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The Risks & Rewards of Being A CPG Entrepreneur

Feb. 26, 2021
We talk with Dr. James Richardson about the risks and rewards of growing a CPG brand, including the risks entrepreneurs should—and shouldn’t—take as well as what it means to be memorable versus unique.

We're back with Dr. James Richardson talking about the risks and rewards associated with being a CPG entrepreneur. Richardson is a Ph.D, a cultural anthropologist, and the author of Ramping Your Brand. Through his company Premium Growth Solutions, he helps CPG entrepreneurs create strategic plans to achieve exponential growth. 

This episode is Part 2 of our CPG entrepreneur series. Read the transcript or listen to Part 1 of the series: A CPG Entrepreneur's Guide to Growth

Read the Transcript

Erin: I have a two-pronged question for you and it's about risks. So the first part of the question is what risks are food entrepreneurs taking that aren't paying off? And the second part is, what risks should they be taking instead?

James: I think one of the risks that I see people get involved in who are selling in retail, and I think a lot of people got sucked into this year, is doing a whole bunch of paid advertising on social media for years, your brick retail sold product line. And not only does it lose money but unless you have right away because of the pay per click fees and just the impression feeds to get inside somebody's feed. But generally, these campaigns don't do much more than create awareness. And they do it at a cost that, you know, when I look at people who try these things, it doesn't seem to me that you create the same level of memorability at the same amount of money as you do getting out into the community.

Now, a lot of people put their money out, they took it from field marketing this year and then stuffed into social media because they didn't know what else to do with it. And so, they're learning but generally speaking, food brands early on aren't gonna get much of a return when they're brand new. A whole lot of paid media because there's a lot of impressions adding precedent essentially to generate memorability though. It takes more ad impressions in my experience to generate any kind of memorability for a new trademark.

What's frustrating for my clients is an old tired zombie brand, and there are many of them in food companies. A snack could come out of nowhere and like DNI campaign, and it would be phenomenally more successful than my clients that nobody's ever heard of. And that's just because, oh, well, that's an old brand. So yeah, I get that. So it already had a base of awareness. It was simply activating that. My clients don't have any of that luxury so, you know, they tend to get sucked into paid advertising too early on social media when they should be doing these cheaper interactive techniques. So that's a risk that people take, it's a financial risk, and it often does not pay off with food, unless you have an offering that's really amenable to direct to consumer sales. And I can tell you that food is a tough one. It's a real tough one in DTC. It's never performed as well as beauty supplements and then several other categories.

In terms of a risk that founders should be taking, that they're not taking, I think that adding people on staff before you think you can afford it so that you have people focused on a couple elements of outreach out of the store. So that you, the founder, can be more of the band director and focus on fundraising and not get sucked into all. It's something that people don't do early enough.

How early should you do it? That, unfortunately, has to do with your P&L and how a bunch of things look, but I'm telling you that people who struggle are the people who have been basically not sleeping, but for all the wrong reasons because they're not hiring people to take over stuff that they don't particularly add much value to, like operations, making sure stuff is labeled and shipped, and the distributor is getting what they need and paperwork and BS. They're getting sucked into that and they have no time for things like leading the event marketing because that's what they should be doing. They're passionate about the business, right? They need to be out in front of the public most of the time, fundraising, things that only the founder can do. No investor wants to have a meeting with the head of marketing. They wanna be with the founders. So, what happens is, people get busy and they get that initial growth, so they just find themselves actually overwhelmed. This is very common. So I tell people as soon as you can barely even afford it, that's how I call it, that's when you jump...you bring that part-time social media person. And, you know, the beauty of startups is you can multitask. These are folks who get that they're gonna be asked to wear 10 hats. And if they don't get that, then you hired wrong. It's amazing what you can get out of 30 hours of somebody who's just motivated. There I can show you unmotivated bureaucrats, they will squander 30 hours faster than you can say squander.

Erin: Yeah, there's definitely a lot of thirsty, hungry people who want the work and are great at the work. I’ve read this in multiple places—and you mentioned it before with the yoga instructors—that there's an advantage to taking some of your greatest fans, the people who have, you know, maybe reached out or been passionate about your product, to given them an opportunity, or to employ them because they're already a fan, they already like your product. Now, bring them on staff, because you know they already like your product and they're going to speak well of it already.

