Ep. 19 Learning the Right Lessons from the Covid-19 Emergency

APRIL 01, 2020

00:18 Welcome to our new reality in the United States and to episode 19 of Startup Confidential. So let’s face it folks, COVID-19 and social distancing are the number one topics on all our minds these days, well, most of our minds, other than the recession which has almost certainly begun. And both are combining to form a major, major, major hiccup to 2020 plans for all of you, large or small. So I wanted to share some near term lessons from prior recessionary near term lessons, given the particular combination of disruptions, historically unprecedented disruptions that are going on right now. So let’s get to these first because these affect how you operate the business right now. You need to be able to adjust your Forward P playbook right away when you have market disruptions like this that hit and they hit regularly enough that it’s almost impossible for any successful brand to thread the historical needle between the last one and the next one.

01:20 The fact that we haven’t had a major economic disruption to business in eight years is completely anomalous if you look at the historical record. So we were overdue for a recession anyways. We were all lucky. We should have accept that. Even once this is over, you want to be ready, especially if you’re a new brand, you want to be ready for it to happen again, even if it’s just another mild recession in five years. So I just wanted to say that severe disruptions aren’t actually uncommon. It’s just that they don’t [inaudible 00:01:49] happened on this magnitude and this is so historically Black Swan-ish that we don’t know quite where it’s headed. But clearly in the near term, here’s some risks you’ve got to mitigate for emerging food and beverage brands specifically.

02:01 You have a decline, a severe total decline in public attendance side events that were used or going to be used for field marketing and sampling. This was a major, major, major trial push technique. It’s basically going to be unavailable to you in the near term until retailers reopen store demoing and the events start happening again. And honestly folks, that may not happen at all this year. You need to be prepared for the fact that it won’t happen at all in 2020. So how do you market in that environment? You need to be prepared for a huge uptick in home grocery delivery. That’s kind of a no brainer. The data’s very clear on that. Even with the massive delays and disruptions in the core markets for Amazon Prime now, people are still ordering like crazy. They’re just shifting their ordering habits to put up with the two, three, four day delay that might be happening.

02:48 But the issue with home delivery guys is that it is reducing the number of trips into brick and mortar retail. And if you’re selling an impulse product, so snack nuts, candy, grab and go beverages. If you’re selling any portion of your revenue on impulse and in those categories you are, then you’re going to lose a percentage of your revenue because the bodies aren’t coming in there to receive the impulse in the store to salivate over your thing. And the habit of going and grabbing stuff on the go is vanished because people are stuck at home now. That’s why Pepsi’s stock has tanked guys because they have an enormous amount of their revenue that sold on impulse out of the store. And if you have a sizeable business, you’re going to feel some of that. You absolutely are.

03:35 So just be aware of that. Now there are ways to drive impulse online and this is the time to experiment. A third area is possible. The retailer ban on food and beverage demonstration started with Costco and it’s pretty much spread everywhere. So those are no-go. Digital sampling is available to you through sampler and other services. You may want to explore that in the near term. If you want to really invest in trial, and that’s a strategic decision that you may not want to make this year. You may want to hunker down with your fans. We’re going to have a decline in food service, traffic that is going to accelerate as the fear accelerates. So we obviously, and a lot of the are major metros, the restaurants have already been shut down in home eating, but the issue and takeout and delivery is still happening.

04:17 In fact, it’s encouraged by governors to keep those businesses afloat. But the problem is here’s another source of impulse sales. So if you were selling packaged goods into QSR restaurants to be bought on impulse, cafes and stuff like that, that impulse is very, very unlikely to happen. Even if the person goes in to get takeout, because if they’re going in their mind is about how quickly can I get out of this investment with my takeout and get the hell out of here. So they’re not going to be in a mood to be receiving the sensory signals that drive impulse sales of food, candy, snacks, you name it, very unlikely. Unless it’s right at the register and even then, probably not. Another risk to mitigate is obviously the cancellation of in-person buyer meetings. Those have basically been shut down nationwide.

04:59 Furthermore, you’re going to have to try 10 times as hard to get a phone meeting because the bigger players early stage and the bigger brands are occupying the buyer’s time as everybody’s scrambling to keep up with the massive surge, massive surge in packaged food and beverage demand. My webinar that happened last Friday, March 27th, I talked about some of the factors to understand about that surge. It’s not a growth curve. It was a surge. There’s a difference between a growth curve and a surge. Another risk is localized sales barriers affecting smaller businesses with highly localized distribution. So if you’re trucking the product in to local stores, this is going to become more difficult. They may not want you in the store. You may not want to go to the store. Another risk is that you need to suspend localized field sales operations, certainly national ones because you can’t even get on the planes.

