The End of Coca Cola, P&G and the traditional distribution model

[vegaseller]

Going to be stepping on some holy grounds here so please hold the crucifix for now.

 

One of the things I got to thinking over the past several years was about whether the business model we have seen Buffet and other investors invest in continue to make sense or not. I know this sound crazy but hear me out. We all know the story of Coca Cola, the low price, inelastic, semi-addictive product then converted into large global distribution base and brand portfolio. The story of the company for the past 40 years was about building out this massive global distribution footprint to the point where it was easier to find a bottle of coke in some rural Indian village than a bottle of water. But there are some problems to this model, primarily that A) You can't really find another 1-2 billion consumers now B) It is hard to capture consumer surplus (price segregation is impossible and C) it is hard to capture increasing share of the consumer wallet as living standards improve. (people will cap out on how much product to drink a day).

 

And I got to think about the problem with mass distribution or infrastructure models, usually the core is highly profitable and end up subsidizing the hinterlands, the last mile country road to a small town is a very unprofitable investment. In my mind, this is also a problems existing CPG companies face, the last customers is hard to reach, expensive to acquire, at some point it is much better to increase wallet share and/or capture the consumer surplus of your core base of customers. This is why targeted ads are changing marketing so much, as it allows companies to price segregate by customers (different tier of a similar product) and big data is so valuable (increasing wallet share).

 

I wonder if the time for traditional companies that relies on the formula of building out distribution, acquire/develop a bunch of products and push through your channels is over. The rise of third party infrastructure rails like Amazon and facebook for distribution and customer aggregation also has removed the needs for doing that yourself. I feel the economic laws revolving around specialization will push companies to being more product oriented and focused on capturing consumer surpluses through niche products. The obvious play is that the infrastructure rails will capture a large part of the economics, but who knows if big scaled brands even exist 10-20 years down the line?

 

Just some foods for thoughts, feel free to join in on the conversation.

[Green King]

A distribution built out is based on cost benefit analysis of your product. Low margin high volume vs high margin low volume.

 

Coca Cola is a very profitable product and will be for a long time. These products might not carry the same share of mind as they used to but still worth something. would love to buy it at 5 times earnings. It is over priced and there is too much competition in those names.

 

It is harder to create massive focused influence as compared to the past. But I wasn't around during the golden age of tv so I am not sure.

 

Also share of mind over entire market share changes slowly due to the limitation of the human mind.

[vegaseller]

A distribution built out is based on cost benefit analysis of your product. Low margin high volume vs high margin low volume.

 

Coca Cola is a very profitable product and will be for a long time. These products might not carry the same share of mind as they used to but still worth something. would love to buy it at 5 times earnings. It is over priced and there is too much competition in those names.

 

It is harder to create massive focused influence as compared to the past. But I wasn't around during the golden age of tv so I am not sure.

 

Also share of mind over entire market share changes slowly due to the limitation of the human mind.

 

I would argue mind share has changed significantly over the past 10 years due to the rise of mobile and the consolidation of the internet by categories

[Green King]

A distribution built out is based on cost benefit analysis of your product. Low margin high volume vs high margin low volume.

 

Coca Cola is a very profitable product and will be for a long time. These products might not carry the same share of mind as they used to but still worth something. would love to buy it at 5 times earnings. It is over priced and there is too much competition in those names.

 

It is harder to create massive focused influence as compared to the past. But I wasn't around during the golden age of tv so I am not sure.

 

Also share of mind over entire market share changes slowly due to the limitation of the human mind.

 

I would argue mind share has changed significantly over the past 10 years due to the rise of mobile and the consolidation of the internet by categories

 

I agree with that. Relative to historical levels yes fast. Relative to the speed of Google facebook zero to hero much slower or Altavista Hero to zero.

