00:00hi everyone welcome to the 1/6 + Z
00:03podcast I'm sonal today is part of our
00:05ongoing series on consumer tech trends
00:08we're talking all about the category of
00:10consumer packaged goods or CPG and where
00:14this fits with what's going on in online
00:16and offline commerce trends overall
00:18including when it comes to the grocery
00:19business we also talked about the trends
00:22of DTC or direct-to-consumer and the
00:24concept of micro or emerging brands as
00:27well joining us to have this
00:28conversation we have a 6 in C general
00:30partner Jeff Jordan who's written a lot
00:32about competing with Amazon and the
00:34future of e-commerce and marketplaces
00:36and has been on the front lines of this
00:38area both as an operator and investor
00:40witnessing firsthand from many angles a
00:42lot of changes in the industry and then
00:44we also have Ryan callback of circle an
00:46investment platform powered by data and
00:48technology he also talks a lot about
00:50innovation in the CPG space and more
00:53which is why we invited him to join this
00:54discussion please note that the content
00:56here is for informational purposes only
00:58should not be taken as legal business
01:00tax or investment advice or be used to
01:03evaluate any investment or security it's
01:05not directed at any investors or
01:07potential investors in any fund for more
01:10details please also see a 6 and C com
01:12slash disclosures the broader question
01:15that we covered throughout this episode
01:16is how does technology and especially
01:18the internet change and in some ways not
01:21change the way we do things why do some
01:23of the traditional businesses in these
01:25industries though full of some of the
01:27smartest people have trouble innovating
01:29and can tech really help in fact that's
01:32where we begin the conversation with the
01:34assertion that it's been hard to bring
01:36tech to CPG even though there seem to be
01:38a lot of products trying out there as a
01:41user I have a hard time perceiving this
01:45because I am constantly bombarded with
01:47consumer products that are techy whether
01:49it's like a thousand beauty product
01:52lines there's a thousand even generic
01:53lines that I'm getting hit with so I
01:55have a hard time blocking that this is a
01:56reality tell me what's happening there
01:58it's a great point so I think first one
02:01of the reasons that you see that is the
02:04DDC movement which is directed directly
02:06to consumers all right yeah a handful of
02:08tech VC firms they're putting a fair
02:11amount of money into consumer product
02:14that cell just direct-to-consumer or
02:17predominantly direct-to-consumer that
02:18money is usually not used for innovation
02:21for product innovation it's usually used
02:24for marketing I agree with Ryan that
02:25they're largely marketing companies it's
02:28actually a derivative of Amazon
02:29unfortunately if you want to play in
02:31e-commerce in a post Amazon here it you
02:33cannot sell what Amazon sells
02:34successfully I mean early on we tried a
02:36number of concepts that some are around
02:39anymore that said okay I can kind of
02:41sell the same thing as Amazon with a
02:43different distribution twist with
02:44something like this but you can't so
02:46then the next wave of companies was okay
02:49if I can't sell I can't compete with
02:51Amazon directly skew by skew let me get
02:53proprietary skews and so they're
02:55formulating different products with
02:58different branding and they typically
03:00aren't on Amazon or another retailer but
03:03that is where a lot of the direct
03:05consumer stuff is happening and you know
03:08frankly you know some success not a ton
03:10of success in doing it why is that by
03:13the way you know at some point you're
03:14still competing with you know with the
03:16legacy players and what's worse is
03:19they're also competing with each other
03:20so there are a half dozen a dozen you
03:23know brands all trying to find you early
03:27on they find you at you know 20 dollar
03:29acquisition cost when ten of them go at
03:31each other they're competing for you 10
03:34companies trying to grow competing for
03:35you and then that also caps their
03:37ability to price so you know one of the
03:39big secrets in e-commerce is virtually
03:41no companies get big and make money in
03:43the United States on e-commerce I can
03:45name five ecommerce companies in the
03:48u.s. after decade two decades of
03:50investing and God knows how many tens of
03:52billions of dollars who are a billion
03:54dollars in sales and profitable yeah I
03:56mean you're making the point
03:58particularly around the rising CAC we
04:00see a lot of DC companies raise money
04:03you know with a CAC let's call it $10
04:05$30 and then over the course of
04:07subsequent two years it raises literally
04:10sometimes by an order of magnitude I
04:11mean and and that is just killing their
04:13profitability and by that just to
04:14quickly summarize you mean catechism
04:16customer acquisition cost using all that
04:18marketing dollars to acquire their
04:20customers exactly I think I think when
04:22you know d2c direct-to-consumer
04:24businesses I think a lot of folks look
04:27and say okay we're stripping out the
04:28middleman the retailer the offline
04:31retailer and because of that we can put
04:33that margin that the retailer gets into
04:35our business and this is going to be a
04:37wonderful business the problem is that
04:39you need to attract people to your site
04:41right you know to get people to come to
04:44your startup to come to your URL and buy
04:47something is a really difficult thing
04:49and so that's what's driving these
04:50customer acquisition costs up now there
04:52are some DC companies native deodorant
04:54was bought they only raised two or three
04:56million bucks in total sold for 100
04:57million to two Unilever why did you know
05:00ever wanna buy that company like why
05:02wouldn't they just make their own
05:02in-house brand another brand the CPG
05:05companies large ones have lost the
05:07ability to innovate they just they
05:08innovate through acquisition now and
05:10they buy early so you know Lieber bought
05:12Dollar Shave Club Unilever doesn't have
05:14a shaving business way I believe or
05:17deodorant offerings when I'm guessing
05:19they saw something in there so it in
05:21biotech are kind of the same the big
05:23pharma companies are buying their
05:24innovation the big CPG companies are
05:26buying their innovation yeah you know
05:27historically large CPG has been able to
05:30rely on their brands brands that have
05:33existed literally in some cases for
05:34fifty or a hundred years
05:36meg Scott cook and brine sweetie and
05:38Steve Ballmer all at P&G together right
05:41after I graduated from college Meg was
05:43the brand manager I believe on crest Wow
05:45and can you think of that cadre of
05:48talent in the same ha CPG seems like cuz
05:54I have a lot of friends that go through
05:55their career starting at Clorox yeah
05:56heard of a training there's always like
05:58a mafia on a training room that people
06:00get some fundamental skills in these
06:01companies so what are they actually
06:02getting out of these companies there's a
06:03quote in one of the Apple movies if you
06:05can sell sugar water you can certainly
06:07show probably something to that right to