James: Well, it's not academic to me. I've seen people do it really successfully. And the funny thing, Erin, is, you know where this came from this, this hiring trick is what it really amounts to. But it came from natural behavior occurring at every trade-show that ever used to happen.

In the early stage universe, one of the secondary reasons and sometimes it's the primary reason for a sales guy or marketing person, anybody to go walk the floor and not sit at their booth is because they're looking for a job. And who are you more likely to have success with? So somebody who's already been working in a startup environment who like we just talked about? And I have overheard this at Expo West multiple times. Some person who actually has a booth over in the hall E is going to hall D and like, "Oh my God, I love your product so much." You know, and I'm like, "They sound like a rabid fan and they're actually running the booth over there." And that conversation is not often entirely innocent. It's often sort of a plug. You know, that's where I first noticed this. And then I saw people do it, I'm like, "Oh, submit," because you get 10 times the work out of people who actually love your product. There’s a religiosity to it.

Erin: I also like that word, religiosity. I like that.

James: I mean, it doesn't... Yeah, I mean, it's why startups are made fun of by big companies, right, because you're going to meet them at a trade show and they seem, kind of, goofy and they're, like, way too excited. They kind of sound off their meds. But that, unfortunately, is the passion that gets more work out of people at low cost. And that's, again, where I say the risk you gotta be taking is bringing the part-time helping or the full-time helping. Literally, six months before you think you're gonna need it is when you actually need to bring them on. That's what people don't realize because if you wait another four months, you're gonna be hiring them when you're overwhelmed. And that, Erin, is when almost every human in a management position makes a crappy hiring decision. I have lived it and I have seen it. And you don't wanna do that. And so, I'm going... I'll say it to the internet right now. Just don't hire me and use my fee to get that person on board. That's how important it is. I mean, no, seriously, if you can't get to a million dollars, like, very easily anymore with a solo program.

Erin: You mentioned on a recent blog post of yours, that 2021 will likely be more competitive for early-stage CPG startups. Why is that?

James: So, there's a couple of things but the number one problem is that due to the surge in CPG volumes, which is the vast majority has gone to the legacy incumbents. They already dominated the shelf space, but they've actually been assigned by the major chains even more shelf space so that they don't go out of stock. So the big chains drive most of the shelf space availability United States because most of the traffic is there, they have actually assigned more shelf space to the non-release days, non-challenger brands with literally less linear feet to fight for. And until that surge dies down post-pandemic, post-vaccination, it is just gonna be harder. It's going to be... The line is the same. The line to get into Kroger's the same. And even though... Actually the line maybe a little smaller as people sort of freak out and don't launch. But it's still hard to get in and get that space.

So you've gotta have a better, compelling rationale to get in and get good space. But also for companies that are also already established in the seven figures, it is a more challenging environment to add our info, unless you're one of my lucky clients in something like the deli department. And the deli is doing so badly, Erin. It is such a horrible year for deli of a supermarket that I as I talk to you, I'm thinking, "Why am I not launching a brand? I could probably take half a cake with no slice.” Anyway. But that's about the only place that's really good. So you got shelf constraints, but also you have co-manufacturer constraints. If you're just starting and growing fast, and you didn't pre-book your run rate at an expanded rate, you know, you may be picking up the phone and metaphorically speaking find out that your co-man is booked. I mean, I have clients who are in fairly capacity constraint categories. and then those categories, I mean, we're talking in startups, they're getting one run a year. Now, that's terrifying, right? So that will get a little easier I think with the pandemic easing because some of that private label volume, which is filling up those plants, to some extent, will attenuate, at least it always has with every recession I've seen.

So it's more on the supply and shelf situation. And that's creating more competition For 2021. I could go on and on and on about why life is just getting more competitive for early-stage CPG startups. That's why I wrote the book because I want people to think more like a high octane kind bar, kind of business early on because they embed that in the DNA of their startup, they are gonna do so much better. And they will be able to outflank any me-toos that are ripping them off because they read, you know, a couple of PR pieces and said, "Well, I could do them," which is more competitive. But because of the internet, it's very easy to find out what's going on in terms of innovation is that used to be a thing. You remember them, I think. That used to be a thing, just trying to figure out what launched. That was the thing that took research. So, now people are literally out there every day themselves. So you wanna be set up with the most optimal operations, design everything today so that if two people come and rip you off, basically that you're still gonna scale first. That's what I tell people.