[StubbleJumper]

Okay, that was a thoughtful piece.  I would observe a few things:

 

1) For KO, there is already some degree of market segmentation enabling the KO supply chain to engage in some degree of price discrimination and capture a portion of the consumer surplus.  They do this by selling coke through different retail outlets.  I can go to WalMart or a well known Canadian pharmacy chain and buy about 4.2 litres of Coke for roughly US$2.  Or, while inside Walmart or the pharmacy, I can buy a 500ml bottle of Coke for about US$2.  Or, I can go to the Coke machine outside the store and pay roughly the same US$2 for a 355ml can of Coke.  Or I can go to a restaurant and pay US2.50 for a glass of Coke.  Don't even get me started on the near-criminal price of Coke at the hockey arena!  In each circumstance, it's the same product that I am buying, but with drastically different pricing depending in which market that I am electing to make the purchase.  The supply chain captures more of my consumer surplus on the basis of the location where I buy the product.

 

2) The subject line of your post includes references to both KO and PG.  Interestingly, the Amazon distribution model makes a great deal more sense to me for PG than it does for KO, in large part due to the varied markets in which I buy KO's products (see above; I will not be ordering a Coke through an Amazon-type supplier when I am at the hockey arena, nor when I am at a restaurant).  However, most of PG's products that I buy are from either WalMart, CostCo or a large grocery store.  Rarely is there much urgency to my PG purchases because I don't wait until I am down to my last square of toilet paper before buying more, nor do I wait until I am completely out of Tide before I buy more.  If the pricing were right and the delivery was rapid, I could imagine myself no longer buying PG's products at WalMart.  I might even buy some of my bulk Coke purchases through an Amazon type of arrangement, but it would be the minority of my Coke purchases because I don't consume all of it at home.

 

 

I would say that KO's distribution model is tenable for the specific type of product that it markets, which is to say, a product with place-based consumption (ie, restaurants, or convenience purchases).  But, I say that you are right about the consumer staples that are consumed almost entirely at home.  That's a supply chain that is ripe for disruption if somebody can figure out a cheap way to ship 12 rolls of toilet paper or a 3 kg box of Tide.

 

 

SJ

[vegaseller]

Okay, that was a thoughtful piece.  I would observe a few things:

 

1) For KO, there is already some degree of market segmentation enabling the KO supply chain to engage in some degree of price discrimination and capture a portion of the consumer surplus.  They do this by selling coke through different retail outlets.  I can go to WalMart or a well known Canadian pharmacy chain and buy about 4.2 litres of Coke for roughly US$2.  Or, while inside Walmart or the pharmacy, I can buy a 500ml bottle of Coke for about US$2.  Or, I can go to the Coke machine outside the store and pay roughly the same US$2 for a 355ml can of Coke.  Or I can go to a restaurant and pay US2.50 for a glass of Coke.  Don't even get me started on the near-criminal price of Coke at the hockey arena!  In each circumstance, it's the same product that I am buying, but with drastically different pricing depending in which market that I am electing to make the purchase.  The supply chain captures more of my consumer surplus on the basis of the location where I buy the product.

 

2) The subject line of your post includes references to both KO and PG.  Interestingly, the Amazon distribution model makes a great deal more sense to me for PG than it does for KO, in large part due to the varied markets in which I buy KO's products (see above; I will not be ordering a Coke through an Amazon-type supplier when I am at the hockey arena, nor when I am at a restaurant).  However, most of PG's products that I buy are from either WalMart, CostCo or a large grocery store.  Rarely is there much urgency to my PG purchases because I don't wait until I am down to my last square of toilet paper before buying more, nor do I wait until I am completely out of Tide before I buy more.  If the pricing were right and the delivery was rapid, I could imagine myself no longer buying PG's products at WalMart.  I might even buy some of my bulk Coke purchases through an Amazon type of arrangement, but it would be the minority of my Coke purchases because I don't consume all of it at home.

 

 

I would say that KO's distribution model is tenable for the specific type of product that it markets, which is to say, a product with place-based consumption (ie, restaurants, or convenience purchases).  But, I say that you are right about the consumer staples that are consumed almost entirely at home.  That's a supply chain that is ripe for disruption if somebody can figure out a cheap way to ship 12 rolls of toilet paper or a 3 kg box of Tide.

