Ep. 25 Why Hitting the Gas on Distribution Almost Never Works

JULY 01, 2020

00:19 Welcome to Episode 25, Why Hitting the Gas with Distribution Alone Rarely Works.

00:27 Look, the hockey stick is probably the best known visual metaphor for growth in the consumer sector, including consumer tech, but here’s why you should forget about it if you’re a premium consumer packaged goods startup. The hockey stick is essentially delayed unicorn growth. If it happens that way, it is almost always an unplanned convergence of three kinds of luck, lucky product design in just the right category at just the right moment in that category’s historical evolution. Yes, the unicorn still has to be managed properly as a business and sold into retail as well but it doesn’t require Lance Collins to be on your team. You just need all three of those pieces of luck to converge, although it wouldn’t actually hurt that much if he was on your team.

01:16 In my nearly 20 years of research into CPG growth in the US market, I can say that unicorn growth happens about once every two to three years, max. Given that hundreds and hundreds of CPG companies are launched each year and tens of thousands already exist at any given moment, I think it’s fair to say this is not a path you really should be planning. It’s not one you can plan to be on, especially when in the majority of cases I reviewed, unicorns, much like the line extensions of big co-brands that they crudely mimic, they don’t actually keep growing and scaling because they essentially cheated.

01:57 They hijacked faddish obsessions and rode tailwinds more than built the business through intensive consumer persuasion, strong commitment, word of mouth, leading to higher repeat and virality. [Collie Power 00:00:02:09], for example, that I talk about in my new book, didn’t scale as fast as it did off of virality, there was no time. It did it by riding a weight management ingredient fad, brilliantly.

02:21 Forget hockey sticks, unicorns, and other shitty metaphors of statistically less than likely growth. The most common growth mistakes CPG entrepreneurs make, just as they’re starting to succeed, after they get through the death funnel I talk about, is to get impatient and start ramping doors excessively. They confuse distribution breadth with growth. They start thinking like a broker. They count doors and keep reading shallow trade media articles that also count them.

02:51 Wait, what’s excessive distribution breadth? Well, let’s get empirical then, shall we? There are around, oh, 250,000 doors that take CPG items in the United States. Around 38,000 of them are supermarkets, lots of territory as they say. Adding thousands of doors when your current store count is less than a million dollars in trailing revenue or less than a thousand existing doors is the most common mistake for brands that can’t really afford effective field sales and field marketing or advertising to build awareness. What I just described more or less equates to going national in just one of the top 10 chains servicing the country with CPG items.

03:34 This kind of aggressive overreach is based usually on the fallacy that door count is directly proportional to top line sales. That fallacy is fueled by inexperienced private equity and angel money, which I encounter too often. It betrays a massive degree of ignorance as to how bloody hard it is to gain trial for premium price CPG items when they’re sitting not too far away from the commodity equivalents. Just showing up on shelf is hardly sufficient.

04:03 Look, I’ve done analysis of a large, random sample set of premium brands. I can tell you that top line growth is not statistically correlated to the scale of distribution breadth, not at all. You are as likely to grow as you are to decline if your only growth lever is adding doors. The initial orders usually get followed by lower orders for founders who simply bank on distribution growth as their primary lever. Only a massive advertising onslaught can stimulate awareness fast enough to move products distributed on mass in mere months.

04:43 For scrappier companies, you can replace the massive advertising with massive PR, such as once upon a farm did, but these are not tools generally available to your average CPG entrepreneur. The more innovative your brand is the more the failure will be precipitous. Ironically, this may cause you to rethink your offering when in reality the problem was the shitty advice you took from some board big co-executive trying to help you. I swear to God, that seems to be the origin of most of this.

05:12 You didn’t give it time to incubate, you didn’t give your thing time to incubate in real consumer social networks and in modern urban culture at large. Siggi’s Yogurt could have just given up the ghost in 2010 because they weren’t scaling really fast. Growth had been there, had been steady, but definitely not exponential. The product line launched well ahead of urban trendsetters in low sugar eating. It was early, as many innovations are, some of the best ones, and it needed time for culture to catch up.

05:44 The macro trend, however, was already there but getting lots of consumers to alter their cultural expectations of a sweet flavored yogurt took time. It’s just one example of why launching at Walmart purely for the of thousands of new doors will never produce the scale of business, that arriving in Walmart years later, once your premium innovation has had time to build demand ahead of availability, will achieve for you.

06:10 There’s a time when you want to go into the high traffic commodity flooded doors at Walmart to maximize your revenue creation in that chain. Most cases of premature Walmart entry, for example, that I reviewed lead to delisting due to under=performance and, honestly, sometimes at the request of the founder, not even the buyer. Even then, for premium priced items, too much of the potential audience is literally priced out despite their potential attitudinal interest. Lay style advertising, even if you had the money or a PR machine to do it slightly cheaper than paid media, it’s not going to generate the same kind of returns as it does for a highly iconic name brand that’s been around for decades at a non-premium price.

07:01 Look, there’s a way to accelerate in premium CPG and it does not involve sudden national distribution before you have developed and tested a playbook at a smaller scale. If you’re going to go national quickly, e-commerce, for the under-capitalized entrepreneur, is absolutely the best way to do this since it provides opportunities to do highly efficient targeted advertising and email marketing to every single customer.

07:22 More importantly, you don’t pre-sell a whole bunch of inventory blindly into some retailer system before you know the state of demand in that geographic location. You’re selling on demand, not ahead of known demand. One rule of thumb to use in assessing whether you’re adding too much retail distribution as you’re thinking about onboarding options that your sales team is generating, is to put together a conservative unit velocity projection for that added distribution. i.e., those added stores at the new account, and see if it’s doubling your trailing revenue all by itself over the next 12 months.

07:56 Wait, James, didn’t you write a book about doubling your revenue? Yes, I did. That’s great but not if the doubling is achieved entirely through store count growth. This doubling should mathematically be caused, in part, if not to a large extent, because of steady velocity growth at existing stores. Should not be caused entirely through distribution breadth increases. If you’re curious about how this math works, I’m going to be publishing a VIP founder white paper later this summer with some real world examples of how this plays out.

08:30 If you are such a founder interested in this topic, please go to my website, www.premiumgrowthsolutions.com. Scroll down to the PGS monthly section and fill out the form there to subscribe. This is a founder’s only little sub-community. I do screen it so I boot you out [inaudible 00:08:48].

08:50 Thanks folks, and remember, be safe out there.


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