06:14be able to sell literally the same
06:15product for 30 years in a row think
06:18about trying to do that in the
06:19technology space that be maybe they'll
06:20be impossible there's a fun book by a
06:22Harvard Dean I called different and it
06:25basically says almost all consumer goods
06:28are these small incremental improvements
06:31that everyone copies because that's the
06:33improvement that a wider mouths on the
06:36Crest toothpaste because that you go
06:39oh so Colgate will do wider mouths and
06:41spearmen and you know it whitening and
06:43versus brands that kind of just throw it
06:46out just do it differently she's as
06:47Harley she's as Apple she's as Red Bull
06:50and they just came to market with
06:52completely you know we are going to be
06:54different and it's it's so interesting I
06:56love the book because 99% is exactly the
07:00same and then the 1% yeah that gets back
07:03to the point of like why these large
07:04brands are losing market share you know
07:06the large brands have have not had to
07:09innovate they've been able to rely on
07:10their brands on whether it's Coke or
07:13Pepsi over it it's the same product just
07:15their brand name for decades now these
07:17smaller chart brands these emerging
07:20brands are able to develop the
07:22innovation and house and deliver that to
07:24the consumer the consumer on the other
07:25hand for the first time in history
07:28saying I demand products they meet my
07:31unique needs maybe the three of us used
07:32to eat the same breakfast cereal now the
07:35three of us are eating different things
07:36we're demanding products and meet our
07:38unique needs that customer consumer
07:40demand is pulling forward the innovation
07:43and giving it a market that's why though
07:44I just wanna put a little bit more on
07:45this dtc topic though because when i
07:47think of the theory the internet which
07:49you know it disintermediate s-- this
07:51intermediary you can go direct to people
07:54you create movements on the internet I
07:56mean talk about meme culture like if a
07:58meme can monetize why the hell can't a
08:00product so I'm still having a hard time
08:02buying why DTC is so hard the internet
08:04enables the longtail so all of a sudden
08:06everything's discoverable where it used
08:08to be there were three television
08:09networks and 10 magazines that mattered
08:11the world is different it used to have
08:13you know very narrow portals to work
08:17which was great for big companies that
08:19have you know a stable product lines so
08:21you know you couldn't do TV on a five
08:24million dollar revenue line you can do
08:25internet on a five million dollar
08:27revenue right but that's exactly my
08:28point is we have a world where we do
08:30have a long tail discoverability yeah
08:32you have the ability to access find your
08:34niche audience yep you also have a world
08:36where you can still make hits on that
08:38long tail like there's there's a
08:40proliferation of CPG companies but why
08:43did dtc not work so when we say doesn't
08:46work i think it is an incredible channel
08:48for iterating on a product i think it
08:49drives innovation I can find my consumer
08:52in test a new product next month I can
08:55test a different product that's very
08:56different than the offline world where
08:57if I'm selling into Safeway or Whole
08:59Foods or Costco down the street it's
09:01hard for me to switch the product out if
09:03it's not working to tweak a package
09:04whatever it is people in the technology
09:06space take that kind of a be testing for
09:07granite in CPG it's much much harder you
09:12need to move not just bits and so if you
09:15run a chain of stores actually a couple
09:17like all the companies that are getting
09:19challenged growing continuing to grow
09:21dtc sales are turning to offline retail
09:23in different in different forms and
09:24every company I've worked with is trying
09:26to do that because incremental rather
09:28counterintuitive it is but the way store
09:30management work I used to be CFO the
09:32Disney Store is you try products
09:34typically you do one two or four sets a
09:37year and you try products in a
09:40significant subset of your stores
09:42because you know if it's a bomb you
09:43don't want to buy deep in it so you'll
09:45put it in five stores to test for the
09:47first six months and then they say that
09:49worked well let's go to 50 stores for
09:51the next six months and then but time
09:53you get chain wide it literally is a
09:55couple years later and so you know just
09:57it's you know it's really hard to grow
09:59your business and that's for Disney
10:01stores where you have your own product
10:03in its store so if you think of like the
10:05CPG products they're selling through a
10:07third party the retailer now they have
10:09to make a much bigger bet they can't
10:11usually just start in five safe ways so
10:14they have to start in 200 now when you
10:16start in 200 flipping that changing that
10:18product if it didn't work it can kill
10:20the company when I was at Xerox PARC one
10:23of the companies we partnered with was a
10:24large CPG company and their number one
10:27challenge was trying to figure out what
10:29happens after the consumer buys the
10:31product they had zero insights I'll
10:33actually it's even worse I have zero and
10:35said they know what they sell into the
10:37retail chains they don't know what sold
10:39where to who write it's incredible
10:42that's crazy how is that not possible so
10:45people who are listening to this will
10:46respond well what about credit card data
10:47the problem with credit card data is
10:49they can tell you what the retailer
10:50selling not what was bought at the
10:51retailer so I can see what nordstrom.com
10:53sales for last month I can't see what
10:55pairs of jeans were bought there why not
10:57doesn't it say even the point of ask you
11:00know oh well yeah but it's it these
11:02credit card companies don't sell it and
11:04more importantly to back to Jeff's point
11:06they don't tie those products to
11:08individual people will sorry some
11:10retailers have loyalty card data but
11:13there there's privacy issues with them
11:16selling that's 84 51 division of Kroger
11:19sells part of it but not in the way that
11:21we're talking about here that can say
11:23this person who I can by the way can
11:25match so NAL's what her purchasing power
11:27to your Instagram account that has not
11:29done anywhere you know typically CPG
11:31marketing is you buy a circular in the
11:33Sunday paper you buy an endcap display
11:38and billions of dollars goes into those
11:41and who knows if it works and they
11:43certainly don't have any any data beyond
11:45oh our total sales went up a little bit
11:48there one of the key things that it was
11:50compelling about instacart to us is that
11:52they have a revenue sharing from the
11:54consumer I wrote in a stream from the
11:55grocery retail partner and a revenue
11:57stream from CPG companies who are
11:58interested in accessing the consumer why
12:01the CPG companies were so interested in
12:03that is it's the first performance
12:05marketing they've ever seen not
12:07something like instacart they know
12:08everything I've ever bought and they if
12:09they know I love you know Heineken beer
12:12and the product manager of Stella wants
12:14to try to convert me they can give me a