05:47 How do you manage the [inaudible 00:05:49] without the high touch field sales staff either locally in your home market or nationally or regionally? Another risk is funding is going to be harder to find outside the angel universe. Institutional funding is going to get much harder to find, yes, it’s there, but you’re really going to have to chase a lot harder. And you want to chase the funds that your network is telling you is at the end of the fund cycle, so they’ve got money, they have to, have to spend this year. So you need to find the funds that have to spend money in 2020. Everyone else is going to be taking their money and they’re going to invest in their existing portfolio. But the folks who need to make new deals are the ones who will. So find those folks, otherwise you’re going to have to stick with angels and angels may be stepping out of the game as well as they focus on rebalancing their investments and we’re going to lose angels permanently because they’ve lost 30 to 40% of their net worth in the last three weeks.

06:38 Which for them could be tens of millions of dollars. So they may be just deciding to check out of investor country. So you’re going to have to work harder if you need to raise capital. I would not raise strategic capital this year per se, because we don’t know how long this is going on. You don’t want to raise capital this year and not know when you can deploy it. That makes no sense. It’d be better to hold. Here’s the thing. 80% of CPG brands, I know that was a depressing list, but 80% of CPG brands are selling 500 [inaudible 00:07:03] in trailing revenue. That hasn’t changed since I wrote my book. If you’re in that death funnel, you are very, very unstable week to week, you already know that. You’re reorders are not stable. We’re most likely entering a recession that the government will not declare that for another quarter. That’s just what they do.

07:18 What happens in this environment that you have to understand is that trial of new trademarks within a category, it shuts down unless you have a particularly, particularly what I would call 5% of new product launch level of innovation in healthy better for you attributes in your category. You’re going to get trial. You will be able to stimulate trial if you’re that innovative, but otherwise it’s going to shut down and what you’ll get is if you get trial, you’re going to get trial because your competitor’s out of stock. And that is what I call weakened purchase intent trial because they may just be buying you out of desperation. We know that impulse sales have been shut down and grocery trips are people trying to get in and out. And they’re not going to the stores often. They’re going to the store and they’re buying for a week, two weeks at a time. And the more paranoid they are about the virus, which is correlated with education and income, the more likely they’re going to do that.

08:07 So a lot of impulse packaged food and beverage companies have been used to increase trip frequency has driven increased impulse sales in those categories. And a lot of their growth has come from the increase in the trip frequency and that’s all shut down. So you need to stay in close contact if you’re in the death funnel with your distributors and brokers for updates on your key accounts. You need to prove to them, literally on the phone or on webcam that you are incredibly committed to keeping your stock up to servicing them because they’re going to instinctively not be paying attention to you unless you fight for that attention. You’re just too small. These are the near-term risks. These actually aren’t the biggest lessons coming out of what we’re all going through right now for your business. The important lessons actually aren’t being televised at all.

08:52 They’re not being discussed on LinkedIn to my shock and horror. And they are probably not coming in your inbox either and that’s because they’re being forgotten and because they tie to consumer behavior. Ooh, yes, those consumers, the people who drive your business as opposed to the distributor and retailer who just intermediaries. This is an absolute perfect time to focus more on them, specifically a subsegment of your consumers. So if we look back at the great recession of 2008, we can learn some of the most valuable lessons that still hold right now in the COVID emergency for emerging CPG brands. And they aren’t tactical at all. They’re big, big, big, big macro things that you don’t think about much day to day. Here we go. They are A, the category you chose to begin with. B, your strategic philosophy. Now these two things seem random and unconnected, I know, but let me back up a bit and give you some context so you can understand why I bring them up.

09:48 We know the consumers do a couple of things during the recession that negatively affect early stage premium CPG brands. And as I say this, I really want to double down on the highly vulnerable folks in the death funnel when I talk here, because your trademarks are the least known and the youngest. So think about anybody who launched in the past 18 months and that’s who I’m talking about. So consumers generally stop trying new premium trademarks and they stick to the ones they currently know. They stick to the brands they currently know in each category period, whether premium or mainstream, the phenomena has been well-documented either way. And they’re doing this out of stress. They’re in a stress psychology, which is socially generated in which risk is managed by banishing as much of the alien as they can and clinging to that which they know.

