As we have discussed before, big consumer packaged goods (CPG) brands continue to opt-out of doing their own research and development to develop new products in favor of purchasing emerging brands. This route is often cheaper, faster, and more effective, as consumer preferences and purchasing behaviors are shifting faster than ever.
When does a brand become an attractive acquisition target? In an overly simplified view, the process generally goes something like this: idea, proof of concept, product-market fit and continuous growth (growing sales and profits through various channels and products), all culminating in a viable asset that will be accretive to the acquirer’s financial profile, customers and broader organizational values. At CircleUp Growth Partners, we look to invest in brands we believe can make it to this point in the future (or pursue a different exit opportunity).
Most brands we speak to are in the “Growth” phase of their lifecycle. They’ve hit on an idea (identified a consumer need to solve), product-market fit (demonstrated sales as proof) and are now focused on growing. As an investor team, we aim to assess the viability of a brand’s plan to go from where they are now ($1-20M in sales) to where they want to go ($50-200M in sales). Commonly, product expansion is highlighted as a major driver of future growth, as most brands have difficulty achieving meaningful scale selling a single product. Below is a high-level snapshot of how we think about new product innovation, along with questions we’ve asked ourselves and founders.
Product Expansion Strategy
How Big is the Market?
Understand how big your existing product can get – comparable data is extremely helpful when answering this question. If you manufacture women’s vitamins and are currently doing $20M in sales online, how much more can you expect to do? How big is the market? Is it growing or declining? Are you aligned with category trends and tailwinds? What do the market leaders generate in women’s vitamins sales? How much more can you grow sales via another channel (i.e. moving to retail)? If data shows there is a ceiling for your growth with a certain product or channel, it could be time to invest in additional products. It’s key to understand your market, competitors and what makes your brand special. Tracking new market trends is often a good place to start when evaluating possibilities for new innovations, below is an example of how CircleUp utilizes Helio to monitor trends when we help entrepreneurs with market research.
Source: CircleUp - Above is an example of our ability to use Helio here at CircleUp to monitor trends within categories over time, potentially providing additional data points to brands as they consider where to expand.
Understand the Consumer
Is there another consumer need that you can easily address with your brand (ex. women’s vitamins > sleep aid)? If so, have you earned the brand authority with your consumer to go into this new area (i.e.if you are effectively solving Problem A, the customer can trust you to solve adjacent Problem B)? What is the revenue opportunity with this product vs. your existing product or other alternatives? Does another brand already solve this need, or is there a gap in the market for you to fill? Does the new product support your existing consumer or bring in an entirely new consumer? If an entirely new consumer (ex. premenstrual syndrome supplements), why will they choose your brand vs. a competitor? Does the category have high or low barriers to switching between brands? Does your price point work for them? Are you able to meet the new consumer in channels where you already are, or do you need to shift your strategy? If you are offering new products to the same consumer, ideally, they will be additive to what they already purchase and not cannibalize your sales, increasing their basket size and building more trust in your brand (women’s vitamins + sleep aid). For DTC brands, this will increase AOV at the same CAC (as you are marketing to the same customer). The same theory applies in retail, though it is less measurable. If you are bringing in a totally new consumer, know why they will buy and become a loyal customer going forward. Hopefully there is an overlap in need states that allows you to sell multiple products to different consumers (ex. premenstrual syndrome + women’s vitamins) It is a necessity to understand who you are currently selling to and why they buy your product to inform product expansion. In our view, adding products to your existing customer’s basket is by far the best way to grow revenue profitably.
CGP Portfolio Company Example: Koia
Koia’s initial product line was their protein drink, offering consumers a flavor forward, plant-based single serve protein option. They launched a smoothie option in late 2020, which has since been their fastest growing product and has proven to be incremental to their core protein drink. Koia had authority in low sugar, high protein plant based drinks. They recognized the store was lacking options with these attributes in the smoothie category and saw the opportunity. They were able to convert existing customers to smoothie customers, and were able to attract new customers to the brand. The success of the smoothie product drove increased sales of protein in existing accounts, boosting overall brand awareness and revenue.