12:17Stella coupon a Stella samples to sell
12:19everything else and then see did I
12:20change my behavior over time that's the
12:22holy grail of marketing like that type
12:26of data I'd like closing that feedback
12:27loop is a big F deal they also over time
12:30have the ability to kind of literally
12:32move the product on the page right which
12:35if you think about offline retail you
12:36can't do it what do you mean by on the
12:38meaning when you're looking at instacart
12:40what product you're looking for can be
12:43physically oh like kind of personalized
12:45rearranged to your and it's exactly I
12:47would you cannot do in a physical and
12:49it's completely obvious in tech but for
12:50people that are in CPG it's a
12:52game-changer so I was in a safe way half
12:54a mile from here on Sand Hill six months
12:57ago and was buying some steak steak was
13:00in the refrigerator next to the steak in
13:02the refrigerator were wood chips the
13:04wood chips have no need to be
13:06refrigerated they're literally just wood
13:07chips to put in a barbecue they're in
13:08the refrigerator because they're on sale
13:11and they want to put them next to the
13:13steak that's it and so your
13:14refrigerating literally wood that's good
13:17because he goes back to Jeff's point if
13:20the endcap would have been 30 feet away
13:21then you would have lost the consumers
13:26example I love that let's talk about
13:28grocery for a little bit as an
13:29interesting category so first of all is
13:31gross you're gonna go the way of malls
13:33and other retail so I've got a not very
13:37popular opinion on this I think grocery
13:40stores are here for the very very long
13:43term very long term meaning next 20
13:46so taking a step back d2c and e-commerce
13:49has been around for 20 plus years this
13:51is not a recent phenomenon food is still
13:53Jeff you could tell me I think 5% of
13:55sales digital yeah I'm way under yeah I
13:58don't foresee a world in which everyone
14:00is just going to go online a and B when
14:04that happens or when it gets to be a
14:06much higher proportion of where you buy
14:08your your groceries I still think that
14:10that groceries going to be delivered
14:12locally but the core point is grocery
14:15today to three percent net margin
14:17business that's hard to strip out a lot
14:20of costs from that there's not a lot of
14:22weekend right so you think about where
14:24technology has been particularly
14:26successful at killing other industries
14:29they tend to be industries where there
14:31is a fair amount of profit right it's
14:33also like bamos costs disease too if you
14:34think about it eventually penetrating
14:36healthcare and absolutely education like
14:38things that are way more expensive than
14:39they need to be in technology as a
14:41vector to just cut right through
14:42absolutely but the safe time app is a
14:43safe way down the street has a one and a
14:45half percent net margin so what are we
14:47gonna do to rip the cost of that because
14:48that thing is already delivering a
14:50pretty good product to the people that
14:52live within a mile and a half of here I
14:53mean there was a set of companies that
14:55was trying to help physical retail
14:57compete with the digital commerce and it
14:59was so interesting we didn't invest in
15:01many of them at all because we are
15:03internal reference was we're shorting
15:04the future you know just say it's not a
15:06long term winning proposition and there
15:08Marge is gonna get squeezed so they're
15:09gonna squeeze their vendors then we made
15:11the insert cart investment in the belief
15:13that the grocery stores are there it's
15:14distributed look they have distributed
15:16little warehouses they provide service
15:18and it was interesting Fred Smith the
15:20founder of FedEx when the internet first
15:21came up said I think a whole lot of
15:24goods are gonna be delivered by FedEx
15:26groceries ain't gonna be one of them
15:28because the concept that you're going to
15:30load a truck in the morning and having
15:33the streets and that deliberate ate
15:36something at 8:00 p.m. that was put in
15:38the truck at 4:30 a.m. and you know he
15:41just said I don't think it works
15:42building up the shopper Network is so
15:45hard to replicate for someone else going
15:47forward it's it's not as simple as let's
15:49just hire FedEx to go do this thing oh
15:51and in the operational intensity its
15:53aggressor we think we think in grocery
15:56we think effectively there are a couple
15:57different dimensions that grocery chains
15:59need to compete on we think it's its
16:01assortment we think it is convenience we
16:03think it is pricing and experience
16:05pricing is a really really hard place to
16:07compete on you're competing with Amazon
16:09to a point that Jeff made earlier you're
16:11competing with a Walmart I think that's
16:13just a really really hard place to win
16:15you can't win on this one weight one to
16:18two percent exactly the margins are
16:19already so low yeah so let's put pricing
16:21aside for a second I also think that
16:23grocery is in some ways an experience
16:28for some people I'm an experience for
16:30the consumer to go in perhaps with the
16:32family perhaps you know just buy a
16:34couple things here and there they want
16:36the immediacy of that we don't see that
16:39going away anytime soon I think it's
16:42gonna be hard to win again because how
16:44do you invest into an experience if you
16:46if you have such low margins right I
16:48will say one quick sidebar and
16:49experiences if Connie were in this room
16:50she talks a lot about what happens in
16:52China you know she talks about this
16:53incredibly fascinating phenomenon where
16:55grocery stores in China have become
16:57destinations themselves because there's
16:59literally restaurants inside the they're
17:01doing all kinds of neat food chef beings
17:03etc cooking on-site doing all these
17:05interesting things I mean what's your
17:07take I wish I was with the CEO of a
17:08large grocery chain about a month ago
17:11who made that same point there they are
17:12starting to experiment by putting
17:14restaurants effectively restaurants
17:16inside their local Asian supermarket it
17:20almost all have Indian ones do they have
17:24like samosas for two dollars yeah I
17:26would say I think it is nice to have not
17:29a not a requirement to be successful I'm
17:31not convinced that that's gonna be the
17:32core differentiator going forward so
17:34what do you think is gonna be the core
17:35differentiator you had one more
17:36dimension convenience and assortment
17:37those last two so convenience to me is
17:39delivery delivery or in-store pickup I
17:41think that that will end up being table
17:43stakes not a nice-to-have meaning you
17:46convenience well my question on this is
17:48why bother even having a grocery store
17:50if you only need to deliver why do you
17:51just might not keep warehouses then if
17:53experience isn't gonna win the thing
17:54like why not just have a bunch of
17:56warehouses that deliver food if delivery
17:57is the thing yeah so to be frank that
17:59could be the 50 year vision that really
18:02could in the UK which for whatever
18:04cultural reason has been doing grocery
18:05delivery for a long time and it's a much
18:07deeper state of penetration they're
18:10starting to have what's called dark