10:33 That includes their social networks, but also includes their set of brands that they bring into the house. Because nobody wants to deal with the, “Hey, let’s try a new kid yogurt,” and the kid hates it. In this kind of the experience, in this kind of moment, no one’s in the mood for that crap. Just to give you a family household example. So that’s one of the reasons why these aren’t happening. The other thing is that at least half of the premium market, which skews female is very other directed right now and so they’re not focused on their own self-indulgence nearly as much. So you’re not going to get as much experimenting in chocolate and wine and other stuff. You may get it episodically amongst the wealthy, but the middle classes are going to stop trading up to artists and brands purely for indulgence.

11:17 Part of that is because some of the people trading up [inaudible 00:11:19] just lost their restaurant job. To be honest with you. They just can’t be wasting money on stuff like that when they’re trying to pay the rent and their grocery bill. So anybody trading up that isn’t essentially high net worth or high cashflow, upper-middle-class, anybody not in those groups trying to trade up on the basis of ingredient quality or unique flavor, sensory experience, stuff that’s tied to the high end restaurant world, think specialty foods, this is going to be a shit year. It’s going to be a very challenging year, especially Q4 if this continues into that. And now what I mean is not the COVID emergency as much as the recession and that its effect on cash flow and people’s perception of the amount of money they have. It will not stop trade up to specialty goods, but it will reduce the amount.

12:08 So you’re going to have to fight harder for that trade up dollar because there’s less of it available. Both of these behavioral changes that I just talked about have a differing impact on your business based on its core category which is why I brought up that variable just a bit ago. So I know this is not what anyone listening really wants to hear because you can’t change your category right now. You’ve chosen it. You’re locked in, baby. But this is one of those moments when you’ve got to be really honest about what upside and downside your category is creating for you in this particular landscape of consumer packaged goods in a recessionary environment. And I want you to focus more on the recessionary environment right now because that affects your strategy. The social distancing is affecting your tactical playbook to a large extent, and we don’t know how long it’s going to last.

12:51 The recession however, will probably be a minimum multi-year reality unless there’s some miraculous COVID emergency lift and flood of capital, and I haven’t seen a single economist suggest that that’s going to happen in 2020. The reality is where you chose originally to innovate matters a lot in how you’re going to react strategically once the recession hit. So how is this so? Well, it has to do with the structure of premium trade-up behavior. And that varies immensely by category in modern American food culture. This has been well-documented by myself, my colleagues and other people in the food and beverage industry who specialize in this area. And if you don’t believe me, you can go to your grocery store right now on your next mega stock-up non-hoarding trip because we don’t hoard people. We don’t hoard.

13:34 We stock op. Wink, wink. Just go stare at the dairy aisle and look at the organic product that’s out of stock versus the categories where organic is in stock and you’ll see how much variation just in dairy there is a demand for organic. Category by category. I’m not going to sit here and explain to you why that is because it’ll bore you all to death since most of you aren’t in those categories. But the point is the structure of premium trade up varies immensely by category. And you have to understand more about how it does in yours. And a lot of that has to do with the social drivers and the occasion based drivers for trade up and how amenable a category is to habituation of daily to weekly consumption of the premium offering. So some categories generate almost all their premium trade up because we want to indulge in what we think is a more refined, unique, higher quality sensory experience, cheese, beer, wine, chocolate, bread, boom, shaka, ice cream, doo doo doo doo doo doo doo doo doo.

14:27 These are some of the earliest categories that went premium in the 1980s and 90s. And when I say went “premium”, I’m talking premium into the middle classes, even if it was just on the holidays. Now if you sell in these categories, a recession’s a real problem every fricking time, because you lose that middle-class trade up because they already knew it was optional and most of the year they’re eating shit cheese, shit beer, shit wine, shit chocolate chip bread. They’re just trading up to your stuff episodically when they feel lovely, lucky lottery, good. And they don’t right now. The number of people who aren’t going to is probably going to be much larger right now in 2020 than it was in 2008 and nine. And part of that has to do with the speed at which tens of millions of people are losing their jobs.

