The Year of Disappearing Brands

Summary

From the Ground Up: Episode Summary - "The Year of Disappearing Brands"

Podcast Information:

• Title: From the Ground Up
• Hosts: Diana Ransom (Executive Editor) and Christine Lagorio-Chafkin (Editor-at-Large)
• Episode: The Year of Disappearing Brands
• Release Date: November 25, 2024

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Introduction

In this episode of From the Ground Up, hosts Diana Ransom and Christine Lagorio-Chafkin delve into the troubling trend of disappearing consumer packaged goods (CPG) brands. Drawing insights from a compelling article by Tom Foster, they explore the underlying factors causing brands to lose shelf space and discuss strategies for entrepreneurs to navigate these challenging times.

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The Decline of CPG Brands

Tom Foster's Investigation: Tom Foster, an editor at large, uncovers why numerous supermarket brands are vanishing from grocery store shelves. He highlights that the era of rapid growth through similar strategies, akin to tech startups, is fading. The co-founder of Oura Bora, a sparkling water brand, emphasized to Foster that "it is astronomically harder today" for new brands to gain visibility and sustain themselves compared to a year earlier (02:28).

Impact on Specific Brands:

• Kombucha and Kind Bars: Christine notes the disappearance of brands like Kind Bars and fluctuating presence of Kombucha brands, such as GT's Kombucha (02:28, 02:45).
• Hope Hummus: Diana shares her experience with the disappearance of a favored hummus brand, attributing it to potential missed sales targets (02:45).

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Role of Venture Capital and Funding

Decline in Funding: A significant factor in the decline is the reduction in early-stage venture capital (VC) funding. According to Tom Foster:

"At the end of last year, the total amount of early stage VC funding for CPG brands was down about 60% from its 2021 high" (03:29).

Additionally, new product launches have plummeted by approximately 70% within the same period (03:29).

Shift from Growth to Profitability: With funding drying up, brands must shift their focus from aggressive top-line growth to achieving profitability. Diana encapsulates this shift:

"The investors are... talking about profitability now" (14:04).

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Strategies for CPG Brands to Survive

Sustainable Growth Over Hypergrowth: Tom advises brands to aim for sustainable growth rather than chasing hypergrowth fueled by excessive funding:

"Aim for sustainable growth...you probably don't have the money to do it. Don't do it" (29:55).

Building Authentic Relationships with Retailers: Successful brands like Me and the Bees have navigated challenges by fostering genuine partnerships with retailers. Tom explains how Me and the Bees reduced their footprint from 7,000 to 6,000 stores by:

"Building a real brand partnership...doing bee education events" (31:01).

Leveraging Existing Partnerships: By aligning brand values with retailers, companies can create mutually beneficial relationships, as demonstrated by Me and the Bees' collaboration with HEB (31:01).

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The Grocery Store as a Marketplace

Analogy of Grocery Stores: Tom Foster presents an enlightening metaphor comparing grocery stores to apartment buildings:

"The store itself is like an apartment building. The company that owns the store... is the landlord. The shelves are the apartments and you're the tenant" (21:09).

Costs and Challenges:

• Slotting Fees: Brands pay slotting fees to secure shelf space (22:43).
• Premium Placement: Prime locations (e.g., near store entrances) incur higher costs (21:09).
• Velocity Requirements: Maintaining shelf presence demands meeting certain sales thresholds (22:53).

Vicious Cycle of Marketing and Shelf Space: Diana articulates the cyclical challenge:

"You want to sell out of the product on the shelves is to put a bunch of money into marketing...you can't even stay on store shelves" (24:16).

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The Future of the CPG Market

Predictions for Recovery: Tom Foster anticipates that in one to three years, the CPG market may stabilize and return to pre-boom conditions:

"One to three years, maybe things will start to return to normal... more healthy growth" (34:26).

Potential for Roll-Ups: Some brands might merge to create synergies, providing them with the runway to adapt and thrive:

"Companies might merge...find synergies by rolling up into one entity" (34:07).

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Takeaways and Lessons Learned

Emphasis on Profitability: Brands must prioritize profitability over mere growth to ensure long-term sustainability in a tightened funding environment.

Niche Targeting and Sustainable Practices: Focusing on niche markets and adopting sustainable business practices can help brands maintain their presence despite financial constraints.

Authentic Branding: Authenticity and alignment with retailer values can differentiate brands and foster stronger partnerships, as evidenced by Me and the Bees.

Avoiding Tourist Capital: Brands should seek patient capital rather than relying on venture funding expecting rapid returns:

"Raise patient capital... not just tourist money from the tech world" (30:09).

---

Notable Quotes

• Tom Foster on VC Funding Decline:

  "At the end of last year, the total amount of early stage VC funding for CPG brands was down about 60% from its 2021 high." (03:29)

• Diana Ransom on Profitability Shift:

  "The investors are... talking about profitability now." (14:04)

• Tom Foster on Sustainable Growth:

  "Aim for sustainable growth...you probably don't have the money to do it. Don't do it." (29:55)

• Christine Lagorio-Chavkin on Direct-to-Consumer Challenges:

  "And the cost could be like upwards of a million dollars just even land on store shelves." (30:09)

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Conclusion

"The Year of Disappearing Brands" offers a profound look into the challenges facing CPG brands today. From dwindling venture capital to the high costs of shelf space and the necessity of shifting focus from growth to profitability, the episode provides valuable insights for current and aspiring entrepreneurs. By fostering authentic relationships, targeting niches, and emphasizing sustainability, brands can navigate these tumultuous times and secure their place in the competitive marketplace.

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For a deeper dive into Tom Foster's full article titled "The Great CPG Rapture," visit inc.com.