 

 

SJ

 

I agree, I think KO has some ability to price segregate. Although I was more comparing it to say mobile games, where you have the ability to offer the product to most customer for free but also have the ability to capture people who will spend thousands. The model where you are trying to find the 1 person who would spend the $1000 rather than the 1,000 people who would spend a $1 seems to be the winner in the new world.

[rukawa]

I had similar thoughts to this some time ago...though my arguments were a bit different:

the-rise-and-fall-of-brands

 

Basically I think the rise of brands is due to two things: limited distribution channels and limited advertising spots on broadcast television. The rise of cord-cutting, the demise of broadcast television and finally the infinite shelf-space of Amazon spell the death of brands in the long run.

 

The question everyone should really ask is where the hell did brands even come from in the first place?! We tend to think of brands like we think of the air around us...like they are some inevitable fact of life. But why didn't we have brands in the 19th century? My argument is that we didn't have brands because we didn't have broadcast television and we didn't have highways.  Broadcast television heavily favored the rise of brands because the limited advertising spots and massive reach of the medium created dynamics that favored larger companies that could afford massive advertising budgets.

 

Highways enabled the rise of chain stores which needed the highways to provide distribution. The rise of chain stores heavily favored national brands since chains stores preferred to hold a single product nationally instead of many different local brands. In addition chain stores had limited shelf space and so often pushed companies to pay for national distribution (e.g. slotting fees) . Again this favors a few big brands.

 

All of this is changing now. Amazon's shelf space is infinite. Think of the viewership of a show like Bonanza and compare it to any hit show today. Audiences are much more fragmented and with cord cutting and PVRs many people are not even watching commercials. There is simply no advertising medium comparable to broadcast television in its heyday.

 

All this spells the death of brands like Coke. Other brand names may exist but will only thrive if they have a reputation for quality or service...think Toyota.

[oddballstocks]

Interesting piece.

 

I would argue that we did have brands in the 19th century.  Go back and read old newspapers, there were definitely brands, but they were different.  They were established with advertising.

 

Ever see a Mail Pouch barn?  That was branding at its best.  They paid farmers to paint the brand on their barns.  It's very common in the Midwest, the barns are still painted although faded.

 

I don't think brands are going away.  I think in a sense they're actually stronger than ever, but different.  The old guard brands built their reputation by blasting us with ads on TV and in magazines.  Do you remember seeing TV ads that'd say "For more information see our ad in Family Circle magazine."  Brands established themselves regardless of the quality of the product.

 

This new paradigm is very consumer driven.  Consumers are finding the best brands and then telling each other about them via the Internet.  One of my hobbies is backpacking and there's a Reddit sub I frequent devoted to lightweight backpacking.  There are 'blessed' brands that have been trail tested that provide the best product at the best price.  They're all niche brands, but they can all be purchased online.  People write about products they love in blogs and give extensive reviews.  Finding an extensive review about anything in 1987 was difficult.  There were magazine articles, but that was it, and discoverability was tough.

 

There's also a backlash against big brands.  I know a lot of people who's rather buy "Dr Organic Wholesome Made From Angel Feathers Detergent" and pay 3x the price of Tide just because it's not Tide.  Even if the item sits on the same shelf and has 99.9% the same components, the branding making it unique sells.  This is an opportunity for P&G if they can produce and sell these sorts of products.

 

Amazon isn't going to eliminate every store either.  I find for myself that I've been moving back to brick and mortar with a number of things.  In general if I can find an item and it's within ~15% of Amazon's price I will buy it in person verses buying online.  B&M needs to focus on niche items though, that's where the value and markup are.

