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So Sam, first half to start out by asking: What's your favorite digitally native brand that you've ever bought from and what did you love about it?
My favorite digitally native brand is Hello Toothpaste. And I think what drew me to it was that it was an alternative to what was offered in the stores, and that's what really captivated me. In fact, when we understand the motivation of why a lot of shoppers are migrating from the in store to the online, across every single major CPG category, what we're seeing that the search for something new is really driving a lot of the need to go from in-store to online. Shoppers just want to find new and different brands that they're not able to find in the in store environment.
So how did you discover it yourself? Where were you online when it popped up in front of you?
Amazon search. I just typed in toothpaste and it was one of the top items that came up with my search results. Because they had good content, I was able to, to read and better understand the brand. I liked the packaging. I loved the natural message that they're having that they weren't chemicals. And that's what really got me off the sidelines and be able to take a chance and buy it.
And were you searching for something new in toothpaste or were you just trying to find some toothpaste to get and then that just totally took you down that path?
Yeah, I was not searching for something new. I was searching for toothpaste and I just used the generic, you know, “good toothpaste” to search, expecting, you know, Colgate to come up or cross the come up, and you know, Hello toothpaste was doing a better job in terms of winning the buy box. And, and because they did that that day, they were able to get me as a convert.
Plus, as we talked about before we went on the air, you have three children that are going through orthodonture in one stage or another. So I'm sure toothpaste is at the top of your list. How can I prevent spending more with the orthodontist?
Well, you're exactly right. But it's also the desire to try to put in front of them all the best, most natural products that are available. I mean there's so much news nowadays about, you know, lead pipes and chemicals in this, I mean, big, big news piece this morning about Zantac having chemicals in the medicine and so forth and so on. And, you know, a lot of consumers are just going that extra mile to make sure that what they're buying and putting into their body is actually feeding or helping their body as opposed to adding some type of a chemical to do something that's not natural.
Yeah. And it makes you less price sensitive, I would imagine.
Yes and no, but I mean, that's where the online shopping experience is a great equalizer. I mean, because he has clear price transparency. I, I don't believe spending anything more for Hello Toothpaste than I am for say, Colgate toothpaste. Now, to be clear I am laying out more cash per purchase because of how they're bundling things together. So I'm buying at a higher price for a larger bundle. But generally speaking, when you start doing the math, it all adds up to a regular toothpaste, you know, regular Walgreens in store toothpaste costs.
Well, speaking of costs and online, if Hello is your favorite, favorite, a digitally native brand, what's your favorite private label brand?
I would say Kirkland. Then brands online, you know, and their online execution isn't as good as it can be. So there's a lot of resellers that are out there reselling their brands as third party sellers on Amazon. But no, anything Kirkland is fantastic. And I think, you know, I'm going to the heart of what we're going to talk about here too. When we started talking about private label versus brands, understand that the private label is nothing more than an extension of the brand of the retailer. So it actually is a brand, it's just a brand of a retailer. And when you put it into that context, you start understanding what is the role or what does, what does some brands want? Some retailer brands, what roles they have in your, in your life? Well, for me, you know, Costco always delights me when I go there. I'm always able to find what I want or what I need. And, and I think that that brand promise being fulfilled every time I go there is one of the reasons why I really do enjoy the Kirkland brand so much. Just despite the the category that it says.
Totally. So today the two major topics that we're going to cover are the two major threats to traditional market share of, of large brand manufacturers. And one is the digitally native upstarts. There's just, it feels like there's startups in every single category of raising a ton of money for venture capital and eating market share, going direct to consumer, going through new routes to market. And the second is what seems like a rise in private label private label sales I believe are their highest ever as a percentage of market share in both of these trends are, are acting against the traditional category captains across almost every single major category. So in that context, I wanted to start by going deep with private label and the digitally native brands in conjunction with each other on what the market share looks like. I mean, you and I with IRI data, you've got a really amazing example of coffee and like in store you go down the coffee aisle at any grocery store and there's Folgers and there's, you know, I just a handful of brands, but online there's a whole bunch. So can you share what the coffee category in particular looks like? Cause I think it's just an awesome example of what we're, what we're seeing across the rest of the categories.
It's true. Absolutely. And before we get there real fast, let's make sure we understand the story. The reason that established category brand leaders within the in store world, the Folgers, you know the Starbucks, so forth and so on. The reason that they continue to do so well is, believe it or not, because the in store environment is really a closed ecosystem. It's a closed ecosystem where very large corporate retailers operate with very large corporate branded organizations to really exclude out any type of a fringe or new type of item. They do that because of how much money they're exchanging between each other. And in the form of fees, in the form of trade discounts in the form of additional co-marketing programs, so forth and so on. These large corporate entities, some retailers, some brands really work to really separate themselves from everyone else.
Now when you go to the online world, that barrier to entry really diminishes. And the number one catalyst catalyst of this has been the Amazon marketplace. Because of the Amazon marketplace, any one of us here on the line today can actually start a brand tomorrow and sell it to my aunt on Amazon. So that barrier has evaporated. So now more and more competition is coming in. What we discovered and let's start general, then we'll go coffee. What we discovered if we take a look at the entire consumer packaged good industry and we line up the top 80% of sales for the online world, we compare it to the top 80% of sales in the in-store world. What we quickly realized is that there is nearly three times as many brands online in that top 80% of sales as there are in store.
So that's a representation of a substantial fragmentation of what consumers are buying. When you take it to the coffee category, which is a bit of an extreme example here, especially for a food category, a beverage category, what we find right now is that that number of brands online in the top 80% of sales versus the number of brands in the in store environment and the top 80% of the sales is 6.2 times greater online than it is in store. Again, it's an incredible, incredible amount of fragmentation of the marketplace that is really leading to this issue that many in store category brand leaders are experiencing, which is a decline in share.