Transcript

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[Diana Ransom]

I'm Inc. Executive Editor Diana Ransom and.

[Christine Ligorio Chavkin]

I'm Editor at Large Christine Ligorio Chavkin.

[Diana Ransom]

This is from the ground up Today's.

[Christine Ligorio Chavkin]

Episode the Year of Disappearing Brands so this is our latest episode from our Ink Features Story series where we talk about one of our most fascinating recent pieces with the writer who reported it for this month we spoke to another editor at large, Tom Foster, about why so many supermarket brands are losing shelf space. Tom tells us that gone are the days of growing consumer market products popping up and using similar strategies to fuel their fast growth to tech startups. The co founder of the sparkling water brand Oura Bora told Tom that it is astronomically harder today and that shoppers might discover fewer new brands compared to a year earlier.

[Diana Ransom]

Wow. Yeah, it was a very interesting article. Christine, do you as you're reading it, did you think of any brands that may have disappeared in your orbit?

[Christine Ligorio Chavkin]

Oh, interesting. I guess I don't see kind bars as much as I used to a few years ago at my little local grocery store. Also, I feel like the Kombucha brands really cycle out frequently. There's new ones popping up and I don't see like the old staples like GT's kombucha that much anymore.

[Diana Ransom]

Yeah, it's funny, I was actually sitting there knowing this conversation was going to happen, thinking of different brands and I was like, is Kombucha disappearing? In my view, no. But that's just because my preferred brand is still There. But what's leaving the shelves in my local grocery store is like a hummus brand that I used to love. It's called Hope. I think it's a little bit startupy. I'm not really sure what's going on with the company, but I just attribute it to maybe missed sales targets. For instance, maybe people aren't buying it as much.

[Christine Ligorio Chavkin]

Some research is needed. Well, anyway, back to the article. Tom brought up just how many CPG brands from 10 years ago are actually struggling in today's economic climate. And there's kind of a unique set of circumstances that have caused this.

[Diana Ransom]

So this is a stat that came from Tom's story. At the end of last year, the total amount of early stage VC funding for CPG brands was down about 60% from its 2021 high, according to Pitchbook. And new product launches were down about 70% in the same time period. And that's according to another data provider called Spins.

[Christine Ligorio Chavkin]

That's a lot. And we get into that in our conversation with Tom, but what I found really amazing was that some of the little brands that he talked to, such as Me and the Bees, Lemonade, and Oura Bora, have found ways to thrive within the industry, even after being kind of stifled in their shelf space by being creative and navigating their business relationships.

[Diana Ransom]

Well, hold on, Christine, before we get ahead of ourselves. Tom started the conversation by telling us about how the idea for the article came from an unexpected source.

[Tom Foster]

Well, this is where real life meets reporting. I was walking my dog, and it turns out my neighbor has one of these companies. My neighbor has a lemonade company called Me and the Bees. Oh, good. They have a great story. Yeah, it's. And you've maybe seen the brand around. They're a national brand. They make really good lemonade that's sweetened with honey. And they have this great story where the founder is actually one of the founders. She's 20 years old today. She was when they started it. She was stung by a bee. She started doing research into bees and discovered that honeybee populations are in peril. And so she and her parents started making this lemonade with a family recipe sweetened with honey. And it became this, like, business fairy tale. They started selling it at, like, you know, youth entrepreneurship fairs. And then they got some distribution. They ended up on Shark Tank and did a deal with Daymond John. And they grew into this big business. And so I've just followed them. I just think it's fascinating. I've followed them for years, and we're walking Dogs one day. And I ask her just offhand, just making conversation, hey, how's it going? You know, expecting her to say that things are just on a tear as usual. And it turns out, no, it's been a really difficult couple years. And she starts just telling me the story of everything they've gone through. And I'm listening to this as a reporter, wishing I was recording the whole thing, but just knowing instantly, wow, there's really a story here. Because I don't think people realize from walking through the grocery store that all of this is going on behind the scenes.

[Diana Ransom]

Well, right. Because if you do walk into a grocery store, you actually don't necessarily see any changes. Right. Like, I guess maybe then end cap will be like, will feature maybe Coca Cola products or something like that, but you'll still see variety on the shelves.

[Tom Foster]

You still see a lot of variety. Yeah, yeah.

[Diana Ransom]

So what actually happened with the Me and the Bees co founder? Like, what prompted the. I guess the scare for her?

[Tom Foster]

So, you know, things are going along, they're. They're growing. They were actually a couple years ago, they were on the. The Inc. 5000 regionals list. They were, I want to say, the 36th fastest growing company in the Southwest, really succeeding. And. And then one day, one of their most important retail partners, arguably their most important, is a company called heb. It's a grocer that is only based in Texas and just a little bit outside of Texas.

[Christine Ligorio Chavkin]

Super big in the south, right? Huge.

[Tom Foster]

It is, you know, one of the largest privately held companies in America. You know, just like if you lived in Texas, you would think like, they, they ran the world. If you didn't live in Texas, you'd be like, who? So one day H E B doesn't come through with a purchase order, and then there's another one, like a week or two later and then another one, and there's like, you know, this is their most important retail partner. And if you're in this industry, you make your products not on demand. It's not like a retailer says, hey, we're going to order this much, and then you go out and make it. It's no, you're forecasting that, you know, based patterns. Retailers are going to buy this much and so you're making this much. So suddenly they've sunk a bunch of capital into making a whole bunch of lemonade that they're expecting HEB to pick up. And HEB doesn't.

[Diana Ransom]

Wow.

[Tom Foster]

And so now they're sitting, they've got all their capital tied up in this Lemonade that's sitting in a warehouse and they're not selling it.

[Christine Ligorio Chavkin]

And this saga gets more complicated.