Erin: You talk a lot in your book about the why behind the brand and its importance. Can you explain that a little more and give us the why for it's important, like what you've done there.

James: The ‘meta why.’ So, the problem that I've encountered with early-stage companies and it's like a weird alternate universe version of the problem of big company innovation teams have when they try to go predict three years in advance what people wanna do with a widget, it;'s that whether it's a forecasted prediction of demand and the demand drivers based on a whole bunch of supposition and a whole bunch of research, not based on experience of the product, a hypothetical basis or whether it's a startup, who is just deciding that this is the flavor and this is the product. Until you do some initial consumer research you don't know why people are repeating. And repeat purchase, and more specifically, extended repeat as we're talking about in the book is really the secret sauce when you can create it and sustain it over multiple years. That's what drives exponential growth without pumping $30 and $40 million into businesses.

If you know a lot of bankers who have money, you're welcome to do that. Most of you don't. So, you don't really have another option than to do the cash efficient way. And the cash efficient way is to create a business built off of 80% plus repeating on an annual basis and probably 50% on a monthly basis. And people are repeating habituating to your business. They're buying it literally every month for a couple of years. That's what you need to create on the ground as an undercapitalized business.

You have to know what the symbolism is, what the language is, what the sensory cues are that your habitual fans have figured out. And don't assume that you know what it is just because you invented it. The innovator is the least qualified person to tell anybody, including himself or herself, why the business is succeeding at the level of product consumer engagement. I don't say that just because I'm an arrogant social scientist. I've lived that.

That gap and understanding, and when you don't understand it, you go do crazy things with your package symbolism that doesn't connect with people. And you go and you spend five years selling kale chips because you were never listening. You're only listening to yourself. And kale chips don't scale because they're freaking disgusting. And if you gave a handful of kale chips to a random sample of even 50 people in the general public, almost all of them will spit it up. And to me, that's the golden sort of Uncle Larry test, which is, "Oh my God, it's disgusting." Now if you go to Expo West, you can find 1,000 people who love kale chips. And that's the problem. You've gotta understand objectively how to figure out what's driving repeat? And then you have to figure out a playbook that's going to find more of those people and spread the message that they figured out. And it's often not the message that led you to start the business.

So in my book, I created this sort of qualitative segmentation. And it was really just to explain one thing, most people who start food companies are geeks. They're category geeks. All right? That's great. That means they were the highly qualified to determine whether something was gonna be a new incremental addition to the category because they've been geeking out on the cargo. All right? The problem with it is they're geeks. And geeks generally, like myself, we're not very good at communicating traditionally to a broader non-geek audience, right? And so the beautiful thing is the early consumers who are not geeks at all can tell you that. Very few of them are gonna be geeks, especially when you get up into the million-dollar range. You're gonna engage a whole bunch of people who are not geeks in your category, they should get out something really cool about your brand. And I come back to Chobani, it's my favorite example, not because I've been talking about Chobani. They don't talk about this, which is that, you know, Greek yogurt launched in 1998 in Whole Foods as an ethnic food. It didn't go anywhere. Nobody cares.

There's no audience for people who want Icelandic yogurt. That's not how Americans buy yogurt or a lot of other things. And it's not a path to skip, right? Now, Fage, that's a Greek food company. They didn't care about the U.S. market. It was totally irrelevant. And it was kind of nice. And it was fun because they got to go to New York. But other than that, it was a total rounding error. They never took it seriously. They didn't do any research. Now Chobani did a lot of research. But he did one thing that was super lucky, was he decided to launch at ShopRite in New York, which is just about the craziest possible place he could have come up with, right, in upper New York State. Like, what? And then things started selling like crazy. And if you talk to those early consumers, as I have, you find out that, "Oh, well, this is just a protein-heavy replacement for cereal." And that's what drew me, that's what created that explosion.

