Rollups – How to Build a Modern Day CPG

When I was at Jarden (now Newell Brands), we always had clear acquisition criteria when it came to M&A. 

  • Strong cash flow characteristics
  • Category leading positions in niche markets
  • Products that generate recurring revenue
  • Attractive historical margins / or margin expansion opportunities
  • Accretive to earnings
  • Post earnout EBITDA multiple of 6-8x

This strategy allowed us to grow from one brand (The Ball Jar company in 2002) to over 50 brands and ~$8b in sales by 2015 when the company merged with Newell Rubbermaid. 

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Partnerships Are Your Hidden Weapon

A VC once told me that 50% of some of their portfolio companies’ growth is coming through partnerships. I wasn’t surprised, but I found this quite interesting, because successful structure and execution seems to be the achilles heel of many organizations. 

Through the marketing lens, there’s no shortage of content and advice on how to grow your startup. The thing is, most startups look at marketing as a cost center (which it usually is) but there is white space here that is more efficient than marketing and that is through partnerships. Now, I know “partnerships” is a broad term, but let’s try and narrow it down by focusing purely on revenue generating initiatives. In my previous roles roles at Casper and Newell Brands, I oversaw numerous innovative partnerships and here are some lessons I learned as well as some thoughts on why this space continues to be undervalued. 

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The Innovator’s Dilemma is Real and Corporations Need a Strategy

If you haven’t read the Innovator’s Dilemma by the late Clay Christensen I highly recommend it. For those who work in innovation, this book is a wealth of knowledge on how to structure your company to embrace new technologies. Prior to joining the startup world, I spent nearly 9 years at a large S&P 500 corporation where I witnessed firsthand how slow and cumbersome these giant companies are. We held significant market share in many of the niche categories we dominated but slowly it became clear that insurgent brands (startups) wanted a piece of the pie. When large incumbents want to innovate it can sometimes take years to get a new product to market and ultimately the customer (which sometimes can be a buyer at a large retailer) may not even want it. A Harvard Business Review study estimated that at least 75% of internal new business endeavors fail – and this assumes R&D is even a priority. In 2018, less than a half of the S&P 500 companies recorded any R&D expense. The reason for this? Blame share buybacks.  Over $200b more was spent on buybacks in 2018 than R&D and one would argue that this has little to no influence on the productive nature of the company. Hedge funds and activist investors chasing short term wins are further enabling this behavior. 

Meanwhile tech companies who are spending in R&D are reaping the benefits. Startups are getting products to market 3x faster than incumbents (Bain & Co: 2018).  So as a corporation, you must refine your innovation strategy into three parts under a buy, partner, build scenario or be left like one of these folks. 

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Newell and VF: How to Kill a Consumer Goods Giant

I’ve taken a bit of time off from blogging recently to focus on other things, but recently came across this article from the WSJ about the fall of VF Corp ($VFC) and it reminded me of other legacy brand aggregators, such as Newell Brands ($NWL), that have also struggled as of late. There is a common strategy across both companies – they chose to concentrate key decisions around marketing, product development, and sales at the corporate versus brand level. And the results clearly show that was a mistake. 

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Ad Agencies Need to Innovate to Win in Retail Media

Total digital ad revenue in the US climbed 10.8% to nearly $210b last year, despite a slowing economy and a myriad of other challenges. While the growth rate is a far cry from the 35% figure in 2021, it still shows that marketers continue to spend online to drive purchase consideration. But there was an interesting stat included in that $210b spent last year – 20% was on retail media advertising. 

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Utilizing AI to Help Build/Frame Partnerships 

One of the most difficult aspects of doing partnerships or business development regardless of industry or sector is clearly understanding why two parties should get “married.” In my experience building numerous JV’s/partnerships, one theme continues to resonate, and that is how do you construct a winning partnership where each side feels as if they have gotten equitable value. Oftentimes, initial discussions tend to be more tactical or acutely focused on a very specific asset that one side seeks access to, when the focus should be framing the outcome from inception. This entails being able to articulate clearly the ‘gives’ and ‘gets’ of a deal and not jumping right into the weeds. Jeff Bezos has said, at Amazon, before any work is done on a new partnership, the press release is written. This accomplishes a couple key things. 