[Tom Foster]

Right, sure. I mean, so they decide that they're going to go on a whole journey trying to sort of figure out what's going on here, you know, and one of the first things they have to sort of figure out is like they've had their own experiences. This was one of the big alarm bells for them. But there were, you know, some other things that they noticed when they were trying to raise a little bit of money. They were trying, you know, they were seeing some conditions change on the ground. So one of the things, one of the first things they have to do is understand what's happening in this industry. And so that's sort of where, as I started talking to them, my conversation went was like, okay, let's, let's first back away from exactly what they're doing in their company and understand the larger forces at play here.

[Christine Ligorio Chavkin]

Great.

[Diana Ransom]

And what are the larger forces at play?

[Tom Foster]

Well, I'm so glad you asked.

[Christine Ligorio Chavkin]

Asking the big questions. What is going on? Tell us about the Fed. Tell us about the venture capital ecosystem. Give us the whole, you know, big, big financial picture.

[Tom Foster]

Basically, the tech playbook came to the consumer packaged goods industry. So the idea there is you raise a bunch of venture capital, you spend it on marketing, you spend it on distribution, you spend it on sort of running up the scorecard on top line revenue and, you know, proving that you have as big an audience as you can have. Because what you were trying to do is attract large acquiring companies to come in and pay a whole bunch of money and buy you for a fairly large multiple of revenue.

[Diana Ransom]

Right, so this is the RX Bar model.

[Christine Ligorio Chavkin]

Right?

[Tom Foster]

Exactly, exactly.

[Christine Ligorio Chavkin]

And are they actively like subsidizing that sort of, that consumer acquisition in this model the way that a tech company would, the way that like Uber maybe did in the first place? Sure, yeah, exactly.

[Tom Foster]

I mean, they're not worried about profitability, they're worried about growing the top line. And the idea is it's not that Google or Facebook is going to come in and acquire you, but maybe Coca Cola or PepsiCo or General Mills or Nestle. And so this starts to happen. And you mentioned the RX Bar model. So RX Bar is a company that makes these energy bars. They were sold for in 2017, $600 million. They'd been around for about four years, and that was about a 20x multiple of the prior year's revenue. That's an insanely high multiple. And so that Looks like a tech company. That's the model that happened with tech companies that powered the whole venture capital boom. So all of these guys who are in that business start seeing this happening. They see a couple examples like rxbar, and they say, we're going to go put our money in that industry now. But these are guys, if you think about it, who they don't really understand the world of building these real world products and services in the way that they do the tech world. So you've got what people who are sort of native to consumer packaged goods call tourist money coming in, and it totally changes the game.

[Diana Ransom]

There was one investor you were, I think you describe in the, in the story that basically sent a check without even talking to the.

[Christine Ligorio Chavkin]

Oh my gosh. Well, yeah, I love that phrase of the tourist investor. Tourist money. It's great.

[Tom Foster]

Yeah, they just, they came, they came in from Silicon Valley and they were like, well, let's, you know, take a tour through this other industry. So, yeah, the example you mentioned is a great one. So one of the, one I talked to a number of founders for this story, me and the bees, you know, being the first one. But one of the other founders who was just really fabulous to talk to is a guy named Paul Boge, who started a company with his wife called Ourobora. They make sparkling water. And you might have noticed that there are a handful of sparkling water companies that have proliferated over the last decade.

[Christine Ligorio Chavkin]

Just a few, just a handful.

[Tom Foster]

Ourobora is one of them. And Ourobora has, they've got something special. He grew up in a family where they didn't drink soda. He was making with his SodaStream, really fancy, you know, flavor infusions in his homemade sparkling water. And he would have dinner parties and, you know, drape a white towel over his arm and serve it to people like it was a fine wine, you know, and, and people loved it. And his wife is a graphic designer and she drew these, you know, colorful, whimsical illustrations for the labels. And, and they came up with this, this product that felt more high end, more boutique than all of the other ones that you saw. And it caught on for that reason. It was like they had an angle on this wine. They had cool flavors. You know, it's like these interesting cactus.

[Diana Ransom]

Rose or, you know, it was like a cardamom flavor.

[Christine Ligorio Chavkin]

What's your favorite one, Tom? Let's talk to Tom the human here. What's your favorite Ourobora?

[Tom Foster]

I mean, I do like the lime cardamom, because who puts cardamom in their sparkling water. Right?

[Diana Ransom]

Yeah, I haven't tried that one yet. But the ginger. There's some ginger concoction that I like.

[Tom Foster]

Oh, that would be the ginger Meyer lemon. Yes.

[Diana Ransom]

Ooh, ooh.

[Tom Foster]

Not just a regular lemon.

[Diana Ransom]

That's a good one.

[Christine Ligorio Chavkin]

All right, I need to try that. Okay, what happened next, Tom?

[Tom Foster]

So he's gone out and he's been able to raise money because he's got a real, you know, he's got a hot category, obviously, and he's got a real differentiator in this category.

[Diana Ransom]

But at the point where he was raising money, he actually wasn't able to. Right. Or it was really at first.

[Tom Foster]

He goes out and he starts raising money. And the example you alluded to, he goes out one of the. And he mentioned this. This wasn't every investor he spoke with, but one in particular. He's got a pitch deck. He sends it out, and he's speaking with one of these potential investors. And the guy's like, yeah, yeah, yeah, yeah, no, I don't need a meeting. Just I saw the deck. It's cool. Just send me the wiring info. And he wires them $200,000.

[Diana Ransom]

Must be nice.

[Tom Foster]

So, you know, that's how frothy it got.

[Christine Ligorio Chavkin]

But was that the last moment of the. Of the tourist money that you. That you saw?