15:10 It tends to put one in a very busy mood. This is conducive to self-indulgence of comfort food, but unfortunately it’s conducive to pounding Lays and Doritos for the vast majority of Americans. I myself have dipped into the Frito-Lay much to my own horror, of course. It’s a problem for these folks in two ways. You’re asking folks to spend a lot more essentially for fun and that just seems naughty, naughty during a recession. So psychologically it’s a lot like vacations. Now, it’s very easy for most people to shut down the vacations because it’s a big ticket item and duh, you see the bill headed your way as you’re booking, and so you shall be unbooking and you shall be not to booking new things. It’s very easy for middle-class Americans to shut all that crap down. But they still need the fun and they still need the fun foods.

15:56 It’s also very easy for them in our distribution environment to simply snap back to Lays. If their reason for eating potato chips was basically emotional eating and for most people, that’s exactly what it is. There’s no health, better for you reason to have a bowl full of Lays. It’s pornography for the mouth. So why not get it for nothing, for very little than pay for kettle chips? Now, another reason is that the categories I just mentioned, cheese, beer, wine, chocolate, bread, ice cream. These tend to be … a lot of premium is bought for parties, for events. Events may not happen a lot in your household when you aggravate the low frequency over a crap ton of households, you get a lot of volume. You get a lot of volume.

16:38 So those categories, specialty foods especially, get really slammed because no one is getting together. Social distancing is really a cluster. In a recessionary environment people don’t hold those parties as much. They just don’t. That all shuts down where it reduces in frequency. Again, if you’re thinking about the 1% or the top five to 10%, which is probably you, then you’re not going to see this in your social network as much during a recession. But for the average person who trades up in those classic specialty categories, they’re not doing it. So Whole Foods may have their business go up, but it’s going to go up pretty disproportionately from folks who are already core shoppers. They’re just going to spend more because they’re not a restaurant. They’re losing lots of trips from what I would call the casual specialty trade up who’s going there because they’re having a party.

17:24 So I call it the Budweiser snapback, happens all the time in a recession and those people will start trading up again once the cashflow looks better. I am absolutely positive they will. We just don’t know when. And I doubt it’s this year. I really, really wouldn’t plan on it this year. So in categories like this, there’s just a loss of sales. How much there is percentage wise will vary based on your awareness but these are categories that really build themselves on episodic consumption that’s shutting down. But in categories where premium trade up occurs because of health drivers or deeper health commitments on an individual level, brands that were chosen before the economy tanked often have become habitualized into daily life. And this is what you really want as a founder. So these are categories where premium trade up doesn’t get hit nearly as bad.

18:08 And that’s because it’s habitualized trade up and that can be true for a startup and it can be true for a $10 million brand, $30 million brand or a billion dollar brand. Right now is a period for those kinds of brands and those kinds of categories and obviously bars is one of these where the mass majority of purchasing is health-related where loyalty marketing is now, used to be a lower priority, now it’s an absolute top priority 911 mission critical marketing thing. And so you need to have relevant offers communications to keep your brand memorable among those who already love you in those categories that are oriented primarily to health driven trade up. Why? Because it’s going to help them remember you. So even if you go out of stock or experience long shipping delays, and this is all happening right now to small businesses that aren’t getting much service at all from Amazon FBA, or if you decide to do something dramatic and switch channels to keep going, they’re going to have a delay in availability.

18:59 Memorability will help bridge that gap in availability. Memorability conquers lack of availability, and this is something that you can control if you have built up the digital lists and digital communication channels. And you can do it as effectively, probably, honestly, more effectively than [inaudible 00:19:17] could ever do. Because when you decide to share your founders struggle trying to get your product to people, people are going to be amazed that you reached out. They’re going to feel very, very emotionally involved in that communication. And that’s going to make you memorable and it’s make more likely that you’ll literally guilt trip them into continuing to buy you or to buy you again, once you appear. So you’ve got to open up a loyalty communications channel, not every day, but during this time probably once a week, at least to update your fans on availability and offers.

19:46 You’ve got to keep your current fan base buying you people. So extreme creativity is needed. Show your human side as a founder to get this done and I would say for the most part, if you’re in the early ramp up of the business, don’t spend your time trying to build awareness or try right now with your precious dollars. Spend your dollars to preserve the business, preserve the fan base, keep them buying you. Keep them happy because the loyal people will be driving automatic word of mouth even online at some degree. So keep them happy. These are just my initial thoughts folks. Be safe out there. Literally, be safe out there.