Ep. 49 The Not-So-Secret Weapon to Eliminating Your Competition

JULY 1, 2021

“There’s no such thing as defensible innovation in food,” a jaded marketer muttered near me at a very long, two-day innovation off-site years ago. This opinion makes total sense if you look at the average line extension from a public food or beverage company. The vast majority of legacy brand product launches are new flavors or formats (drinkable yogurt). If Brand A launches one of either, their rival can quickly establish an equivalent, potentially neutralizing any brand-to-brand market share problem. For example, look at the recent hard seltzer craze. 

Yet, after working for years in the early-stage end of the industry, I’ve realized how wrong the above marketer was in absolute terms. Defensible innovation is possible in food and beverage. More importantly, I’ve seen how strategically effective manufacturing-level insulation can be for entrepreneurial brands in their quest for scale.

What do I mean by manufacturing insulation? I mean a formulation that U.S. co-mans can NOT make at an industrial scale on their existing lines in North America (and perhaps anywhere in the world). It’s a formula that requires retooling lines, buying specialized equipment, too many humiliating trips to European plants that are years ahead of them or all three.

Entrepreneurs who insist on their original formulation generally find themselves building their facilities. Sometimes these early facilities act as pilot plants that eventually convince a major co-man to dedicate a line to them. In other cases, these brands scale entirely on their own. I know of dozens of early-stage brands doing this right now.

Self-manufacturing is probably the most brilliant insurance policy you can take out when it comes to scaling efficiently. Why? Because it is the best way to eliminate direct competition for years or even entirely (if you can grow exponentially).

I’ll admit that the advantage here ironically goes to current co-manufacturers themselves, at least to the curious Willy Wonka types among them. Speaking of candy, a great example of how this works is the story of Scott Semel’s now-famous creation: Bark Thins. If you ever wondered why neither the Hershey company nor Mars launched a similar product long ago (it’s just a smashed-up chocolate bar with inclusions), the answer is in the technical details. Bark Thins is a fractured random weight product. Candy bars, however, are geometrically uniform across almost all major brands. Breaking up the chocolate and then ensuring that the ounce weight of chocolate shards placed in each bag is identical is a mechanical engineering puzzle. Moreover, public firms rarely green light expensive technological re-toolings of their existing plants for such an idea (although Hershey later did for its not too successful line – Cookie Layer Crunch). It costs millions and millions of dollars to set up brand new lines for a BigCo style launch, and if it doesn’t work out, the political fall-out is usually worse than the financial loss incurred by the retooling.

A much less well-known example is none other than KIND bar.  At the time of KIND’s emergence in North America in 2004, public and private bar manufacturing plants focused entirely on “slab bar” technology. These bars are made from ingredients mixed into a dough-like substance, extruded, pressed, baked and cut into uniform shapes (granola and energy bars). Powerbar was the first, then Zone, then Clif, etc. Lubetsky and his team didn’t have ready access to large-scale plants that could maneuver whole ingredients without pressed extrusion into a rectangle shape on top of a chocolate layer. In fact, in his book, Dan Lubetksy reveals huge problems just producing those initial runs, including oxidizing almonds (when nicked or rubbed) and other challenges. KIND was conceptually simple for consumers, yet a royal pain to commercialize. This is, in part, why no major U.S. bar brand had ever even tried a non-extruded bar with whole ingredients.

I could share more cases of manufacturing insulation, but the more significant takeaway here is something I talk about in my book under what I call the Law of Formulation Anchoring. It’s very advantageous for a new CPG brand to have a novel formula or production format or both because it creates an initial layer of defense from copycats but also because it creates a foundation for enhanced memorability.  However, if this novel formula also requires specialized manufacturing facilities not widely available, it will be tough to chase.  Strategics, especially, will be unlikely to get involved at all, even with a lazy line extension, for sheer lack of a co-man to call up and push through a copycat order. Strategics will more or less have to wait until you scale, if you scale, which is to your financial benefit anyways as a seller.

While self-manufacturing is often assumed to be more expensive than paying co-man tolls, the costs of workable used equipment have come down radically in the past five years alone, according to my R&D sources. It is cheaper than ever to create a formula that you do have market control over. If you’re an emerging brand about to start, it’s worth thinking through at length before jumping to the co-manufacturing option by default.

If this is NOT in the cards, then you can use contracts with co-mans to ensure that your proprietary ingredient formulation at least is not shared or is defensible in court. 

There are four layers of defensibility in CPG. I will list them in order of relative power in fending off imitators.

1.     manufacturing process
2.     the formulas
3.     packaging container
4.     your brand identity

I’ve been talking to you about the least discussed and most potent option. The manufacturing process. Those who self-manufacture generally have something technically innovative, not just symbolically differentiated. And this is THE power position in CPG. 

If you use a pilot facility to scale to a couple of $million with your technically unique production method, it might just be enough to convince the right co-man to customize a line for you. I know a few founders are doing this right now. But you need to be incredibly credible as businesspeople. 

That’s all, folks! Be safe out there