[Tom Foster]

It might have been. It might have been. I'm not sure. He told everybody that he probably wanted to keep that spigot on for a while.

[Christine Ligorio Chavkin]

Right, right. Absolutely. Absolutely. At what point did these companies start to see a turn? At what point in your reporting did you start to see this. This kind of change happen?

[Tom Foster]

I mean, I think a couple of things happened over the last few years. I mean, we all heard about inflation. I think you probably heard that.

[Diana Ransom]

I might have heard about inflation.

[Tom Foster]

Inflation was out there. It was this thing. Interest rates went up, so capital started drying up. Because of those things, consumer habits start to shift a little bit, right? Customers become a little bit more price sensitive.

[Diana Ransom]

And M and A slows down, too.

[Tom Foster]

M and A slows down, all of it, right? Like this whole flywheel just starts, like, grinding to a halt. And so you've got all of these founders out there who've got these companies who have been playing by this playbook that's like run up the top line scorecard. And suddenly it's like, well, they were doing that using all of this free cash that was powering the model. Suddenly they don't have that cash. They can't do that anymore. So that's what changes but it's also.

[Diana Ransom]

The investors are, you know, they're not talking about just get eyeballs, just get, you know, people in the door. They're talking about profitability now.

[Tom Foster]

Right, because suddenly that's the whole thing. Yeah, exactly. It's like once this model grinds to a halt, there's no way that, you know, you can keep doing it that way. And so they have to turn a profit. And suddenly that just. That's an entirely different business for a.

[Diana Ransom]

Lot of these founders, especially if they're bootstrapping. I mean, it's almost like. So you also mention a screed by a man named Brooks Powell. And I wonder who is Brooks Powell and what was he talking about on LinkedIn?

[Tom Foster]

In almost any industry, you see these people, these founders who've made themselves sort of thought leaders and they post long threads with tips from their experiences in their industry. Brooks is one of those people in the consumer packaged goods industry. He's based in Houston. He has a company that makes a hangover cure. And his hangover cure business has just taught him all kinds of lessons. And he's talking about. Here are the things, he's sort of acknowledging this slowdown that we're talking about in a post that I was looking at, and he mentions a handful of things that companies can do to try to sort of work their way out of this. One of them that has been somewhat successful for him, and this gets a fair amount of attention from people who are his readers, is selling direct to consumer. So it's a really interesting thing that if you think about, say 10, 15 years ago, we saw this huge proliferation of direct to consumer brands that started online first. Right. And so they were selling everything from mattresses to homewares to shaving creams to, you name it. The whole idea was, let's cut out the middleman, let's cut out these difficult retailers, let's cut out all of this, this stuff, you know, this old model, and then we'll pass along the savings to the consumer. Well, the dirty secret of that industry was that, you know, that was a really great idea for a short amount of time until everybody started doing it. And the cost of customer acquisition on the digital platforms became really expensive and became in many cases as, or more expensive than paying for a third party retailer or paying for your own, you know, rent in your own stores, never.

[Christine Ligorio Chavkin]

Mind the cost of shipping for some of these goods. Right, right. So I would, Paul, like a razor is one thing.

[Tom Foster]

Yeah, exactly.

[Christine Ligorio Chavkin]

A pallet of beverages is another.

[Tom Foster]

Well, that's right. The Oura Bora guy, Paul was saying the crazy thing is that direct to consumer is still 20% of his business.

[Christine Ligorio Chavkin]

Wow.

[Tom Foster]

But to ship one 10 pound case of water, what do you think that costs him?

[Diana Ransom]

I mean, I know because I read the story.

[Christine Ligorio Chavkin]

So $10.

[Tom Foster]

$13. $13 to ship a 10 pound case of water. So like if you're.

[Christine Ligorio Chavkin]

And a consumer doesn't want to see that price. Right. They don't want to pay that. They don't want to. They don't want to per paying it at least I guess I should say.

[Tom Foster]

Yeah.

[Diana Ransom]

So this idea of like using direct D2C or direct to consumer as your salvation is not really that helpful for brands that are. What did. How did you refer to them as Wet heavy.

[Tom Foster]

Wet heavy product. Yeah, but if you have, you know, lightweight expensive products.

[Diana Ransom]

Wet heavy products.

[Tom Foster]

Yes, but lightweight and expensive. If you were selling, you know, gold flakes, it would be, you know, like maybe a really good business.

[Christine Ligorio Chavkin]

Oh, beautiful business.

[Tom Foster]

Right?

[Christine Ligorio Chavkin]

Yeah, yeah, yeah.

[Diana Ransom]

I mean, and the demand for gold flakes is probably really.

[Christine Ligorio Chavkin]

What about makeup?

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[Diana Ransom]

Oh, makeup gold flakes.

[Tom Foster]

That would be good.

[Diana Ransom]

Yeah.

[Christine Ligorio Chavkin]

Saffron, you mentioned saffron would be great.

[Tom Foster]

Yes. So let's get in the saffron and gold flakes business. Right. We don't need refills.

[Christine Ligorio Chavkin]

We'll be like ancient spice traders. But d to see.

[Tom Foster]

Yes.

[Diana Ransom]

When we come back, I asked Tom about what it is actually like to do business with the grocery store. But first, a quick break.

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[Diana Ransom]

What was the name of that guy? James Richardson. James Richardson, Is that his name?

[Tom Foster]

James Richardson is a, is a consultant that I spoke with.

[Diana Ransom]

Yeah, so James Richardson who you quote in the story, he has this really interesting way to put what it's like in a grocery store. He basically talks about a metaphor like how to think about a grocery store and how to think about like as though you're paying rent in a grocery store. And I wonder if you can help paint that picture for us. Like what is it actually like? What are the fees attached? What is totally like, what is it like to actually do business with a grocery store?