18:11stores where you basically look a lot
18:14like supermarkets they're locally
18:15distributed they have the inventory
18:17assortment but they're not in
18:18high-traffic parts of town which mean
18:20the rents are much much lower and so you
18:23know if you know as a result you don't
18:25have to make it pretty you don't have to
18:27have the lights you know lots of lights
18:28don't have to have high labor all you
18:30have to do is pick in them and so that
18:31that is how grocery has been developing
18:34in one of the most advanced digital
18:36grocery markets so it'll be interesting
18:37if whether that happens in the US every
18:39argument that I can make on why grocery
18:43stores won't just be warehouses where
18:44people or it gets delivered from every
18:47argument I can make is a short-term
18:49argument I can't make a 50y argument fat
18:51so I think that that could happen over
18:54I don't think customer adoption will be
18:55big enough to get rid of these stores
18:57these stores these aren't little mom and
18:59there are fortune 500 companies that are
19:03we know there are destinations I mean I
19:05see like families on weekends all the
19:06time it's like it's an outing to go to
19:08the grocery store but if they had like a
19:09daycare I think that would be a huge win
19:12frankly yeah that alone would be a big
19:14difference exclusively shop through in
19:18sakai to our family's grocery because I
19:20can't bring the kids to the grocery to
19:21work at this - it's to create this too
19:23much cancer so I believe that
19:24convenience will be table stakes so then
19:27it comes down to what is the way grocery
19:29wins what are the way grocery store
19:30competes to me it is just about
19:32assortment that's your fourth dimension
19:33this is the fourth dimension after price
19:34experience convenience and now that's
19:37right assortment is what what are the
19:39products are on the shelf right so if
19:41you think the last 80 years it has been
19:44well what's perhaps you can give us this
19:46month coke General Mills Unilever
19:48Procter & Gamble etc today as we've
19:50talked about consumers want brands and
19:52products and meet their unique needs the
19:54problem with that is that the buyer at
19:57the retailer meaning the person that
19:58selects let's say the chocolate
20:00the buyer at the retailer is still the
20:03same buyer that lived there 20 years ago
20:05in some cases they don't use a lot of
20:07data they are literally trying chocolate
20:10bars to decide what goes on the shelf
20:11that's a really hard place to be in a
20:13market that is trillions of dollars to
20:16decide which of these emerging brands
20:18they want to work with so the default is
20:20gosh maybe I just rely on the big brands
20:23to tell me who to work with that's a
20:25real example sometimes the big brands
20:26literally say work with these emerging
20:29maybe I work with the distributor who by
20:31the way has paid more than by the by the
20:33larger brands but there isn't really
20:35good solution for a lot of these fortune
20:37500 retailers on how to optimize their
20:40assortment the data that exists for
20:43these grocery chains is pretty poor
20:45you've got a couple retail level sales
20:47providers that on average track twenty
20:49thirty thousand products or companies
20:52rather each there's about a million and
20:55a half out there a million and a half
20:57and they cover of less than five percent
20:58of them and even the grocery and food
21:00shows aren't they sort of like I'm
21:01thinking the equivalent in fashion and
21:03boutiques like you essentially have like
21:05a fashion show yeah to curate all the
21:07brand's the emerging brands the existing
21:08brands new product lines why isn't there
21:10an anthropology of groceries stories
21:12because I think of anthropology as a
21:13retailer they have the sort meant
21:15because they go around the world to find
21:17a variety of design so it works very
21:18well for a certain demographic of women
21:20you know like in their 20-30 years etc
21:22then you have to say which of these will
21:24my consumers respond to at the right
21:27price so you get exposed to the million
21:29but then you know which - I can only
21:31carry X thousand in my store how do I
21:34figure that out online might actually
21:35help because you can put infinite
21:38selection online and see what's selling
21:39so if you're a grocer I'd be looking at
21:41my online sales just to inform my
21:43offline sales like oh wow that's a
21:45breakout hit online why wouldn't it be a
21:47breakout hit offline interestingly then
21:49you might come back to a customer
21:51acquisition challenge for the CPG
21:53companies which is if we have a ton of
21:55products online how do we then stand out
21:57that comes back into advertising alright
21:59it's kind of a vicious circle or
22:01virtuous virtuous it's a skewed sample -
22:03like what happens online and offline
22:05it's definitely skewed but it's you're
22:06in a complete information vacuum which
22:08is our loyalty cards are really skewed
22:11sample that's a very soft selective
22:14you're not really getting the huge
22:15untapped space of what you're not but
22:17you're actually finally getting data per
22:20person basis to kind of examine it's
22:23hard to understate how blind most buyers
22:26at most physical retailers are right now
22:29yeah they're just kind of it's instinct
22:31it's you optimize the current assortment
22:33but then how do you layer in new things
22:36and there's a plethora of new things
22:38that you don't know people have the
22:40tasteful exactly so you think about that
22:42you got a buyer for the chocolate
22:43category right and that could be an
22:45older candidly white male who's making a
22:48decision by the way not diverse racially
22:53by age varying demographic location so
22:57should we be selling the same thing in
22:59LA that we do in Vermont so how are
23:01people gonna get this data cuz right now
23:03Jeff is describing that they're
23:04desperate for data so they have to rely
23:05on these they have to get data somewhere
23:07but that's still adverse selection type
23:09data yeah it's not like the the true
23:11opportunities face of data so where does
23:12the data come broadly speaking in
23:14consumer there's a really beautiful
23:16thing that a lot of people they don't
23:17live and breathe this space they don't
23:19recognize which is there is a tremendous
23:21amount of data that's out there in the
23:22world meaning I can already see where a
23:26product is sold how many SKUs a company
23:28has meaning how many products that
23:29company sells what the price points of
23:31the products are what the end users
23:33think of the product and if I'm tracking
23:34it I can see how all those things change
23:36every single month and how they compare
23:38to every other company in the category
23:39those factors have been shown to be
23:42predictive of success people can
23:45aggregate those now the challenge and
23:47this is this is where it gets really
23:48tricky the challenge is that you're
23:50consolidating information across
23:51literally hundreds of unstructured data
23:53sources it's extremely intensive and
23:56extremely intense and very difficult
23:58sounds ideal for an AI solution yeah it
24:00is it is but but the data is out there
24:01is like once we think that that data is
