Unbundling Food

Tech entrepreneur Marc Andreessen famously said, “there are only two ways to make money in business: One is to bundle; the other is unbundle.”

This bundle/unbundle process most commonly appears in the digital media and technology space. Successful unbundling requires product innovation that makes it an obviously better choice than its predecessor. For example, the ability to instantly download a single song of your choice from iTunes, versus driving to Tower Records to buy a full CD, is clearly the better option.

Consumer packaged food (CPG) brands been able to avoid the unbundling disruption, because innovation in the CPG space was stagnant. Innovation usually meant introducing a minor variation to a product line, such as offering a family size version of an existing SKU. This limited “innovation” worked as long as all of the large CPGs were playing the same game. But, when technology set its sights on the food vertical, disruption was inevitable.

Ten conglomerates control the majority of the food products that Americans consume. These CPG giants achieved record profits by bundling food brands, and creating systems with major retailers to control how retail shelf space is allocated and food products are marketed.

In this system, retailers and top brands work together to decide where all products (those of the brand and its competitors) sit on the shelf. The so-called category captain enters a virtuous cycle of success: The bigger the brand, the more control it has over the shelf, the harder it is for another brand to come in and take share, the larger the big brand grows. For CPG brands, this moat was their answer to innovation, and it was wildly successful for decades.

To successfully disrupt and unbundle, a food brand must utilize digital marketing, leverage technology, and truly innovate the core product. Despite unprecedented growth in the reach of digital platforms, legacy CPG brands generally utilize a tried marketing strategy. This starts with a new “product”, such as a family size SKU, that is blasted across radio, print and TV to generate foot traffic that makes the retailers happy, the legacy brands are happy with a 2% incremental sales lift, and it keeps out the competition. Based on Kraft Heinz’s loss last quarter, however, this strategy is starting to show its age.

According to the Wall Street Journal, Kraft Heinz “has been struggling to keep up with consumer shifts toward simpler ingredients and healthier food. Many of the company’s brands, like Jell-O desserts and Kool-Aid drink mix, clash with current trends.” Legacy CPG brands are known for their inability to innovate. Except for government health mandates (i.e. removing trans fats), legacy brands tend keep their product recipes for as long as possible, fearing negative consumer reactions to recipe changes, like what happened with New Coke.

Today’s consumer shift toward healthy, natural and simple ingredients have created an opportunity for emerging direct-to-consumer CPGs to enter the market with highly differentiated, and truly better products. This was exactly what happened with Quest Nutrition when they launched a protein bar that had a previously unheard of one-two punch of taste and nutrition.

In only five years, Quest evolved from a small direct-to-consumer brand, to the best selling protein bar in America across all distribution channels. Quest was an early success story of how a brand can unbundle a category and turn the tables on the traditional CPG/retailer relationship.

By creating huge online communities of diehard fans, and selling (at least at first) direct-to-consumer, brands can break the cycle that generally benefits legacy players. When enough people demand a product, it gets placement on the shelf. If it becomes a top performer, like Quest did, it becomes the category captain, disrupting the classic CPG moat. Other upstarts, like Halo Top Ice Cream, are using this strategy (the ice cream isle is the most cut-throat) and proving that entrenched brands are no longer the presumed winner.

Further shifting the power away from legacy brands, consumer shopping habits are rapidly evolving, thanks to technology, such as same-day delivery and in-store pick-up. Wal Mart noted this in its Q4 report, stating “We’re leveraging our stores as a strategic advantage in new ways. This past year, we nearly doubled the number of stores offering online grocery pickup to more than 1,100 locations in the U.S. and we’ll add another 1,000 locations in fiscal 2019.”

Just as downloading the song you want from iTunes is clearly better than driving to Tower Records to buy a CD, so too is ordering a product online and getting it delivered to your house or the trunk of your car. The cost of that convenience results in the shrinking importance of the retail shelf. This opens up the digital shelf as another strategic lever for direct-to-consumer brands, who know how to leverage their strong social community and merchandize their products online.

Digital marketing, the use of technology to ease consumer pain points, and product innovation are the three ingredients that new brands must utilize to successfully unbundle and win in the marketplace. Kraft Heinz’s solution to slumping sales is to bundle more. Bernard Hees, Kraft Keinz CEO, said he is preparing for “more consolidation in the future that we believe is necessary and will happen.” Meanwhile, innovators will find opportunities to continue unbundling food categories that haven’t seen real innovation in decades. The cycle will then continue, where either a winning upstart bundles, or major brands like Kraft Heinz will continue do what they do best – acquire and re-bundle.