online has dramatically lowered the cost to launch a CPG or retail startup, which has helped level the playing field between emerging and legacy brands.
3. Profits are on the rise
Consumer products are often viewed as low-growth categories in the US, but CPG and retail company profits have been steadily increasing since the early-aughts at an annual growth rate of around 6%. While lower than the overall growth rate of private companies, at 8%, that’s still nothing to sneeze at.
4. Big brands are losing market share to small brands
As social impact and e-commerce continue to dominate consumer trends, smaller companies are increasingly driving growth and wresting market share from legacy brands. Since 2011, large consumer enterprises have ceded $18B in sales, equivalent to 2.7% market share, to small- and medium-sized companies.
5. M&A is skyrocketing
In order to cope with this changing landscape, big brands are increasingly acquiring smaller brands once new products have been tried and tested in the market. As a result, consumer product M&A is at an all-time high, with over 1,300 deals projected in 2016.
6. Venture capitalists are getting in the game
Consumer goods companies have typically been the province of private equity shops, but as startups have gained market advantage and the M&A environment has heated up, venture capitalists are starting to pay attention. The availability of earlier-stage capital means that VC-backed consumer startups can make bolder, more innovative leaps and grow faster and more efficiently than ever.
Consumer trends, industry growth, M&A, and financing environments are all supportive of CPG and retail startups. These indicators have been steadily improving over the last decade, but we’re still just on the cusp of a revolution in consumer goods. As millennials mature and reach peak purchasing power, their penchant for authenticity and social consciousness — very different from the shopping preferences of their Baby Boomer parents — increasingly influence consumer trends. And as consumer trends evolve, so must the startups looking to capitalize on those trends.
Sophie invests in consumer products at Collaborative Fund (@collabfund) in New York. Prior to joining Collaborative, she co-founded di8it Charts, a data visualization startup for digitizing chart images. Before di8it, she traded credit derivatives and served as Credit Products Manager at III Capital Management. Sophie has a B.S. in Mathematics from Tufts University.