24:04going to start getting consolidated by
24:06data providers technology companies that
24:09then sell it to the CPG companies or in
24:12this case the grocery chains so the data
24:14opportunity do you believe that I mean I
24:15know we actually have seen a ton of
24:17companies trying to do it and the
24:19interesting part is how hard they have
24:21to work to get the data are there been a
24:23whole bunch of them that one are trying
24:25to incent consumers to take picture
24:27of their receipts and submit the
24:29pictures and they do optical character
24:31recognition on the back to try to
24:33reverse-engineer what did Jeff by and we
24:36see multiple companies trying to do that
24:38there are other approaches to there's
24:39some some there was a on demand they'd
24:42send armies of people with smartphones
24:44to take pictures of shelves so that they
24:47know the competitive pricing oh look
24:49cress is 229 and Colgate's 315 what
24:53happened to sales you know but they
24:55don't know what Coke what Colgate
24:57interests is and so they don't know all
24:59they know is Michael I see in in the
25:01southern region slowed down or sped up
25:03and you don't know why which is equally
25:05problem in the case the receipts
25:07companies we've seen a lot of those two
25:08that the challenge has been many of them
25:10tap out at five ten million consumers at
25:12least here in the US the problem with
25:15that level is that then that's such a
25:17small portion the part of the overall
25:18population that you're not capturing the
25:20long tail of companies right so the
25:22chances that the five million dollar
25:23popcorn company is bought in a
25:26population that small is relatively low
25:29they're going to be buying the Procter
25:30and Gamble's General Mills the world but
25:32then you're just getting more data on
25:33the larger companies with the grocery
25:35chains not exactly they need to eat on
25:37the longtail okay so in this world this
25:39longtail world this world of offline and
25:42online distribution and those are the
25:43two distribution broadly that we're
25:45talking about we are seeing a lot of
25:47micro brands and we didn't talk about
25:48that when we were talking about director
25:49consumer yeah there's a whole lot of
25:51media pieces dissecting this phenomenon
25:53first of all what is a microbe and and B
25:55why does it matter or is it just the
25:57high P bang yeah so let me just clarify
25:59micro brand you mean an emerging
26:01consumer product company typically
26:03called less than ten or fifteen million
26:05dollars in revenue so yes but I think
26:08you're the one who argues that it
26:09denotes size not channel because the way
26:10I've read it in the media it does talk
26:12about it as yeah the the recent
26:14economist article kind of confuse the
26:16two they started talking about micro
26:17brands and then they said basically
26:19implied that micro brands means d2c
26:21micro to me unless I'm missing something
26:24denotes size not channel so I don't
26:27really love that term to be candid with
26:28you because I did well for the same
26:30reason I would imagine that the
26:31entrepreneurs around here wouldn't like
26:33it if you if we call them micro
26:34technology companies right they're
26:35they're starting companies because they
26:37want to build something big
26:38and you know I think that sometimes that
26:41comes across as a little bit high in my
26:44yeah especially if it's just an ice
26:46cream company but look I'll be frank
26:47with you the ice cream company that's
26:50able to strip out fat and calories from
26:52the ice cream and still deliver great
26:54products to me is having a bigger impact
26:56in the world this is like halo right a
26:57laptop yeah it's exactly right so but
27:00when we we talk about them as as
27:03emerging brands so emerging brands can
27:06be sold certainly offline or online but
27:08what's happening these brands are
27:10growing very very quickly right now in
27:12every single category and consumer large
27:15brands are losing share to emerging
27:17brands and the large brands are just
27:19terrified by this so why is it happening
27:20we think three primary reasons first is
27:24what we talked about before the
27:25personalization of the consumer the
27:27consumers are demanding product to meet
27:28their unique needs two other reasons
27:30that are pretty relevant to this
27:32conversation one is decline in
27:35distribution costs really more instead
27:38of just saying its decline it's really a
27:40shift from fixed costs to variable costs
27:43and that's because of the internet like
27:44the the entry point to be able to buy
27:46get up a business up and running
27:48is part of the driver but I don't imply
27:51that that is the key driver in my view
27:53it's more that the offline retailers are
27:55in hungry to work with the small brands
27:57they're struggling to figure out how to
27:59do it and so what we're seeing as many
28:01the offline retailers are eliminating or
28:03lowering slotting fees slotting fees are
28:05the cost to get your product on the
28:07so if I want to launch a new chocolate
28:08bar to get on the Shelf of Safeway it is
28:10literally fifty to a hundred thousand
28:11dollars just to get it on the shelf
28:12think about that for a second if it's
28:14the Apple App Store to launch an app
28:15it's a hundred thousand dollars
28:17it'd be a huge barrier to entry that
28:19fixed cost is declining rapidly or the
28:21last five or ten years because these big
28:23brands are eager for the groceries were
28:24for these smaller brands or assortment
28:26actually that's right
28:28the third driver for why these emergent
28:29brands have been so successful over the
28:31last five or ten years is marketing
28:33costs and that does get back to your
28:34point about the internet so marketing
28:37costs have also flipped from fixed to
28:38variable fixed meaning it used to be
28:40let's buy an ad and Us Weekly cost me a
28:42hundred thousand dollars circular circle
28:44example is a great one today it is let's
28:46say it's the Dollar Shave Club YouTube
28:48ad and that's an extreme example but
28:50it's you're able to at least get
28:52product out there on a variable cost
28:54basis because the flick fixed to
28:57variable transition these smaller brands
28:59these emerging brands are able to grow
29:01much more effectively than they could
29:02have 10 years ago so it literally is a
29:04variable cost when I was managing eBay
29:06you know we were doing TV and it was a
29:08million dollars to produce an ad and
29:10then you know ten million dollars to
29:12distribute it with a frequency that the
29:14brand people thought was efficient so 11
29:16million dollars was the ante to go on
29:19television for free Bay at the time so
29:21now ten thousand dollars of Facebook ads
29:24and and try to reach your core audience
29:26so when you think about where this goes
29:27in terms of innovation in the consumer
29:30space we think that over the next 10 15
29:3320 years the brands that win there will
29:36be more of them but they will get to a
29:38smaller level so what I mean is it lasts
29:4110 or 15 years the brands that one
29:43Chobani etc you can build multi-billion
29:46dollar businesses I'm skeptical if
29:49that's true in CPG going forward I mean
29:52it's almost math because the total
