Industry leaders and investors warned CPG entrepreneurs that brands need to plan for a tighter investment market if they hope to survive in the rapidly changing economic climate.
How emerging CPG businesses can survive the rising tides of inflation and the possibility of an impending recession were at the heart of a roundtable discussion on Wednesday titled “Coping with Economic and Capital Market Volatility,” which was co-hosted by Naturally Chicago, a collaborative community focused on accelerating natural and organic products, and wellness-focused research firm SPINS.
The panel kicked off by referencing a LinkedIn post that Once Upon A Farm CEO John Foraker wrote three weeks ago.
“The next year or two in the private financing markets are likely to be brutal. You should plan for that, if you’ve not done so already. Extend runways, manage burn, and play a longer game,” Foraker advised. “Ironically, this will happen while the demand side of the industry and growth opportunities remain very robust, as consumers continue to seek better, healthier options.”
The panel of speakers included Foraker along with Adnan Durrani, CEO and Founder of American Halal Co./Saffron Road; Jordan Gaspar, Managing Partner of AF Ventures; Jason Mercer, Principal and BIPOC Portfolio Lead at Cleveland Avenue; Chuck Templeton, Managing Director of S2G Ventures and Founder of Open Table; and Wayne Wu, General Partner at VMG Partners.
Prepare for the Worst
After over two years of pandemic-induced market swings, CPG brands are facing the grim combination of labor shortages, supply chain disruptions and runaway inflation. Among the panelists, the consensus opinion was that growth is likely only going to decelerate further.
“In the three decades I’ve been in this industry, this is the worst I’ve ever seen,” Durrani said.
More than half of all CPG companies are on course to grow below the market by 2027, according to a recent report by Kearney. This is attributed to inefficient supply chains causing an $800 billion falloff in top-line growth over the next five years.
In the near term, employee retention combined with the cost of freight and raw materials is spooking some investors.
Facing such conditions, entrepreneurs need to be nimble, resilient and prepare for a longer runway to survive, Gaspar said. “We’re saying to people: you’ve got another 12 to 24 months ahead. We don’t know what’s going to happen and so predictability is out the door.”
Forecasting will be difficult because the speed of the downturn has caught many off-guard. With the cost of capital going up, panelists noted that investors may be wary of what they are funding and the expected returns on their investments.
It has been a hot investment market for emerging brands, but as things cool down, CEOs will have to understand that valuations will lower and term sheets might be less generous.
“I’m not telling you things are burning right now,” Mercer said. “But if you don’t see smoke, you got a problem.”
Though unpalatable, cutting costs and raising prices quickly will help companies keep the walls from closing in. Opting to take a hit on margins rather than risk upsetting consumers, as many entrepreneurial brands have done, is untenable in the long-term, according to Wu.
“Those who wait have paid,” he said. “You can only take the hit for so long. You’re gonna have to raise the price just like everybody else.”
Build a Great Brand
Yet for businesses that have built strong brands, conditions could prove more stable. During bull markets, many companies focus on increasing topline numbers – sales, profits and revenue – without taking a more holistic approach to building a great brand. Yet in a bear market, that approach may be counterintuitive, according to the panel.
A brand that builds an emotional connection with consumers will have more success than those that are specifically looking for an exit strategy, Wu said. “If anything this marketplace shows strategic buyers which brands are truly strong…there’s a flight to quality and those that have the quality are raising capital, and they should stay the course.”
It can be described as working in the business versus working on the business, said Chuck Templeton, Managing Director of S2G Ventures. Entrepreneurs need to spend time attending to day-to-day, urgent matters just as much as working on the macro aspects of the business.
Turning problems into solutions will be a helpful skill in the coming months, Templeton said, as founders and CEOs who focus on the brand’s core principles and are able to turn down the noise in the markets will be more successful.
Finding Opportunity in the Downturn
Companies can capitalize during harder economic conditions by focusing on what consumers want and what their competitors aren’t offering.
If smaller companies can hone in on gaps in the market, set achievable growth targets and build a strong company with realistic margins, investor interest will follow, the panelists said. Entrepreneurs might need to take terms that are not ideal or find enough working capital that ensures the business can survive longer than 12 to 18 months, but that could secure a lasting future for the company.
Focusing on smaller goals that are realistically attainable, could ensure more success long term, Mercer advised, as opposed to trying to compete with the more established brands too early.
During down times, big brands will take shortcuts with packaging, ingredients and shipping to decrease their inputs. Finding agility and endurance without diluting a brand’s product is harder for smaller players but allows them to maintain their consumer base when markets tighten.
“Figure out what your superpower as a brand is and really think out the next four to five years,” Durrani added.