 

Amazon needs to get their bots under control too.  For example I was looking for a cheap pool float this weekend.  I looked on Amazon for the one that had broken.  One seller had it for $238.  Yes, someone wanted $238 for a float, it was probably driven by supply and demand and inventory, but the price was insane. I wanted it for that day to use in the pool.  Went to a pool store (for something unrelated) they had a sale, and sale prices were usurious.  Went to Target, floats were all $19.99, about $10 more than they should have been.  Found one at Target for $5, purchased on the spot.  The problem with Amazon is my mind is tainted from that.  I know it was a wrong price, but it was so far wrong that I probably won't look there again.  Anchoring on price is important.  Amazon would have done themselves a favor by having a simple "Out of Stock" message.  This is what retail stores do.  You don't see an empty shelf at WalMart with an item sign for $200.

 

 

 

[vegaseller]

"In the case of consumer packaged goods, most are manufactured by CPG behemoths who rely chiefly on two aging mechanisms for building consumer awareness: broadcast marketing and physical retail shelf-space. Dollar Shave Club, and similar modern lifestyle brands like Warby Parker and Bonobos, view these dependencies as a disadvantage and have turned the model on its head. Broadcast marketing, in the age of social media, looks as out of touch to digital natives as President George H. W. Bush looked to us when he was surprised by a supermarket price scanner. Now, brands are built by having direct conversations with your customers, not shouting at them, engaging them to provide real time feedback on your products and services and enlisting them to vouch for their satisfaction with your brand. Brands are now built by your customers, not announced to them. And because of this, product discovery is shifting away from physical shelves into the social streams we all follow. If your brand does not occupy meaningful share in the minds of your customers, it won’t move through the streams and allow influencers to introduce you to new customers."

 

http://www.pakman.com/2014/09/29/dollar-shave-club-and-the-modern-brands/

 

Actually the interest thing about DSC is that their razors are manufactured by a company called Dorco and sold directly through Amazon. I wonder if the future of CPG shifts away from Brands and  back into the OEMs.

[rkbabang]

"In the case of consumer packaged goods, most are manufactured by CPG behemoths who rely chiefly on two aging mechanisms for building consumer awareness: broadcast marketing and physical retail shelf-space. Dollar Shave Club, and similar modern lifestyle brands like Warby Parker and Bonobos, view these dependencies as a disadvantage and have turned the model on its head. Broadcast marketing, in the age of social media, looks as out of touch to digital natives as President George H. W. Bush looked to us when he was surprised by a supermarket price scanner. Now, brands are built by having direct conversations with your customers, not shouting at them, engaging them to provide real time feedback on your products and services and enlisting them to vouch for their satisfaction with your brand. Brands are now built by your customers, not announced to them. And because of this, product discovery is shifting away from physical shelves into the social streams we all follow. If your brand does not occupy meaningful share in the minds of your customers, it won’t move through the streams and allow influencers to introduce you to new customers."

 

http://www.pakman.com/2014/09/29/dollar-shave-club-and-the-modern-brands/

 

Actually the interest thing about DSC is that their razors are manufactured by a company called Dorco and sold directly through Amazon. I wonder if the future of CPG shifts away from Brands and  back into the OEMs.

 

I'm all for removing the middlemen.  I switched directly from Gillette to Dorco years ago.  I don't understand the appeal of DSC or the other one Hanks(? I think that's wrong).  Why pay more for the same product from the same manufacturer?  I've got over 3 years worth of Dorco cartridges at home so I won't have to even think of razor blades for a while (save both money and mental effort).

 

[LC]

I think the death of the traditional CPG is a bit overblown. Distribution of both marketing material and the actual product has definitely changed. Tide ads are on certain websites I or my wife visit. And I get my laundry and dishwasher pods (or whatever they're called) via Amazon usually. But tide pods are still the best of the brands in my mind, and priced a buck or two higher than the competition.

 

The biggest reason the big CPGs will survive is there really are economies of scale. In terms of hundreds of millions of people cleaning their clothes and dishes, it's a helluva lot more economical to produce billions of tide pods in centralized locations vs. some lady in her kitchen making homemade soap. 