[Tom Foster]

Totally. Well, it's fascinating because you would think that selling to a grocery store, it's just there's, hey, there's a markup, right? Because you know they're buying it from you wholesale and then they need a margin so they're marking it up to sell consumer. There's a lot more to it than that. So that's one piece. But then if you are, you know, if you think about a grocery store, think about a grocery store. The store itself is like an apartment building. The company that owns the store. So H E B or Whole Foods or whoever it is, is the landlord. The shelves are the apartments and you're the tenant. If you're the startup brand who's coming in there and you probably want a nice apartment, right? You want one with a good view, you want one that's easily accessible and that apartment's going to be more expensive. That shelf space is going to be More expensive than the shelf space that's, you know, hidden on the bottom, where, you know, think about when you're in the grocery store, how often do you get down on your hands and knees and look at the very bottom shelf, you know, and see what's hidden down there. But those are the things you can probably afford as the startup brand, especially one that doesn't have a bunch of venture capital to spend. So it's very much like an apartment building where, you know, the nicer apartments cost more money and there are fees on top of rent. So let's say you want a stack of your boxes of sparkling water near the front door. So people walk in and they see this, you know, beautiful mountain of sparkling water. Well, that's cost you extra. Let's say, you know, they're doing an end cap display that's somehow themed in a way that would be relevant to your business. Great. Well, you got to pay up to be a part of it. Let's say, you know, all of these different things, even just to get in the store, there's something called slotting fees. So you pay slotting fees to get on the shelf in the first place.

[Diana Ransom]

So the slotting fee is just to get in. Then there are additional fees to pay based on like where you're placed in the store.

[Tom Foster]

Exactly. And then if you want special promotions and all these things, and then you.

[Christine Ligorio Chavkin]

Have to make a certain velocity or whatever to stay on the shelves.

[Tom Foster]

Right, Exactly. That's the other thing is so all of the guys, the people who are running the merchandising for these retailers, they're always looking around for new brands because they want the hot new thing to break open. It is a hits business. And so you got to make a bunch of bets and try different things. That creates opportunity for these brands, and it creates opportunity for the retailers to extract fees from these brands to try to pop, you know, on those shelves. But just because you're a retailer and you're paying those fees, if it doesn't actually work and consumers don't buy it enough to reach a certain threshold, then the merchandisers might kick you out anyway. They might just say, you know what, I only have so much shelf space that I can use. And if you're not delivering enough sales on that shelf space, I'm going to go to somebody else. And so it's this constant game for these brands to sort of acquire the right kind of shelf space. But then to be able to stay on that shelf space and everything costs money.

[Diana Ransom]

And it's so interesting too, because like the way you start to sell out of the product on the shelves is to put a bunch of money into marketing. And then if marketing cost of customer acquisition starts to skyrocket and marketing becomes outrageous, then you can't afford the marketing and then you, thus you can't afford to even stay on store shelves. It's like actually a vicious cycle.

[Tom Foster]

That's exactly right. And you want to know what's even more amazing? So let's say you have a great retail partner that you know you've really succeeded with and your product has popped there. Now it's 10% of your sales and maybe you're 10% of their sales in that category. Well, that retailer is going to say, well, this is a great product idea. And one of the things they might do is they are going to go out and look for competing products from other brands that are doing exactly what you're doing or something close to it. And B, they might even spin up their own competing product and sell it for half the price.

[Christine Ligorio Chavkin]

Oh my gosh. Like, what is a brand to do?

[Tom Foster]

It's competition. Right?

[Christine Ligorio Chavkin]

This happened. This took place in your story too. You found this very example. Right?

[Tom Foster]

There are a handful of examples like this. One of the easiest to see is there's a company called Harry's that most of us have heard of at this point. They make shaving goods and other sort of personal care products. They were one of the original direct to consumer brands that eventually went into Target and other retailers. If you go into the men's shaving aisle in Target now and you look at where Harry's has its shaving cream and razors and everything, they have a nice display, they have really good product placement at this point. Their shelf space is great. They've really succeeded. And right next to that very successful shelf placement is a Target house brand called Goodfellows. And Goodfellows has sort of a similar aesthetic, similar kinds of packaging. Clearly a competing product right next door.

[Christine Ligorio Chavkin]

So is this like the similar kind of old timey font with that, like.

[Tom Foster]

Look real good on your shelf? Yeah, you might not just throw it in a drawer, you might keep it out there because it, you know, says something about you.

[Diana Ransom]

So is this, so is this Target creating? I mean, maybe you don't know the particulars here, but is this Target creating like this white label product or is this Harry's creating the white label product?

[Tom Foster]

Oh, so that's a really good question. So many of these companies, if you go to Trader Joe's or Costco and you see you know, these house brand products that are quite good, often those house brand products are white labeled versions of some major brand product. So the Kirkland Costco laundry detergent might actually be Tide that you're using. But nobody will ever tell you that. The Tide people won't tell you that. The Costco people won't tell you that. You will never, ever, ever learn it. In the case of the Harry's example at Target, they swear up and down that they aren't making that product. I've asked them directly, but they would also never admit it if they were. I don't know, I think I believe them. But yes, that's a really interesting question. And I think in the case where a brand might be so successful that they make their own knockoff at their retailer, that might end up being a good bargain for them to make. Because I think the economics just stack up differently. I mean there are a lot of things that get cut out of the cost stack at that point and then you get additional distribution.

[Christine Ligorio Chavkin]

Yeah, because essentially the brand, like the store, the retailer is paying for that white labeling, right?