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UberEats and DoorDash are Becoming More like Amazon

If you’ve used food delivery apps like DoorDash or UberEats over the last few years, you’ll notice the number of restaurants on the platform has skyrocketed. And interestingly, they all seem to be offering the same types of cuisines. As it turns out, these platforms have become a battleground for testing virtual concepts. In 2021 there were roughly 10,000 virtual brands on UberEats but today that number is now 40,000. 

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Disney: Centralization Doesn’t Always Work

As I was reading last week about how McKinsey was hired to help Disney streamline costs this year, it drew similarities to my time at Jarden when we merged with Newell in 2016.  MK is a great firm, don’t get me wrong, but I continue to see this playbook applied that doesn’t always work. Centralization is not invariably the answer, especially in businesses with strong IP and nuanced relationships.  

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Disney+: Another Unprofitable Direct to Consumer Concept

With news today that Bob Iger is returning to Disney as CEO after a roughly 3 year hiatus, it’s pretty clear that one of the main motives for this move has been the highly un-profitable Disney +, the company’s streaming arm, or as some call it, the new ‘cable’ bill. Like many companies that have legacy wholesale relationships, Disney is trying to make the economics of selling content directly to consumers sustainable. There are a lot of similarities between all the DTC brands today (Warby Parker, Casper, Away, AllBirds, Blue Apron, etc) and Disney+. 

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DTC Brands Need a Publishing Arm

Why is a publisher model appealing to brands? An emerging crop of companies with recurring revenue and large customer bases have discovered that “owning” audiences is better than “renting” them according to CBInsights and ultimately a way to reduce CAC and build more loyalty.  Over the last few years, a growing crop of financial service and SaaS based firms have been acquiring media companies – JPMorgan bought the Infatuation, HubSpot purchased the Hustle and Robinhood snatched up MarketSnacks. Make no mistake – this was a play to decrease CAC (customer acquisition cost) and drive up LTV (lifetime value).   A recent CEO said “Every company should go direct to its audience and become a media company.”  While the noise has mainly been centered on businesses with subscription economics, another cohort that would benefit from this trend are the emerging crop of DTC lifestyle brands that have been growing rapidly over the last 5-10 years.  This isn’t unchartered waters; brands have been acquiring media companies for years. Going back to the days following the bubble, J&J purchased Baby Center in 2001 for ~$10m with the goal of providing more content to expecting moms. Flash forward to today and the pandemic has created another opportune environment for brands to snatch up media companies. Since the spring of 2020, we’ve seen ecommerce sales skyrocket, digital advertising costs increase precipitously and LTV become paramount leading to the newfound realization that paying to advertise won’t have the same ROI as owning an audience to market to.  One of the largest blights these newly public DTC companies have is that they aren’t profitable – the primary reason being the amount of money spent on marketing. 

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Is DTC less Profitable than Wholesale?

When I consult companies I often get asked about either building a DTC (direct-to-consumer) strategy or growing wholesale/retailer partnerships. The argument for DTC is rooted in the continuing belief that it’s more profitable than selling your physical product through retailers.  But what if it’s really not? There’s definitely arguments in support of a DTC strategy (better control of the brand experience, ability to collect 1st party data for consumer insights, offer a more personalized customer experience, etc) but it’s important to be realistic with your investors/stakeholders that there’s very likely a fallacy that it will be better for the bottom line.

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Pricing Power at Retail

You can’t go anywhere and not hear about inflation hitting everything from food, to oil, to cars, and furniture. Whether you ultimately believe it’s transitory or not, it’s an interesting time on the pricing front for brands/mfgs. 

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