[mrholty]

"In the case of consumer packaged goods, most are manufactured by CPG behemoths who rely chiefly on two aging mechanisms for building consumer awareness: broadcast marketing and physical retail shelf-space. Dollar Shave Club, and similar modern lifestyle brands like Warby Parker and Bonobos, view these dependencies as a disadvantage and have turned the model on its head. Broadcast marketing, in the age of social media, looks as out of touch to digital natives as President George H. W. Bush looked to us when he was surprised by a supermarket price scanner. Now, brands are built by having direct conversations with your customers, not shouting at them, engaging them to provide real time feedback on your products and services and enlisting them to vouch for their satisfaction with your brand. Brands are now built by your customers, not announced to them. And because of this, product discovery is shifting away from physical shelves into the social streams we all follow. If your brand does not occupy meaningful share in the minds of your customers, it won’t move through the streams and allow influencers to introduce you to new customers."

 

http://www.pakman.com/2014/09/29/dollar-shave-club-and-the-modern-brands/

 

Actually the interest thing about DSC is that their razors are manufactured by a company called Dorco and sold directly through Amazon. I wonder if the future of CPG shifts away from Brands and  back into the OEMs.

 

I'm all for removing the middlemen.  I switched directly from Gillette to Dorco years ago.  I don't understand the appeal of DSC or the other one Hanks(? I think that's wrong).  Why pay more for the same product from the same manufacturer?  I've got over 3 years worth of Dorco cartridges at home so I won't have to even think of razor blades for a while (save both money and mental effort).

 

I do the same re Dorco.  I think you are talking about Harry's.  What is interesting about them is they started the same as DSC but pivoted and bought the factory in Germany as a long term play.  They are cutting out the middleman.

[mrholty]

I think the death of the traditional CPG is a bit overblown. Distribution of both marketing material and the actual product has definitely changed. Tide ads are on certain websites I or my wife visit. And I get my laundry and dishwasher pods (or whatever they're called) via Amazon usually. But tide pods are still the best of the brands in my mind, and priced a buck or two higher than the competition.

 

The biggest reason the big CPGs will survive is there really are economies of scale. In terms of hundreds of millions of people cleaning their clothes and dishes, it's a helluva lot more economical to produce billions of tide pods in centralized locations vs. some lady in her kitchen making homemade soap.

 

Can you tell my wife?  We make our own soap and cleaning products at 2-3x what it would cost and for a lesser product but it makes my wife feel good. 

The % of people who actually do this are still tiny. 

 

Looking back the only thing that I worked out easy and saved money was cloth diapers and actually found that was way better than disposable.  We spend a large amount upfront ($300 - 20 @ $12-15/diaper) and then a second batch a few months later when we needed more.  So $600 all in.  My understanding is the average family goes thru $1-1.5k in diapers per kid.  For the first 2 months we did disposable and we did disposable at night so they would sleep thru the night.  All day was cloth, every few days we would do a load of diapers and then we had a drying rack where we would hang up the covers to try overnight to the next night and normally dried the diaper inserts in the dryer.  Then the next night take 20 minutes and stuff the inserts into the cover so that they were ready to be used.  Best part was that all 3 kids were potty trained (daytime) by 2 -2.25 years.  Disposables do such a good job of wicking water away it doesn't bother them.  They hate this and wanted to be done at 2.  Easy.  Nights were different. 

 

 

 

[rb]

I second LC the demise of CPGs and brands is overblown. A brand is essentially a promise/agreement between a company and a customer about a product. I don't really see how the internet changes that essence in a dramatic way. Yes, companies have to communicate their promise in different ways, and yes the gob got harder because you have all these extra communication streams but that changes the essence of the brand.

 

Since we were talking about tide, let's look at that because I am a customer. Tide is a premium detergent and it costs a couple of bucks extra than the other ones. I don't buy Tide because I saw an ad on TV or because Wal-Mart stocks it. I buy Tide because we have an agreement - I pay the extra couple of bucks and then drop my clothes in the washer with a bit of their product and a little while later my clothes come out clean. No muss no fuss. Up to now Tide has kept it's end of the bargain. So i keep buying Tide. If Wal-Mart stops stocking it I'll buy it somewhere else. If Tide breaks it's promise I'll check out other products.