[Tom Foster]

Yeah. But you know, of course there's risk of undermining your own brand if you were to do that. I think there's a very, very delicate dance there, but a lot of what else, what you see in other examples is where a company suddenly finds itself facing a competing product from one of its retail partners that they had nothing to do with. And, and, and that product is sold for half the price. It might not be, in the case of me and the bees, the lemonade brand I mentioned, it wasn't an exact direct replica of their product, but there were enough elements of it that were clearly inspired by their product. To their mind that that became a big challenge for them.

[Diana Ransom]

Yeah. And do you know if that product was placed higher up than theirs? I just think about like the Amazon example of. We've heard this sort of similar story with Amazon. You know, the startup brand is on Amazon and the next thing you know Amazon's making its own product and then.

[Christine Ligorio Chavkin]

Also boosting queries are going to something else. That's not the thing you're searching for. Right.

[Diana Ransom]

Or if you do search for the product, you get the Amazon brand versus thing you're actually looking for. I don't really know my question here.

[Tom Foster]

The answer is capitalism.

[Christine Ligorio Chavkin]

Are there any takeaways for brands right now from this? I mean like, is it just like you need to get profitable from day one? Is it starts small, start sustainable? Like what are the things that brands can do Right now, say you already have your concept, you're already trying to get into store shelves. Like, I mean, you should obviously be wary of making deals, but what's the ecosystem right now?

[Tom Foster]

I mean, I think you just said a handful of the really important things is, you know, you need to aim for sustainable growth. The idea of aiming for this kind of top line hypergrowth and hoping for an outsize acquisition in the very near term is probably not going to work out for you. And you're probably not even an option anyway because you probably don't have the money to do it. There's still the risk that people think these kinds of acquisitions are out there. We just saw Siete Foods get acquired for a billion something by PepsiCo. It can happen, but Siete was at a very different level. They've been around for a while. They've had a level of success that is frankly quite rare in this industry. One of the stats that one of the consultants I spoke with, James Richardson mentioned is that the average CPG startup brand is doing something around $500,000 in sales. And that's 90% of the brands out there. Yes. Wow. That's 90% of the brands out there. So most of these guys are small, they don't break out, right?

[Christine Ligorio Chavkin]

Yeah.

[Tom Foster]

And so for those kinds of companies, don't go out and pursue, you know, a big infusion of cash and try to just like make a huge splash. Don't do it.

[Diana Ransom]

I mean, you're basically saying like, don't try to raise money because it's unsustainable. But like, how do you get into the retailers at the outset if it costs? I think you mentioned the cost could be like upwards of a million dollars just even land on store shelves.

[Tom Foster]

You just need to do it much more carefully, you need to do it much more slowly. You need to, you know, just take a much more measured approach. Raise some money. Sure. But you're going to want to try to raise patient capital. You're going to want to try to raise, maybe raise some debt, maybe raise. You know, there are going to be different ways you can do this that aren't the same as raising a whole bunch of tourist money from the tech world that's expecting, you know, a 20x return in the next four years.

[Christine Ligorio Chavkin]

Yeah, I mean, there are ways to experiment too. Right. Like I know Target and Whole Foods have programs for young and emerging founders, for founders of color, for female founders. Find your niche. You know, just check. Start in one store, start in a little region of stores, see what's resonating with your customers first, right?

[Diana Ransom]

Yeah, yeah. And that's sort of what me and the bees is doing. Right? They're kind of. They had 7,000 stores and now they've reduced their footprint, is that right?

[Tom Foster]

They reduced somewhat, down to around 6,000. I believe they solved their conundrum with H E B by going out and building a real brand partnership with them. They started doing events around Texas at libraries, you know, doing bee education events and things that, you know, the brands could sort of be value aligned around. And it ended up working in the sense that then he b invited them to be on a commercial and then they were on a television show.

[Diana Ransom]

No way.

[Tom Foster]

And suddenly they started building a substantive relationship with this retailer in a way that was really different from just like, hey, putting their product on the shelf.

[Christine Ligorio Chavkin]

Or from like knocking them off sort of.

[Tom Foster]

But it's, you know, it's interesting. It's like you hear these kinds of pieces of advice often about like, well, build an authentic brand. I always want to ask, like, what does that mean, you know, like, what is, what is authenticity? But if you can do, if your brand really does stand for something and then you can really align around those values that you stand for with your retail partners and actually make these words mean something. Make retail partner actually be a partnership and not just kind of a piece of jargon that can work, that can really work to your advantage. And me and the bees ended up being an example of that.

[Diana Ransom]

Well, also, it's like, you know, this 20 year old founder who has had this love for bees since she was 4 and like, you know, reverence toward bees since she was four can like go out there and talk about that in a way that these white label companies or white label brands can never do.

[Christine Ligorio Chavkin]

Yeah, yeah. Does she still love bees?

[Tom Foster]

I mean, she would probably tell you she does. I does.

[Christine Ligorio Chavkin]

She really don't know that one. She's never going to tell the truth. So have you got any feedback since this article came out from other brands or from these brands that you had spoken with?

[Tom Foster]

You know, it's been interesting. It's looking at LinkedIn, especially the conversation that's risen around. It has been really fascinating. And the main thing I keep hearing is thank you and thank you because it sort of put some things out there that nobody was saying. It was like, you know, thank you. It was sort of refreshing to have this just be put out in the open. This is the thing we're all whispering about but nobody's really talking about. And I think, you know, then and all you see all these conversations then start to rise among these founders and the funders and everybody else in sort of this ecosystem. And they're providing support to each other and providing advice to each other and telling stories. And it sort of unleashed this really interesting kind of almost like an unburdening. And I think people are looking for solutions. We see interesting things happening where, for instance, and this isn't specifically in relation to the article, but we're seeing some companies, rather than get acquired, they might merge and you might have three or four smaller companies that are somehow strategically able to align. They might be able to find some synergies by rolling up into one entity. And the longer term future might still be to get acquired by a larger strategic, you know, acquirer. But in the near term, that kind of thing might give them Runway. And so there are things like that that are happening. There's interesting kind of movement for people to get innovative and figure out what their way forward is.

