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Shelf Talk: Bonsai brands, Freakonomics on supermarkets, hacking Amazon rankings with cash, and more
Brands (and symbiosis with retailers)
Small brands are steadily chipping away at share from large brands. (That is, until they get acquired by the big brands...) Simon Andrews analyzes the dynamic that has been emerging, calling these new entrants Bonsai Brands, after the tiny shrubs. Being novel, they get a lot of attention. And they get some traction. But they never become huge. And that's OK.
"They look very like big successful businesses. But they are a lot smaller and don’t grow beyond a certain size."
Traditionally, big brands spent heavily on advertising to drive traffic into supermarkets. "Benedict Evans made the point that these big brands were never actually consumer brands - they were essentially B2B brands selling to the big retailers, with a promise to spend heavily on advertising." And they needed retailers as the channel to reach their consumers.
Particularly outside of grocery, these Bonsai Brands bypass the retailer and go direct to consumer (DTC) via e-commerce. That will naturally limit the scope of their distribution, and therefore their size. "They are Bonsai Brands. And if you accept that, they are great businesses."
We don't see this as notably in food & beverage yet as we do in other categories, and I'm wondering if that will change. (LinkedIn, via Benedict Evans)
Just how much is the ascension of small brands affecting legacy brands? Some isolated stats:
Kraft Heinz: Wrote off $15B in value of their legacy brands.
ConAgra’s CEO after purchasing Pinnacle for its frozen food portfolio (Birds Eye, Hungryman, Mrs. Paul’s): The portfolio was “more negative than any of us anticipated it would be."
Coty purchased Clairol and CoverGirl from P&G 3 years ago; since then, they have cumulatively written down their value by $4B
Campbell's iconic soups have declined in revenue for 8 of the past 10 fiscal years
Bain & Co: New brands are capturing 31% of revenue growth.
Can big food buy its way into innovation? If you can't beat 'em, buy 'em? "Despite some early and well-documented bungles, the food giants appear to be doing a better job with their acquisitions. 'There seem to be real learnings realized, which we would suggest has been overall advantageous...'" (Chicago Biz)
Kellogg's RXBar is delivering $213M in revenue, growing from pre-acquisition revenue of $2M in 2014 and $160M post-acquisition in 2017. (CNBC)
Or, it can go the other way around: digital companies buying their way into retail. Internet clothing rental company, Le Tote, is buying the brick & mortar Lord & Tayor for $100M. (SF Chron)
CircleUp's Ryan Caldbeck published a 31-part tweetstorm with stories "about retailer bad behavior" toward smaller brands. None of this is new, and it's probably better than it was a generation ago, but... still. "These big retailers squeeze small companies for margin and give hidden fees etc. that aren't in any contracts and little guys like us have no clout to be able to fight back" Names named include Harris Teeter, CVS, Sprouts, Meijer, KeHe, and more. None of this is shocking to people who have been in the industry, but it's illuminating to see it in writing. And this is why small brands are sidestepping retail altogether. (@ryan_caldbeck)
Freaknomics' podcast had an episode called, "How the Supermarket Helped America Win the Cold War." The episode makes a strong argument that government policies during the Cold War led to the structure of our food industry today, and development of the modern supermarket was "the endpoint of the U.S. government’s battle for agricultural abundance against the U.S.S.R. Our farm policies were built to dominate, not necessarily to nourish — and we are still living with the consequences." This episode is a great (and entertaining) study of the history of the American supermarket. (Freakonomics)
More from Freakonomics: Should America be run by Trader Joe’s? (Freakonomics)
Kroger inked a partnership with British e-grocer, Ocado, to build up to 20 automated grocery warehouses in the U.S. for filling individual grocery orders. One of Ocado's fulfillment centers outside London has 1,000 robots zipping around at 9 mph, grabbing grocers and placing them in bins. (Bloomberg)
It costs a mere $10K/month to get to the top of Amazon's listings. Not on your merits, of course. There is a growing number of "black hat" firms, like AmzPandora and ClockWorks, that take cash in exchange for helping brands manipulate their positioning on Amazon. (At times, Amazon has cracked down on employees in China (Retail Dive) who have facilitated this black market economy, and of course all of this violates Amazon's terms of service.)
A sampling of offerings:
$1.00: Thumbs up on a product review
$1.50: Make Amazon’s algorithm think a product has been added to a shopping cart
$223-$300: Remove negative ratings
$500-$550: Get info on why an account was suspended and advice for an appeal
$1,200: Purchase a “frequently bought together” space
$6,100: Manipulate reviews and sales rank
$4,000-$10,000: Reinstate a suspended account
Meanwhile, Amazon is investing $15B in tools for its third-party sellers. Remember that 58% of Amazon's sales came from third-party sellers in 2018, as Jeff Bezos noted on the first page of his annual shareholder letter earlier this year (Amazon). (Pymts)
Nomads travel across the country looking through clearance racks for items they can sell on Amazon at full price -- or better than full price for desirable items -- in an example of retail arbitrage. "To stock Amazon’s shelves, merchants travel the backroads of America in search of rare soap and coveted toys." (Verge)
🎲 Sort of related and interesting: Why does the $1 bill persist in its current form while other bills have been redesigned? Representatives of the vending machine industry, the National Automatic Merchandising Association, has pushed back on changes. Vending machines are built to accept the current dollar bill, and machine owners don't want to update their bill readers. (Now I Know)
Unrelated but fun: Professional ice cream taster. Yes, this is a job. Tell your kids you found an amazing job to which they can aspire. (My daughter is all over it.) (YouTube)
Both of these items are from Dan Lewis's daily newsletter, Now I Know.
Until next time,