 

OddBall has mentioned the "Angel Feather Detergent" that costs 3x more and that appears to have a market today especially with a certain demographic. However this is a fairly recent development and I'd be careful about extrapolating that too much. I don't know why it's happening. Maybe it's because Millennials haven't been baby making machines (yet?) and some have extra money to throw around like drunken sailors. If that's the case this will reverse quickly when/if they start having kids and have less money to spend on shit like that. However I don't really know why it's happening and I don't think anybody really does. What I do know is that history has proven that value for money has won time and time again. Let me give you another anecdote:

 

2 weeks ago I was down in Niagara peninsula visiting some friends I haven't seen in a while. Niagara is an agricultural region that produces a lot of stuff, but mainly wine and fruit. It also gets lots of tourists (Toronto is next door) and has a lot of restaurants. In the past couple of years they've gone hard into the whole locally produced/locally sourced. So I take my friends out to dinner and at the restaurant the waiter gives me this great obnoxious spiel about their locally brewed beer and locally distilled spirits - as if that's any indication of quality. So now I have to unhappily shell out $15 for a pint of beer that some dude brewed in his basement for all I know. As if there was anything wrong with a $6 pint of Heineken that I was sure I was going to enjoy due to our brand agreement.

[Jurgis]

Since we were talking about tide, let's look at that because I am a customer. Tide is a premium detergent and it costs a couple of bucks extra than the other ones. I don't buy Tide because I saw an ad on TV or because Wal-Mart stocks it. I buy Tide because we have an agreement - I pay the extra couple of bucks and then drop my clothes in the washer with a bit of their product and a little while later my clothes come out clean. No muss no fuss. Up to now Tide has kept it's end of the bargain. So i keep buying Tide. If Wal-Mart stops stocking it I'll buy it somewhere else. If Tide breaks it's promise I'll check out other products.

 

We buy some kind of no-name detergent that costs 50% of what Tide costs and washes as well as Tide from what I see.

But clearly a lot of people believe in what rb wrote and (continue to) buy Tide.  8)

[rb]

I think the death of the traditional CPG is a bit overblown. Distribution of both marketing material and the actual product has definitely changed. Tide ads are on certain websites I or my wife visit. And I get my laundry and dishwasher pods (or whatever they're called) via Amazon usually. But tide pods are still the best of the brands in my mind, and priced a buck or two higher than the competition.

 

The biggest reason the big CPGs will survive is there really are economies of scale. In terms of hundreds of millions of people cleaning their clothes and dishes, it's a helluva lot more economical to produce billions of tide pods in centralized locations vs. some lady in her kitchen making homemade soap.

 

Can you tell my wife?  We make our own soap and cleaning products at 2-3x what it would cost and for a lesser product but it makes my wife feel good. 

The % of people who actually do this are still tiny. 

 

Looking back the only thing that I worked out easy and saved money was cloth diapers and actually found that was way better than disposable.  We spend a large amount upfront ($300 - 20 @ $12-15/diaper) and then a second batch a few months later when we needed more.  So $600 all in.  My understanding is the average family goes thru $1-1.5k in diapers per kid.  For the first 2 months we did disposable and we did disposable at night so they would sleep thru the night.  All day was cloth, every few days we would do a load of diapers and then we had a drying rack where we would hang up the covers to try overnight to the next night and normally dried the diaper inserts in the dryer.  Then the next night take 20 minutes and stuff the inserts into the cover so that they were ready to be used.  Best part was that all 3 kids were potty trained (daytime) by 2 -2.25 years.  Disposables do such a good job of wicking water away it doesn't bother them.  They hate this and wanted to be done at 2.  Easy.  Nights were different.

It seems that maybe you guys are a somewhat different family with the soap making and all. Yes the disposable diapers are more expensive than the cloth diapers. Their value prop is that you don't have to do the work of washing, drying and inserting. This is under the assumption that new parents are so tired from all the work that comes with a new kid that the last thing they want is an extra chore to deal with the cloth diapers. So you're paying the extra $800 per kid not to deal with that. All in all the price seems reasonable.