29:54grocery market is growing one or two
29:56percent easily if the number of brands
29:58proliferate the average revenue per
29:59brand should come down exactly right
30:01yeah but there's no possibility for a
30:04player like what Coke or Pepsi or right
30:06vitamin water or Lacroix so there's
30:09certainly some very very smart people
30:10that disagree with me on this point I
30:12don't see a world in which consumers
30:14want less options the way they're saying
30:18look I want to go to the grocery store I
30:19want to go on instacart and I only want
30:21to see one chocolate bar I don't want to
30:23see something that's different for some
30:25old versus Ryan versus Jeff we don't
30:28foresee that happening yeah my view on
30:30that whole debate always comes down to
30:31when people talk about more concise
30:33versus less choice always comes down to
30:35actually what is the right choice for me
30:36and that does go to your point about
30:38personalization but the nuance I would
30:39say and data is that it doesn't
30:42necessarily have to do with how many
30:43choices you have but that the right
30:44choices are presented to you absolutely
30:45and that's that's gonna be a huge
30:47challenge whoever the grocery chain or
30:49in this case or in the kiss offense cart
30:51is to be able to present the right
30:52choices to you but we don't think that
30:54the answer is going to be let's strip
30:56out the choices altogether right and in
30:5820 years ago the choice was it was Coke
31:01or Pepsi but if you know now you go into
31:03the beverage aisle and there's
31:04you know things that I don't even
31:05recognize you know understand so why
31:09people love Lacroix so much it's just
31:10like water with like a little hint of a
31:12taste I still - let's talk about data
31:17then so we've been skirting around this
31:18topic of data for a while the biggest
31:20thing I've heard so far is we talk about
31:21online - awful offline is that in the
31:24offline world it has been nearly
31:26impossible to get the data we want on
31:28one hand I've heard you say Ryan that
31:29there are many data sources out there
31:31that are really good proxies and that we
31:33can do a lot but Jeff you've also said
31:35that people are starved for data that
31:37things are missing so tell me what the
31:39status is in the world of CPG and data
31:41like where are we right now really on
31:43where how far data what data can do in
31:46this world well so I think both are true
31:47both that there is a lot of data and
31:49that people are starved for data and and
31:51the bridge there is that while there is
31:53an outrageous amount of data in this
31:55industry the data is very hard to pull
31:58together in some cases impossible and it
32:01it's just impossible actually go get it
32:03so the data that's out there around
32:06distribution around product uniqueness
32:09how unique a product is relative to its
32:11competitive set on what the user thinks
32:13of the product on the competitive set of
32:16that product etc all that data is out
32:19there in the world if you begin to kind
32:20of think about where would I get that
32:22well most brands are not trying to hide
32:24there's no concept of living in stealth
32:26in consumers yeah you're not you can't
32:28really like hide your toothpaste that's
32:29right when I launched in my chocolate
32:31bar in the Whole Foods Whole Foods wants
32:33you to know that you can buy the Whole
32:34Foods and I want you to know you can buy
32:36at Whole Foods right similarly I want
32:38you to know what's in the product how
32:39you have an ingredient deck a
32:40nutritional panel that's mandated by the
32:42FDA but it's out there then consumers
32:44talk about my chocolate bar that's also
32:47key so people can begin to understand
32:48what you know what people think of it
32:50they get the sentiment so if you think
32:54about you know rewind to the first year
32:56slack was in existence right so if you
32:58could see every customer that you slack
33:01what they paid for it what the end users
33:03thought of the product and how all the
33:04things changed every single month that'd
33:07be pretty valuable data for a lot of
33:08people have you have that data on every
33:10single CPG company in existence it's out
33:14no that's the challenge right so the
33:15challenge is basically it's it's out
33:18living somewhere on Google meaning if
33:20you google the smallest brand you can
33:22find you can see everything that I just
33:23said the challenge though is how do you
33:26pull all that unstructured data together
33:28and then normalize it so I see a brand
33:31on Amazon I see the same brand being
33:34sold and Whole Foods being talked about
33:35an Instagram etc so a process that we
33:38call entity resolution I remember this
33:40from NLP where you have to essentially
33:41find the same entity with different
33:43variations or names on it but be able to
33:45resolve that it is the same entity it's
33:47an incredibly hard problem it's a lot
33:48harder than people yeah and then on top
33:50of that you also have the problem of how
33:52do you know that that product is a
33:54chocolate bar and not a pair of shoes
33:56that sounds like an easy problem
33:58chocolate bars so it's so that that
34:10that's another challenge that now you
34:11think about the people that want to
34:13consume this data grocery chains large
34:16CPG companies they're not equipped to
34:20pull all that data unstructured data in
34:21normalize it make sense of it match it
34:24together that's not a core competency
34:25from them that's why I strongly believe
34:27it'll be a technology company that does
34:29that and then sells that data to others
34:31right so that's where you believe that
34:32CPG companies can compete and where
34:35technology has a place to play by
34:37providing that data hmm there is a ton
34:39of data and yet people are dead or
34:42running blind yeah and so um you know
34:44it's just it's it's it's not the data
34:46they need there's data around it's it's
34:49it's not helping to make their the
34:51important decisions that are moving the
34:53needle in some cases it's not the data
34:55that they need in other cases they're
34:57not equipped to digest the data and you
34:59know you think of okay so at the at the
35:01grocery store or the chocolate buyer
35:03going back to that example that's trying
35:05to pick what chocolate bar spun on the
35:07shelves they are used to for their
35:10entire career basing it off of either a
35:13their own tastes literally that's how
35:15they try product or that's how they
35:17decide products or be a small amount of
35:19retail level sales bought from a very
35:21structured data source over and over
35:23again and that's not competitive right
35:25because every company has got Miska
35:31everyone's using the exact same thing so
35:33now when you go to them you'd say well
35:35actually there's this whole universe of
35:37data out there covers 30 to 50 times as
35:40many companies as your existing data
35:41source does do you want to use it the
35:43answer is yes but in the but is well how
35:46do i how do I jest that I'm stuck in you
35:49know Excel Windows 95 that's what I'm
35:52stuck using here how do I jest all of
35:54this data who's gonna pull this together
35:56for me because by the way I've got
35:57literally one engineer that works at the
35:59entire company entire division that I'm