And do you feel like in coffee that's happening because there are so many coffee fanatics that want exactly their own buzz? You know, there's certain kinds of coffee.
It's high altitude, handpicked.
I think it's because these firms are doing an incredible job of segmenting the marketplace and finding these very specific consumer that wants what they're able to provide or they're doing a better job of positioning what they have to those very specific consumers. And that's the big point here guys. At the end of the day, it comes down to fantastic marketing. Right? And that's where I truly believe that a lot of the core blue chips, CPG firms, right, with all their big titles and all the money that they have to spend when it comes to marketing, they've actually really let their shareholders down because they become less marketers and more business managers and making sure that they're able to deliver the number of year after year, which is a very good thing. I'm not saying it's not a good thing. My point is, is that when they've been hyperfocused on cost and expense and then really trying to own this close ecosystem between retailers and brand manufacturers, they've gotten away from being able to connect with consumers as well as some of these other firms have been able to connect with consumers.
And isn't it also that marketing online just requires so much more continuous attention and it feels like a lot of these private brands, the digitally native ones, excuse me, are coming in and they're sitting in front of their pages on every site, every day, like tweaking, tweaking, tweaking constantly.
Owning of the business process versus owning of the marketing or owning of the customer is such an interesting way to go about it, but I think the large brands have been doing it for a long time. My favorite story is the rise of Ben and Jerry's in the early eighties. So Ben and Jerry's was, you know, originally a niche brand going back decades ago. It was born and bred in Vermont had sort of like this hippie feel to it, hippie vibe to it and it was gaining a lot of popularity in the Northeast and they were trying to sign distribution agreements with grocers in the Northeast.
At the time, Pillsbury, which has since been rolled up at Pillsbury, was a giant in that category. They owned Haagen Daz. I think Haagen Daz was the number one ice cream at the time and Pillsbury went to their grocery partners and said: “You know what, if you start carrying Ben and Jerry's, we're going to stop selling to you.” Right. They really kind of dropped the hammer on it. And so they blocked Ben and Jerry's from being distributed in grocery stores. And what Ben and Jerry did was they actually went to Pillsbury's headquarters and they picketed it with signs that said: “What's the doughboy afraid of?” And they sold bumper stickers: “What's the doughboy afraid of?” And they had a national media campaign. It was on the news and people are covering it and basically they shamed Pillsbury into relenting and Ben and Jerry started getting into distribution and the rest is history.
And of course now Ben and Jerry's is part of Unilever. But like that, that's kind of how the large CPGs had been operating. Like they, they rolled up into these giant conglomerates that do so much business with the retailers that they can sort of keep competition at power. They've got all the power now. Like, like what Sam, what's you're saying is online that doesn't, that, that blockage doesn't exist. You're just sort of, you can get to the consumer lots of different ways. And then the new brands are kind of there. They're being creative about it. And the old brands are sort of scrambling a little bit to figure out exactly how to operate in that, in that new environment. Is that, is that about right?
You're exactly right. And there's a couple of things that I would add to it. You know, first and foremost a lot of major brands, they like to practice what I call, you know, set and forget, right? Because of these close ecosystems, they're able to set up what they're doing for the next 12 months with a major retailer and they sort of forget about it, you know? Absolutely. They go back and they tweak things throughout the year, but it's really a set and forget type type mentality versus when you go to the online world, it's an always “ON” type mentality. You have to sit there and every single day you have to tweak, you have to learn what happened yesterday. You have to find the search terms that are, that are being used right now by the consumers and make sure that you're as relevant as possible to the set consumer.
In addition to that, what they failed to understand, especially when it comes to new brands, the online space is ideal for new brands to flourish. What I mean by that, first and foremost understand that most products are found via search bars, right? When you search you're able to find what you need. So again that goes back to owning the search terms that you need to own to make sure that you're being found. In addition to that, you have your own content. I use an example earlier today of how one of my favorite digitally in a brand is, hello toothpaste. Well they became my brand because I stumbled upon them. I was able to engage in the content and understand what they were all about. I appreciated it and then my eyes continued to go down the page and I found the reviews and I saw their star ratings and then I was able to to really better understand how I could interact with this product. Like what the reviews were telling me. You know in the in store environment you find a new item, all you have is the packaging. Maybe there's a sample nearby, right? In a Costco or some other retailer, but generally speaking you're left with the packaging and you're able to, you make a decision when you go online, you left with the, the marketing material, the content, right? You're also able to look at ratings and reviews. You look at the sales ranks as well too to see if other people are buying it and then that allows you to make your decision with more confidence that this will or will not be something that I will like.
A lot of the major manufacturers though are gaining a bunch of these skills. Like I look at Tide as an example and Proctor and Gamble on Amazon has done I think a really nice job with Tide. I mean they've got, they've got great images, their product titles are optimized and in that category they're also setting a barrier to entry that maybe it wasn't true three years ago by bidding up the advertising. And so they're there, they're winning all of the top ad spots for anything that has to do with detergent. And it shows in, in the market share, I mean you should, you shared some data where in store Tide has like 60.1% of the share and, and on Amazon it's 53.1% of the share. That's the data that you had from IRI. But I think, I think one of the things that I've seen you talk about in the past is that even if you're defending share, you're, you losing margin like that that shared defense comes at a cost because you can't rely on simply blocking out the competitors to begin with. You have to pay to compete, you have to work at the reviews, you have to work at the SEO, you have to work at the advertising. Do you have any idea like generally speaking, what the margin compression looks like when, when a brand is fighting hard like that?