 

In terms of conversations about disposable vs reusable, propose to your wife that she switch from disposable tampons to cloth ones... See how that conversation goes.  8)

 

<< this site does not have a devil emoji>>

[rb]

Since we were talking about tide, let's look at that because I am a customer. Tide is a premium detergent and it costs a couple of bucks extra than the other ones. I don't buy Tide because I saw an ad on TV or because Wal-Mart stocks it. I buy Tide because we have an agreement - I pay the extra couple of bucks and then drop my clothes in the washer with a bit of their product and a little while later my clothes come out clean. No muss no fuss. Up to now Tide has kept it's end of the bargain. So i keep buying Tide. If Wal-Mart stops stocking it I'll buy it somewhere else. If Tide breaks it's promise I'll check out other products.

 

We buy some kind of no-name detergent that costs 50% of what Tide costs and washes as well as Tide from what I see.

But clearly a lot of people believe in what rb wrote and (continue to) buy Tide.  8)

I'm sure what you say is 100% correct. I'm also sure that there is one or more likely several detergents that wash just as good or nearly as good as Tide that sell for less. However at the point I am in my life it's not worth it for me to spent the energy/time/money/brain bandwidth to find it. So part of my agreement with Tide is you keep washing cloths really well and I won't look for others.

 

But different people are at different points or have different views and different agreements with their brands. Such as I was pretty much as good as tide and save you a bunch of money. Then that's your agreement with your brand. The range of agreements it's endless, but they're there. That's how brands work and that's why they're powerful.

 

Even the "Angel Feathers" detergent has an agreement with its customers. I don't exactly know what it is but it's there. I imagine it goes something along the lines of you give us a lot of money and we'll enable you to be obnoxious and fit in with your obnoxious friends.

[rukawa]

Since we were talking about tide, let's look at that because I am a customer. Tide is a premium detergent and it costs a couple of bucks extra than the other ones. I don't buy Tide because I saw an ad on TV or because Wal-Mart stocks it. I buy Tide because we have an agreement - I pay the extra couple of bucks and then drop my clothes in the washer with a bit of their product and a little while later my clothes come out clean. No muss no fuss. Up to now Tide has kept it's end of the bargain. So i keep buying Tide. If Wal-Mart stops stocking it I'll buy it somewhere else. If Tide breaks it's promise I'll check out other products.

 

We buy some kind of no-name detergent that costs 50% of what Tide costs and washes as well as Tide from what I see.

But clearly a lot of people believe in what rb wrote and (continue to) buy Tide.  8)

 

Its not the cost that I think is the issue. Its the advertising. Go to any supermarket and you will see Tide. Watching tv you were used to seeing Tide commercials. If you never saw a Tide commercials why buy Tide specifically? Rb talks about an agreement but he never explains how the agreement got initiated. Why Tide? There are only a few possibilities: 1) advertising 2) he tried every single brand of detergent and Tide was best 3) word of mouth. My view is that most brands today were built on 1). Google's brand was mostly based on 3)

 

The way I buy currently on Amazon is to do a search and then look at most popular and highest rated product. Right now Tide is pretty highly rated but so is Persil...whatever the fuck that detergent is. Who knows I might buy Persil.

[rb]

Since we were talking about tide, let's look at that because I am a customer. Tide is a premium detergent and it costs a couple of bucks extra than the other ones. I don't buy Tide because I saw an ad on TV or because Wal-Mart stocks it. I buy Tide because we have an agreement - I pay the extra couple of bucks and then drop my clothes in the washer with a bit of their product and a little while later my clothes come out clean. No muss no fuss. Up to now Tide has kept it's end of the bargain. So i keep buying Tide. If Wal-Mart stops stocking it I'll buy it somewhere else. If Tide breaks it's promise I'll check out other products.

 

We buy some kind of no-name detergent that costs 50% of what Tide costs and washes as well as Tide from what I see.

