Digitalisation is the most important innovation to hit the CPG industry in our lifetimes – but digitally-native brands must rethink their sales strategy to prosper. 

The advance of digitalisation has shifted the paradigm, not only as a sales channel (via aggregated online retail marketplaces and direct-to-consumer) but also as a way for brands to get closer to consumers and to acquire data that, until now, was the exclusive province of bricks-and-mortar retailers. 

Digitalisation can also be a powerful strategic sales tool for brands. Marketplaces like Amazon, or more niche-oriented online stores like Thrive Market, can be used by CPG companies of all sizes, from start-ups to legacy, to test and launch products and refresh existing brands. 

From a strategic sales perspective, launching a brand via the direct-to-consumer channel is not only quick and easy because there’s no need to convince an intermediary – retail category managers – to authorise and bring the brand into stores. As part of an omnichannel sales strategy, it’s also a great way to create awareness of a brand before launching (or simultaneous with launching) into retail stores. 

It’s important to add that retail category managers, particularly those with expertise and who know how to use data, provide a great service to brands and to consumers. They serve as a human vetting process that can result in discovering great products, as well as keeping those with failure written all over them off store shelves. Curation has its merits. 

However, so, too, does selling directly to consumers. Category managers aren’t always right and brands have the option of going directly to shoppers with their proposition. 

The most headline-grabbing aspect of direct-to-consumer is its use as a sales channel. And, within that, the big event, so to speak, has been what’s called digitally-native brands. These brands are created and launched with the explicit intent and mission to be sold only online – mostly directly to consumers but also via aggregated online marketplaces – and to never be sold in bricks-and-mortar retail stores. 

In the early days – and early isn’t very long ago because digitally-native brands are a recent phenomenon – several brands were able to achieve solid sales by going digital-only. Many of these have been acquired by big CPG companies. 

However, over the last couple of years achieving that level of sales has become increasingly more difficult and expensive. There’s been increasing debate among founders and their investors as to whether digitally-native brands can still become substantial brands – substantial being defined by a goal of reaching at least US$100m in annual sales. In fact, it’s becoming increasingly difficult to even build a digitally-native brand to $50m in annual revenue. 

Evidence of this debate has been the move recently by a very hot digitally-native brand like Magic Spoon cereal into bricks-and-mortar stores. Magic Spoon is strategically pursuing a multi-channel strategy, is set to enter Target and is readying plans to move into other physical retailers on its brand. The company also recently announced a Series B funding round worth US$85m. 

Bricks-and-mortar grocery retail still accounts for over 90% of all CPG sales in the US. Many digitally-native brands in packaged food thought they could be part of disrupting this reality. It’s not going to happen any time soon. 

Sales of groceries sold online did double in the US during the 2020-2021 pandemic shutdown. Much of this growth has stuck so far but that still amounts to online grocery sales being about 7-8% of total grocery sales, rather than the 3-4% it was prior to Covid-19. 

Numerous other digitally-native brands, particularly in packaged food, are following Magic Spoon because they’re faced with the reality of the marketplace, as well as getting friendly pushback from their investors. Being solely digitally-native doesn’t offer the market size universe, the customer base, nor the sufficient frequency of purchase required to take a brand where its strategic plan – and its investors – need it to be if it wants to become a substantial player, which is the goal of most. 

The customer acquisition costs for digitally-native brands, particularly packaged food brands because they generally have lower margins than non-consumable CPG products, have soared over the last few years as well. 

The primary tool to obtain, maintain and grow sales of digitally-native brands are paid ads on social media platforms and, to a lesser degree, Google Ads. The main – and, to date, most successful – digital advertising platform for digitally-native brands is Facebook. However, of late, Facebook has not been performing as well as it used to for these brands (there are individual exceptions, of course). 

Many venture-capital investors still share the hope that substantial CPG brands can be built by disintermediating the legacy, physical, grocery-retail system. The mission of most of them is fuelled by a legitimate desire to avoid the intermediary, as well as to be able to get closer to consumers by selling to them directly. 

There are CPG brands – most self- or privately-funded and wanting to remain small, niche players – in the consumables space that are doing well as digitally-native brands but there is a growing belief in the industry that it’s difficult to even grow to $50m in annual sales by going the digitally-native route alone. 

Being digitally-native is fine if you want to build a niche, speciality brand that will top out at around $10-25m in annual revenue. To build a significant brand, bricks-and-mortar stores are required not only as a channel, but they’re also essential. That viewpoint has been vindicated by the moves we’ve seen by digitally-native brands into physical grocery and other retail stores. 

We’ve reached a paradigm shift in thinking that’s beginning to turn into a paradigm shift in behaviour. A growing number of founders and executives in CPG, along with investors in digitally-native brands, are increasingly realising that building a brand with significant sales can’t be done via direct-to-consumer only. Even the digitally-native evangelists are getting that old-time, bricks-and-mortar, retail religion. Physical stores matter today as much as they mattered two years and even two decades ago. Omnichannel should be the focus. 

We’re going to continue to see digitally-native brands, particularly those in packaged food, trying to move into bricks-and-mortar retail and at an accelerated pace. In most – if not all – cases, assuming decent-to-excellent repeat consumer sales in stores, after hitting a certain number of stores (far short of being a national brand, by the way), sales in physical stores will surpass their sales as a digital native. This can happen in as little as a couple of years. 

We’re also going to see fewer digitally-native start-ups being created, particularly in the consumables segment. Most investors I talk to are focusing on putting their money with CPG start-ups that have an omnichannel strategy from the start, or those that plan to launch in the direct-to-consumer channel, build awareness and sales – and then launch their move into bricks-and-mortar stores. 

Most entrepreneurs, including serial entrepreneurs that have previously built substantial CPG brands, are convinced physical retail stores matter. That loud clicking you can hear from keyboards is coming from digitally-native brands rewriting their business plans to include physical retail as part of the omnichannel mix. 

My argument doesn’t negate the innovative phenomenon that digitalisation, online marketplaces and direct-to-consumer represents for the CPG business, nor their value. In fact, it does the opposite – it places digitalisation where it belongs, not strictly as a sales tool but rather as an integral part of a CPG brand’s multichannel sales and marketing strategy and the tactics that flow from it. 

Building a brand isn’t for the weak or the meek. Taking away bricks-and-mortar retail, which accounts for over 90% of CPG brand sales in the US, is like taking a carpenter’s hammer away and asking her to hit each nail on the head with a pair of pliers. 

The successful future in brand-building for CPG companies is multichannel – physical and digital retail combined – and figuring out the best ways to create synergy with, and between, the two. That’s where the true power exists today for CPG brands. 

just-food columnist Victor Martino is a California-based strategic marketing and business development consultant, analyst, entrepreneur and writer, specialising in the food and grocery industry. He is available for consultation at: victorrmartino415@gmail.com and https://twitter.com/VictorMartino01. 

Main image: Magic Spoon Cereal Credit: @magicspooncereal / Facebook