[Diana Ransom]

Are you already seeing that happening, the roll up in the way that you were just suggesting?

[Tom Foster]

Yeah, there's some of that. Yeah. I mean, I live in Austin, Texas. There are a couple of them here. One of them is called Nameless cpg. That's three or four brands.

[Christine Ligorio Chavkin]

I love that name.

[Tom Foster]

Yeah. Right.

[Diana Ransom]

So, Tom, what should we expect from the CPG market in the next few years?

[Tom Foster]

Yeah, that's a good question. And I think all of the founders in this industry would love a really a high degree of certainty here, which they're not going to get. But as I talked with founders and investors and consultants and everybody in the industry, they say one to three years, maybe things will start to return to normal. But normal means sort of pre boom. The tourist money, the tech money is probably not coming back. But do we get out of the sort of the doldrums that they're in right now? Yeah. And we get back to some level of more healthy growth. Yeah. In one to three years. Great.

[Christine Ligorio Chavkin]

Well, thank you so much, Tom, for being here today.

[Diana Ransom]

Awesome, Tom. Thanks so much.

[Tom Foster]

Thank you guys.

[Christine Ligorio Chavkin]

That's all for this episode of from the Ground Up. If you want to read Tom's whole story about the great CPG Rapture, as I'm calling it, you can find it on inc.com and the link will be in the Show Notes.

[Diana Ransom]

Be sure to subscribe on Apple Podcasts, Spotify or your podcast platform of choice. Also, if you liked this episode or have suggestions of what topics you'd like to hear about, leave us a review on Apple Podcasts or reach out to us on Inc's social channels, on LinkedIn, BlueSky or Instagram.

[Christine Ligorio Chavkin]

From the Ground up is produced by Maryam Kiparowice and Avery Miles, Editing by Blake Odom, mix and sound design by Nicholas Torres. Our executive producer is Josh Christensen. Thanks for listening and we'll see you next week.

[Glenfiddich Ad]

Hi listeners. I'm Blake Odom, producer of from the Ground Up. Today we have a special segment brought to you by inc. In collaboration with our partners at Glenfiddich Single Malt Scotch Whiskey this year at the INK 5000 gala, Glenfiddich presented the inaugural Legacy Award to Stephen Marsh, founder of smarsh. This award recognizes a trailblazer, an individual who has graced the Inc. 5000 list multiple times, embodying the spirit of innovation, boldness and a relentless drive to defy the ordinary. Much like Glenfiddich, a brand that has pushed the boundaries of excellence throughout its 130 year history to become the world's most awarded single malt Scotch whiskey, Stephen Marsh exemplifies the courage and brilliance it takes to redefine industries and elevate the game. Inc. Editor in chief Mike Hoffman spoke with Stephen Marshall about his remarkable journey, the legacy he has built, and the honor of being the first recipient of this award presented by Glenn Fiddick. Here's that captivating conversation. Enjoy and be inspired.

[Mike Hoffman]

Hi, I'm Mike Hoffman, editor in chief of inc. And I'm delighted to be here today with Steve Marsh, the founder of Smarsh, a multi time Inc. 5000 honoree and the recipient of the inaugural Inc. 5000 Legacy Award presented by Glenn Fiddick. Steve, thanks so much for joining me.

[Steve Marsh]

Thanks for having me. I'm excited to be here. Mike.

[Mike Hoffman]

This is great. Let me get this straight. You've been on the Inc. 5000 list 17 times so far?

[Steve Marsh]

I think that's correct. I think 17 times we double checked it.

[Mike Hoffman]

So you've been on the list 17 times. How many years has the company been in business?

[Steve Marsh]

Since 2001, so about 23.

[Mike Hoffman]

I guess you've been on the list more than you've not been on the list in the 23 years of your corporate life.

[Steve Marsh]

I think once we finally made the revenue threshold, we made the list and have been on it since.

[Mike Hoffman]

Well, congratulations. It's amazing to make the Inc. 5000. It's amazing to make the Inc. 5000 a couple of times. And to make it 17 times puts you in really rare error. Only a few companies have made it more than 15 times. Congratulations. You started the company in 2001. Is that right?

[Steve Marsh]

That's right.

[Mike Hoffman]

Your name is Steve Marsh and the name of the company is Smarsh. Do I have it right that your original email address had something to do with the ultimate name of the company?

[Steve Marsh]

I incorporated to do consulting work, never thinking that, that the business name would see the light of day. It was just incorporated as Smarsh Inc. Because Marsh was taken by the large insurance company, so we couldn't use that. My friends at the time, my coworkers had all called me Smarsh because that was like my email handle. So I said, hey, let's just go with that. The domain name was available and many years later, with a larger marketing department and more resources available to us, more domain names available to us, we still decided to keep the name Smarsh. But that should serve as proof that it never had intention of building this business into anything.

[Mike Hoffman]

So who was your first client?

[Steve Marsh]

My first client was a small brokerage out of Boston, Massachusetts and a friend of mine had worked there and had told me about this need to archive communications for regulatory compliance. And I knew virtually nothing. I mean, I knew absolutely nothing about that. I knew that I needed to make some money to pay rent and that I had some technology skills. So I set out to actually help them implement a solution that I thought I would source from another vendor and quickly found that there weren't other vendors out there doing this, at least to service the small and mid sized companies. The business at that point pivoted from being a consulting business to being the archiving and communications intelligence business that it's become today.