The consumers, an unsuspecting audience you never would have imagined, was actually the magical audience. It was not what the younger geek would have said, about Greek yogurt. They would have given you some crazy other story. So, you've gotta figure that why out because that is gonna become the engine of your playbook. And once you can cut and paste that playbook, you can take it to every market in the country. So, that's why it's also important. I mean, the meta why that you asked for is really the fact that you're undercapitalized for the most part, even if you got a million dollars or 2 million in money, you're still undercapitalized. Right? So you have got to really build a business that's most of the revenue is coming from extended repeat. And it this is a standard that if I'm sure people would be cold just laughing their off right now because you know, basically big brands don't generate that when they launch fire extensions. It's a joke. Most of them have to repeat rates of 10% or less. I don't know if you're aware of that. It's a dismal. It's pathetic.

So, the numbers I threw out at you, not only are they attainable, I've seen in my clients' businesses that they keep happening. And they happen with brands that are highly innovative, where people build memorability into the business, work the out of store angle. And this doesn't necessarily cost a lot of money. But you also do have to listen to your consumers.

And when I started this, Erin, I had this weird, naive assumption that entrepreneurs were like anthropologists. They would politely say, "No, they're not that different than the big General Manager of Kraft Heinz, who thinks he has all the answers in events." Actually not in that one respect. The difference is they can actually pivot and it's easy to convince them to stop, listen, iterate. Once the big guy at Kraft Heinz had launched his line, he doesn’t wanna hear about iteration. All he wants to hear is ka-ching because he's gonna get fired. That ego is not an addressable coachable. But the entrepreneur is a little more comfortable. So, I hope that explained the why in the meta why.

Erin: I wanna close this episode talking about something that you bring up in your book regarding a brand being memorable versus being unique. Can you explain what that means for CPG entrepreneurs?

James: Unique is a very compelling word to the liberal arts crowd. And there's a growing group of entrepreneurs who fit that bill. And I think people... And geeks do actually have a tendency to wanna do something really unique. I remember this for my academic days. I'm gonna be so unique and snowflakey. The problem with unique is that true uniqueness like in a category context, it's just a form of rarity. It's an extreme form of rarity, right? The problem is that by itself doesn't tell you anything about a product line's potential or brand's potential.

Being really, really rare isn't really correlated with success at all. And that's because, Erin, most rare stuff when you hand it to a larger, broader audience of nongeeks in the category, it just looks weird. And so, it triggers to them weird, unappealing, not even worth trying. And it's a large percentage, you're gonna have that reaction, the more rare and weird it is. So unique really raises the specter of, "Oh my God, I just have this weird thing. It's got a weird ingredient. It's got a weird name. It's got a weird texture. It's got..."

So, what you want is an interesting, competitively different thing. So different, not necessarily unique, but different enough, that it's not so weird that I don't wanna try it. And then that is what is, sort of, to me the crucible of creating a memorable brand or memorable product line because some kind of difference for something else in the category and it doesn't have to be very extreme at all. And I talk about in the book, the difference really needs to tap into a mass-market outcome. And that's when things get really exciting.

That's when you can get Halo Top kind of velocities when you chase a really boring outcome, but what you're doing is selling a really memorable, tasty, modern way to choose that outcome. And the potential here to overthink and overanalyze and over-innovate is massive here. And that's what you'll see at Expo West when it starts up again. It’s just booths full of overthink. Like, and I... A Ph.D. gets to excuse somebody to overthink. And I have one so I know it when I see it. And I also know someone who's not listening to their audience, like they're just talking to themselves in a mirror. What you wanna do is create something memorable that's memorable within ordinary people's brains and stomachs, in their brain specifically that excites their stomachs first, creates memorability but isn't actually chasing real uniqueness. Now that's not the point. That's an artistic goal that doesn't lead to scale although it may lead to enjoy. I can't rule that out.

Erin: If someone wanted to get in touch with you and do more of a one-on-one and really reap the rewards of your skills and what you are all about, how could they do that?

James: Well, I welcome early-stage companies to go to my website first, which is premiumgrowthsolutions.com and go to the founder's resources page, and there's a lot of free stuff there. I keep adding to it., all my media appearances, podcast episodes. Everything is there. So there's a lot of tidbits and nuggets to enjoy, webinars courses, all sorts of yums. And if that inspires, you wanna reach out, go to my services page and you can learn how to how to do that there. Otherwise, I wish everybody the best of luck as we get out of this pandemic.

The views and opinions expressed in this episode are those of the guest and do not necessarily reflect the official policy or position of Food Processing.

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