CPG in trouble: Can solutions be found in corporate venturing and startups?
To take maximum advantage of corporate venturing, CPG companies need to adopt some startup know-how, according to Bahige El-Rayes and Roberta Roeller of A.T. Kearney.
Bahige El-Rayes is a principal in the consumer and retail practice of A.T. Kearney, a global strategy and management consulting firm. Roberta Roeller is a consultant in the practice.
Over the past five years, large CPGs have been losing market share to smaller businesses with more nimble business models, greater consumer focus and faster innovation cycles. The top 25 CPG firms collectively lost more than $15 billion in market share to startups and midcap firms. To reignite growth, several legacy CPG firms have created corporate venture funds; however, recent analysis by A.T. Kearney indicates that most of these funds have not yet succeeded in this mission.
In an effort to protect their venture funds from legacy processes, CPGs have often placed them at arm’s length from the rest of the business. As a result, strategic lessons from their new acquisitions’ business models often do not translate to the legacy side of the business. Major CPG companies still suffer from long lag times for product launch, hierarchical decision-making and investments geared toward large brands instead of growth areas.
Learning from these enviable startups first requires finding them. To bring in the right startups, corporate venture capital funds need to maintain a busy pipeline and be comfortable with 85% of investments going to zero — two of the key disciplines of venture capital firms. Our analysis shows, however, that major CPG venture capital funds are a lot less active than independent venture capital firms, with only two to three deals a year on average. To be successful, corporate venture capital funds should work much faster than traditional corporate M&A, adapting the speed and risk appetite exhibited by venture capital firms. Recruiting seasoned VC experts with the right risk appetite can help accelerate the pipeline.
Startups do five things really well: Quick decision-making, rapid innovation, relentless consumer focus, empowerment of cross-functional teams and meaningful analytics. Focusing on transferring these skills will provide CPGs with the greatest opportunity to improve their core business models.
Quick decision-making. Startups are able to make decisions quickly because of their flat hierarchies and almost nonexistent reporting structures. Elon Musk famously emailed everyone at Tesla, encouraging them to “email/talk to anyone else according to what they think is the fastest way to solve a problem for the benefit of the whole company,” instead of going through layers of management. CPGs can accelerate their decision- making by slashing layers and empowering project teams to make their own decisions, with full accountability for outcomes.
Rapid innovation. Agile development, the methodology of highly iterative yet flexible development found in most CPG startups, makes for rapid innovation and leads to beating large CPGs to market with new products by two to three years. To compete, CPGs need to take a leap of faith; test new ideas in “pretotypes” with real customers to get early, meaningful feedback; launch a MVP and continue improving the product. This approach measures actual purchase behavior as opposed to the consumer intention measured by surveys and focus groups, and it allows the company to build the right product much faster. If you weren’t embarrassed by the first version of your product, you probably launched too late.
Relentless consumer focus. The reason brands go viral is not that they are new, but because they hit a nerve with customers. What startups do well is focusing on the consumer first, not on the market or their competition. When Unilever acquired Dollar Shave Club, it not only bought into the lion’s share of the online shaving market, but also added 3 million loyal customers who create recurring lifecycle revenue and provide excellent cross-selling opportunities. Shifting toward customer centricity will help CPGs pick up traction for their brands.
Empowering cross-functional teams. Startups often have tech-heavy yet versatile teams dating back to their founding times when product needed to be built but everyone was also required to do everything else to run the business. At Dollar Shave Club, 25% of its 200 employees were engineers at the time Unilever acquired the company — yet they served more than 3 million customers. CPGs can mimic this setup by deploying cross-functional teams with heavy engineering components to projects and letting them autonomously figure out their product.
Meaningful analytics. CPGs often start collecting large amounts of data in the hope of creating data-driven business models, but the data either go unused or become overcomplicated without business implications drawn from it. What startups do well is employ meaningful analytics, such as conducting structured A/B tests and using hard data to inform decisions. What CPGs can learn from this is setting clear test goals and measuring specific, actionable data for these goals rather than relying on focus group sentiments.
Finally, CPGs need to provide the right environment to transfer startup know-how into their organizations. We’ve been coaching businesses to innovate their operating models by setting up a clear process, determining governance and roles and defining interfaces to harvest the true potential of corporate venturing. There is no one-size-fits-all solution for CPGs. They will continue to struggle on their path to acquire and harvest startup thought processes and skill sets.
To get started, CPGs might look at acquiring an ecosystem. Kellogg’s collaboration with The Hatchery, a Chicago-based food incubator, is one successful example. Accelerators and incubators fuel the deal pipeline and give entry to a whole world of ecosystem partners at once, which is otherwise long and hard work.