[Mike Hoffman]

When you started on the hockey stick like trajectory of growth, what was the first moment, if you remember, where you knew this is not just a consulting business, this is a real business, a technology business, and actually it's a fast growth technology business.

[Steve Marsh]

One moment that comes to mind is we had a large competitor in an adjacent space. They weren't archiving the way we were. They did data backup or something and they made an offer to buy the company. Really in our first year of effort in trying to sell the archiving service. And it was hard as a founder to turn down. I think it was like a million dollars. But it was complicated, but we passed on it. That was a great decision. But that really validated for me that we had built something that was at least perceived to be of value to someone else. And of course making the Inc. 5000 list for the first time after applying earlier that year and not being able to apply the year prior to that because we didn't Meet the. We weren't big enough. We didn't meet the revenue thresholds. Anyway. When we made that list, that was fantastic validation for all the hard work that we had done. It gave us a sense of credibility when we would go out to our customers. By being able to put the Inc. 5000 recipient logo on our emails and on our website, that actually helped us grow to the next level.

[Mike Hoffman]

Beyond that, you at some point took growth capital, private equity, is that right?

[Steve Marsh]

We did. It wasn't until 2007. First investors were minority investors in 2007. Ironically, the point at which they became interested was a point at which we no longer needed money. I think many founders probably go through this. When you're trying to raise money, it's a lot harder than when you don't need it. When you don't need it, everybody seems to come out of the woodwork and then they try to convince you why you should take money. I think that was a key moment where we realized we needed to significantly upgrade our technology infrastructure if we wanted to win bigger and bigger customers. We were making incremental changes every year. The rip and replace that you hear technology companies go through, where every six months or so we were taking out old equipment, replacing it with new, bigger and better equipment. And that really just wasn't scalable. It was becoming a distraction to have to keep going through those projects every six months or so. By raising capital, we were able to get off that hamster wheel, and we were also able to start making some acquisitions became a part of life from that moment forward.

[Mike Hoffman]

What did you learn about business ownership and business leadership going through the process of acquisitions?

[Steve Marsh]

You know, we gained access to people who had operated at the level beyond where we were, which is a pattern, you know, we'll see occur over and over in our business. But there were smarter people who had more experience in a variety of areas, and they presented some of the reasons why we would want to do some acquisitions. They also educated me and the rest of my team on how to do them. But it taught me that there are a variety of ways to help grow the business. You probably don't want to grow your business just doing acquisitions, although that does create value for a lot of companies. But for us, it was a combination of organic growth through innovation and product development and serving our customers with different products and services and making some of these acquisitions to bring in new technology, to bring in additional competitors, to bring in more expertise than we otherwise would possess. And today that that trend continues. You know, we're trying to bring in more AI expertise, for example, we might look to do an acquisition there.

[Mike Hoffman]

Can I ask, where are you guys at revenue now?

[Steve Marsh]

We are about 500 million.

[Mike Hoffman]

And what's the fastest growth part of the company right now?

[Steve Marsh]

There's a lot of focus on leveraging the data that we have stored on behalf of our customers. So if you think about the initial use for those that don't know is that we help customers by storing their electronic communication so that they can meet regulatory requirements. You have to have this stuff, you have to be able to produce it. That's kind of the baseline service. But what we've found is that over the years, you start to amass more and more really valuable information on behalf of our customers. So we have years and years worth of emails, text messages, zoom calls, you know, whatever it may be. In a world where artificial intelligence is taking over and people are trying to find ways to harness the value of data, we're sitting on what we think is one of the biggest gold mines out there in terms of data. It's employee communications that were captured initially for a different reason, but now can be turned into sales opportunities, customer service opportunities, new product ideas. I think we're seeing a lot of growth.

[Mike Hoffman]

So an archive can become a large language model.

[Steve Marsh]

Yeah.

[Mike Hoffman]

So this is obviously the Inc 5000 Legacy Award brought to you by Glenn Fiddick. As you think about the legacy of the company and your legacy as a founder, what do you still hope for? What is your idea of what the legacy you want to leave is?

[Steve Marsh]

We have a very unique culture, I think one that reflects what I wanted to create many, many years ago. I want it to be an organization that hopefully my kids one day look back on and say, wow, dad must have built something pretty interesting here. It's still around. It's still relevant. Our customers still find value in what we're doing. I just want to see it reach its maximum potential. Not every company, even, you know, not every company that is started or that I'm involved in or that I invest in has the same opportunity to persist through time. Some companies are better as a short term product that maybe gets sold to someone else and they integrate the technologies. Some technologies have a shorter lifespan where maybe it's two to three years and then you have to move on. This is a business that I believe truly has the opportunity to exist for many, many years and to be relevant by just listening to customers and adapting and finding or addressing use cases that we found many years ago.

[Mike Hoffman]

Steve Marsh, the founder of Smarsh, a half billion dollar company founded in a Brooklyn apartment that's been on the Inc. 5000 list 17 times. Thanks so much for joining us today.

[Steve Marsh]

Thanks for having me.

[Mike Hoffman]

And before I let you go, we have these glasses of Glenn Fiddick here. You are the inaugural recipient of the Inc. 5000 Legacy Award, presented by Glen Fiddick. So let's cheers to your success.

[Steve Marsh]

Cheers.

[Glenfiddich Ad]

Congratulations again to Stephen Marshall. And I couldn't end this episode without getting a little taste of Glenfiddich myself. And since I got a bottle right here. Cheers to you listeners with Glenfiddich, the world's most awarded single malt Scotch whiskey. Drink responsibly. Glenfiddick single malt Scotch Whiskey is copyrighted 2024 and imported by William Grant & Sons, Inc. New York, NY.

[Steve Marsh]

Panoply.