36:01in right now how am I going to do this
36:03that's why we think it's an outsourced
36:04provider we think grocery stores and and
36:07CPG company is are either gonna be
36:09buying it from a technology company or
36:10they'll have to buy that technology
36:12company bring it in-house it makes me
36:14think a little bit of automotive and
36:15become in traditional Detroit car
36:17companies trying to become autonomous
36:18car companies yeah and I think it's
36:21fascinating they could potentially win
36:22on that front if the right companies of
36:24really smart people in the grocery bills
36:27Walmart's diving in they're also in you
36:29know top-line sales right now in stores
36:31that said it's hard a lot of the best
36:34engineers might want to work for a
36:36grocery store and might not want to live
36:37in Bentonville Arkansas and then they're
36:39incredibly low margin business and so
36:41how do you hire a ton of really
36:43expensive engineers I give Walmart
36:45credit for making the bet that you know
36:47they bought yet they bought at any
36:48number of smaller also have their own
36:50labs like Walmart is known to be a
36:52little bit more innovative with internal
36:53R&D than some of the other CPG players
36:55but it's not that the grocers aren't
36:58capable and don't understand that they
37:00you know just they're a bit of a
37:01prisoner's dilemma there are extremely
37:04truly smart people working at both large
37:06CPG companies and large grocery stores
37:08that are in a really difficult position
37:10you think about like what would you do
37:12if you were in their position well
37:13they're they're out of business that's a
37:15in the case of grocery 2% net margin
37:18business how do they then say to their
37:20boss let's go hire 150 engineers to go
37:23build this thing by the way it's not
37:24gonna pay back for two or three years
37:25that's a really really hard proposition
37:27to make so I think incredibly talented
37:30smart people that work there it's a hard
37:32position to be in one of the smartest
37:34people I've ever met in businesses was
37:36the CEO of one of the largest consumer
37:38packaged companies and she came to
37:40Silicon Valley and and wanted to sit
37:42down and I'm like why are you here you
37:43know we believe software is eating the
37:45world how is software eating snacks she
37:48came up with this very lucid argument of
37:50two things one is all the sudden there's
37:52promotional transparency I used to move
37:54gain share by you know going that
37:57special and Nob Hills food one day and
37:59then special it's Safeway now the
38:01consumer knows exactly where I'm on
38:02special so I've lost the share moving
38:04thing off doing is discounting and then
38:06nutritional transparency and so she says
38:09I have to retool my company because the
38:12two bedrocks that was built on software
38:15ate the challenge with that and I by the
38:17way I totally agree with that diagnosis
38:19the challenge then is that I don't think
38:21that the CEOs of these large CPG
38:23companies or large grocery chains are
38:24given enough runway to go do that so
38:26there's this what we call 3G affect
38:28large financial institution down in
38:30South America that has been investing
38:32into or buying public CPG companies
38:35basically stripping costs out and
38:37delivering shareholder value problem
38:40with that is when you're stripping the
38:42costs out one of the first things ago is
38:43Rd so you already had a problem for
38:45these RGB companies what's the
38:47percentage of R&D that they have so
38:49today large CPG spends about 2% of sales
38:51and are you kidding tax cents tech
38:53spends about 14% of sales nerdy CBG
38:56spends nothing on R&D and low margins
38:58like one point five to two percent are
39:01ready that's right so when you strip out
39:02costs I can deliver shareholder value
39:05and hit quarterly numbers for the next
39:07let's say year or two years but you look
39:09five seven years out you can help are
39:12can you cops like the active investor
39:13problem that's exactly right
39:14and so what we're seeing is that many of
39:17these companies regardless whether
39:19they're doing that cost-cutting or not
39:20they're saying look we were already
39:21spending almost nothing in R&D how do we
39:23get the innovation and this goes back to
39:25a point Jeff made earlier that's why CPG
39:27is beginning to look a lot like Big
39:28Pharma has for about 20 years so one
39:30last question then just to think about
39:32more on the data and innovation side all
39:34of us on this room are in the world of
39:35investing how does this change the
39:38investing game so in terms of how I
39:41the investing landscape will change we
39:44have a pretty strong thesis that in CPG
39:48specifically there will be quantitative
39:51VC firms so what I mean by that is if
39:53you think of the public markets there
39:55are systemic quant funds that have
39:58twenty years or so in some cases thirty
40:00years invested into public companies
40:03basically just using technology it's
40:06very different than a discretionary
40:07hedge fund where you've got a team of
40:09really smart people that research a
40:10stock for six months make a decision in
40:12the case of a systematic want fund
40:14they've got a lot of really really smart
40:15engineers and data scientists we're
40:17building algorithms to evaluate the
40:19company and then make an investment
40:20decision we think that that is possible
40:22in some industries in the private
40:23markets we don't think it's possible in
40:25tech why do you think that's possible in
40:27CPG so there's two main reasons that CBG
40:29is beautiful first the business models
40:32are basically the same so what I mean is
40:34if I'm selling shampoo dog food or water
40:36the margins are different but I'm making
40:38a product and I'm selling the product
40:39it's very different than tech and tech I
40:41might give away the product for five
40:42years you might go freemium may do a SAS
40:44business etc very different business
40:45models because it's the same business
40:47model it's the same game of chess over
40:49and over in testing the second reason
40:51that was there's just an outrageous
40:53amount of data in this space but many of
40:55the dimensions that are predictive of
40:58success of a consumer company are not
40:59data you can get externally it's hard to
41:02get information from afar in consumer
41:05you can get it from afar without ever
41:06talking to the company we have gone
41:08private financials on thousands of
41:09companies that X is our training data
41:11the training data is private financial
41:12some palaces and it isn't kind of
41:14providing a ground truth in order to
41:15sort of compare the decisions against or
41:17what's exactly right right yeah yes it's
41:18the ground truth so I need to know what
41:20success and failure looks like in order
41:23to predict it if you look at a SAS
41:24company a consumer company and an
41:26infrastructure company in tech you can't
41:28compare them whereas if you've got two
41:30beverage companies and one is selling
41:33twenty units per Whole Foods per week at
41:36a 60% margin another selling ten per
41:39units per whole food per week at a 30%
41:42margin it's pretty obvious which is the
41:44better company but also in CPG I can
41:46find that company just by using publicly