Source: CircleUp Growth Partners
What can you logically sell next and how feasible is it given your resources? For example, do you have the same expertise on your team to create a premenstrual syndrome supplement? Are you able to manufacture new products in the same manner, or will you need to work out a new supply chain process? Do you have the talent on your team to market and sell to a new consumer? Is the time right, or will you be spreading your team and resources too thin, potentially resulting in a loss of focus? It is rare for a brand to be perfectly ready for a new product release, the important thing is to understand your strengths and weaknesses so you can direct funding where it’s needed. Communicating clearly with your investors and advisors can help bring in guidance and resources ahead of these big innovations.
Types of Innovation
Will your product expansion be a small one (Line Extension) or something entirely different (Disruption of a New Category)? Not every product expansion needs to reinvent the wheel. There are usually ways to maximize sales in your current vertical before moving to something entirely new. Stay connected to your customers to evaluate the potential for small tweaks that could drive incremental growth – maybe your customers are asking for new pack sizes, form factors or flavors. On the path to an exit, we see many consumer brands successfully focus on line extensions and product expansions, rather than big disruptions of new categories.
CGP Portfolio Company Example: Flex
Flex is creating solutions for menstruation and non-binary bleeders through its massively disruptive core products, the Flex Disc and Flex Cup. While these products are their primary sales drivers, the business was able to analyze consumer feedback to introduce smaller, incremental line extensions that grow AOV and scale revenue profitably, without cannibalizing sales of their core products. Their new biodegradable wipes, cup wash and disposal pouches are relatively low-lift ways to solve additional problems for their core consumer. This is a textbook example of a brand delivering additional value without needing to reinvent the wheel.
Source: McKinsey & Co - Helpful chart from McKinsey to define different types of product expansion.
Once the innovation plan is in place it is important to gather data and customer feedback to measure the effectiveness of your new products. Is it margin accretive or dilutive to your overall business? Is the early growth sustainable, or fueled by an increased marketing spend? Is the product incremental (volume is driven by new buyers), or does it cannibalize (consumers are substituting in new products instead of existing products)? Can you launch the product DTC first where you can interact more closely with purchasers, prior to putting it on shelves? Do consumer reviews indicate a strength or weakness that was previously unforeseen? It is important for businesses to treat new products like an investment, ultimately measuring its ROI. Ideally, the new product is incremental and drives sales and margins upward. The use of a Minimum Viable Product or “MVP” is an effective way to gather feedback on the new product, market and consumer prior to fully investing in development.
Source: EngineerBabu - Visualization of an effective vs. ineffective MVP
Product Expansion Data
According to McKinsey, “Creator Companies”, defined broadly as those who continuously introduce new products, outpace the competition when it comes to growth (Source). Analyzing Nielsen sales data from July 2020 through June 2021, the 30 largest brands in the Vitamins & Supplements category range from ~$60M to ~$1B in retail sales. If we zoom in on these brands, most have many product offerings, across flavors (line extension), pack sizes (line extension) and function (product expansion). There are some exceptions to the rule, however. Goli Nutrition has experienced tremendous growth primarily through their Apple Cider Vinegar Gummies and is just now starting to expand into different products (i.e. calm, super greens, chocolate bites), perhaps due to their discovery of a very large unmet need in the market and a growing awareness of the effects of ACV supplements. Largely, the top selling brands that offer relatively fewer products to their consumers have very targeted branding and dominance around a specific use case (i.e. weight loss, memory, UTI’s), primarily in massive markets with no shortage of demand. Companies like these have grown substantially without needing to introduce something new. However, just because a brand is centered initially around a very specific consumer problem doesn’t mean they cannot successfully introduce new SKUs. ZzzQuil, initially focused entirely on sleep aids, now offers products to address immunity, prostate health, stress and even shower products (mists, crystals). Even former CircleUp brand Smartypants continues to evolve their offerings, initially focusing on adult vitamins and now offering everything from beauty to prenatal to pet supplements. As discussed above, product offering evolution is something that is often required to achieve significant scale. There are endless considerations when going through the new product development process, but the most important considerations are understanding your market, brand, consumer, internal capabilities and implementing a data-driven, flexible plan to measure the success of new products.
Source: NielsenIQ - Chart above is data from Nielsen xAOC + Conv. from Jan-Jun 2021 (sales for this half-year are annualized into the bands in the chart).