41:49available information so I can see that
41:51one of the two companies started in one
41:54six months ago and now is in four
41:56hundred Whole Foods and added three
41:57hundred targets there isn't really an
41:59equivalent in let's say the SAS world's
42:01going to back the SAS world while there
42:03might be structured metrics to look at
42:04and those metrics might be predictive of
42:06almost all of them not all but almost
42:08all of them are only available once you
42:10start talking to the company or know who
42:11focus I do wonder cuz I just watch a
42:13show like billions you know they have
42:15they used data like empty parking lots
42:17and aerial shots of an empty parking lot
42:18for retail to be able to make a decision
42:21on whether to pull the trigger on a
42:22company or not the equivalent in SAS
42:23might be developer heat like viral
42:26developer activity or the adoption rate
42:28among developers there's various heat
42:29maps and sources the part that I have to
42:31ask on the big question of quanta
42:33investing in general and especially in
42:34this case and even in our world Jeff
42:36which is more tech than CPG doesn't it
42:39miss the outlier the out size winners
42:42it's a great point yeah so we that's
42:45another reason we struggled to believe
42:46that it is possible in tech you think
42:48about many of the massive home runs that
42:51they're one prior example no right yeah
42:57so that's why I really struggled to
42:59believe that's possible intact when you
43:01look at the winners and consumer the
43:02previous winners looked really similar
43:06magnitude but they grew and really
43:08really something this might be the one
43:09case where that phrase pattern
43:10recognition that people throw around so
43:12wildly in the valley actually applies
43:13but who the winner was wasn't that still
43:16an irrational behavioral thing versus
43:18something programmable so we've been
43:21able to show that there are some common
43:23themes between both in a why something
43:27wins and how it wins so here's what I
43:30mean you want to find the two which is
43:31really important that's right so why
43:32typically the winners have and look to
43:36be clear this is not perfect their holes
43:38are accuracies yeah typically the
43:40winners have brand intensity with the
43:42consumer so think of vitamin water or 15
43:44years ago kind bar 10 years ago but the
43:47brand really resonates with the consumer
43:48yeah the second thing that is common
43:50amongst the winners in CPG is the
43:52product has uniqueness that matters
43:55interesting so kind bar is actually
43:57pretty good example here when it first
43:58came out everyone said this is a really
44:00crowded category by the way everyone
44:01always says every CPG category is so
44:09kind bar you know at the time though
44:11what people missed was there's Nature's
44:13Valley there's cliff bar and number of
44:15others when you look at those products
44:17they didn't look like real food kind bar
44:20had an insight which was let's make a
44:22product that actually just looks like
44:23real food that's actually why I'm drawn
44:24to them I don't feel like I'm eating a
44:25crappy process bar yep and they actually
44:28show the food the biggest innovation for
44:30a bar from my perspective is its
44:31see-through and you can see it's got
44:37like jagged edges where you can see it's
44:38real it's not exactly so in that case we
44:43you know you can build an algorithm
44:45which evaluates the picture of the
44:47package and literally just says is this
44:49different so we've done that in the case
44:51of snack bars we track about 3,000
44:52stocks so you answer that question of is
44:54it difference a different and then no I
44:56could put fish in my snack bar and it'd
44:57be different then but it may not
44:58resonate with the consumer right that
45:00would be those are two kind of
45:01orthogonal dimensions one is does it
45:02resonate with the consumer and is the
45:04product unique the ones that have one
45:06tended to be high in both then there's
45:09the question of how it wins right so why
45:12it wins and then how it wins the how it
45:14wins is typically distribution gains
45:17distribution gain meaning not just
45:19Alex's famous lines like it's always
45:21about distribution yeah yeah it's in
45:23that is very true in CPG so there aren't
45:25a lot of big winners that have only been
45:27sold in five stores that's not a thing
45:29so then if you think about okay if it's
45:32number of its breadth and quality of
45:34doors meaning t.j.maxx not as valuable
45:36as let's say Whole Foods or Costco so
45:38how do you measure breadth and quality
45:40that date is out there where the product
45:42is being sold is out there in the world
45:44Whole Foods wants you to know it the
45:45brand wants you to know it now it's just
45:46aggregating that information and making
45:49sense of it but that's the how it wins
45:51and you can also get into price point
45:52you can get into SKU count number of
45:53other things but marrying those two
45:55things together is the foundation but
45:57it's basically one business model a
45:59couple the difference is in tech we've
46:00been trying to figure out you know how
46:02do you leverage data and the
46:03decision-making process it's the holy
46:05grail yes you can probably defined a
46:08dozen two dozen three dozen different
46:11worlds of you know universes of tech
46:14companies that are unique you have SAS
46:16and open source and consumer and then
46:18within consumer you have social and
46:20e-commerce so you know just by
46:21definition comparisons hard and then the
46:24other part you have is what you said
46:26most of the huge winners are lightning
46:28strikes Facebook was the second or third
46:29social network but you know no one was
46:31thinking social networks when they
46:33talked about a trillion dollar company
46:35as collectibles online weird Facebook
46:39hot-or-not you know these things
46:41yeah I mean the Airbnb sleep on
46:43someone's couch you know these things
46:45don't present as monster companies they
46:48they start hit a chord and again are
46:51expanded by their community users and
46:53nipping I would add to that by the way
46:54is that there's a complexity map to this
46:56which is a little bit like the Brian art
46:58that we had Brian Arthur on the podcast
46:59and he's a father of network effects and
47:01network effects theory and the point of
47:03when that tipping point it's you don't
47:05know when it tips yeah hard one yeah
47:08like the when it seems like the really
47:10tough question will it and if you think
47:13if you think of Jeff's point like when
47:14Facebook hit there was two other social
47:16networks or maybe three yeah there
47:18weren't three hundred or three thousand
47:20right there were very few examples you
47:22don't have 40 or 400 examples to begin
47:25to look at pattern recognition right the
47:26N equals three or the CPG you so now I
47:31can compare certainly one ice cream
47:33company to the many other set of hips
47:34but the difference between ice cream
47:36companies and snack bars is not great
47:37enough that you can't compare the two
47:39and begin to see patterns well that was
47:41a fascinating discussion Ryan Jeff thank
47:44you for joining me thank you thank you
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