But clearly a lot of people believe in what rb wrote and (continue to) buy Tide.  8)

 

Its not the cost that I think is the issue. Its the advertising. Go to any supermarket and you will see Tide. Watching tv you were used to seeing Tide commercials. If you never saw a Tide commercials why buy Tide specifically? Rb talks about an agreement but he never explains how the agreement got initiated. Why Tide? There are only a few possibilities: 1) advertising 2) he tried every single brand of detergent and Tide was best 3) word of mouth. My view is that most brands today were built on 1). Google's brand was mostly based on 3)

 

The way I buy currently on Amazon is to do a search and then look at most popular and highest rated product. Right now Tide is pretty highly rated but so is Persil...whatever the fuck that detergent is. Who knows I might buy Persil.

Well messaging... Brands broadcast their value prop. What you're effectively saying is that with the decline of broadcast TV brands will not be able to communicate with consumers. That is a really big statement to make.

 

... And the highly rated Persil is a premium brand detergent from Europe made by Henkel (a major European CPG), essentially the main competitor to P&G in premium detergent segment (Tide is not P&G's premium brand in Europe). So the 2 highly rated detergents on Amazon are 2 giant premium brands.

[rukawa]

Well messaging... Brands broadcast their value prop. What you're effectively saying is that with the decline of broadcast TV brands will not be able to communicate with consumers. That is a really big statement to make.

 

Your right it is. So let me correct what I said. Brand's whose reputation is largely based on image will have a much harder time than they used to. I am thinking here of a brand like Coke. Why is Coke superior to other Colas?

 

Brands will only have value if they actually do provide higher quality and greater value. Google is an example. Their brand reputation is not the result of advertising. Continually providing higher quality and greater value than all other competitors is in my opinion a lot more difficult than controlling distribution channels and spending large amounts on advertising.

 

This implies the durability and value of good brands cannot be taken for granted. Each brand is only as good as their latest product.

[rb]

Well messaging... Brands broadcast their value prop. What you're effectively saying is that with the decline of broadcast TV brands will not be able to communicate with consumers. That is a really big statement to make.

 

Your right it is. So let me correct what I said. Brand's whose reputation is largely based on image will have a much harder time than they used to. I am thinking here of a brand like Coke. Why is Coke superior to other Colas?

 

Brands will only have value if they actually do provide higher quality and greater value. Google is an example. Their brand reputation is not the result of advertising. Continually providing higher quality and greater value than all other competitors is in my opinion a lot more difficult than controlling distribution channels and spending large amounts on advertising.

 

This implies the durability and value of good brands cannot be taken for granted. Each brand is only as good as their latest product.

Ok, if I'm understanding your post right is that the detergent category doesn't count because it provides adequate value to consumers. So we should move on to Coke which in your view doesn't and they only buy it because of bullshit TV advertising and because of its massive prowess in distribution. So let's unpack that.

 

Firstly, the thing about marketing is that you message to consumers, and then the consumers make up their minds what the value of your product is. If messaging can continue, then how are people's attitudes gonna change? Advertising happens in many forms and it follows eyeballs. There was a lot in TV because that's where the eyeballs were. When TV declines it'll move somewhere else. If messaging can't continue, then internet advertising really is shit and Alphabet and Facebook aren't really worth that much.

 

Secondly, yes distribution matters, but mostly in setting up new markets, winning new minds, etc. If we're talking Coke vs generic, the internet really only affects Coke's grocery channel. Every grocery store I've walked into in North America and most of the world really carried generic cola alongside Coke. So it's not like people didn't have access to generic cola. People had access to generic cola and still chose coke. Amazon isn't gonna change that.

[JayGatsby]

These businesses are good because people choose a product/brand and stick with it for a long time. I think generally people choose the product though. Although that's influenced by their preconceived notion of the brand, the product is more important than the brand. In Charles Koch's book he describes a theory that businesses have to keep innovating and putting themselves out of business, otherwise somebody else will. Largely the businesses that are being discussed stopped innovating and tried to rely solely on name recognition to earn an outsized profit.

Gillette: I remember when the Mach 3 came out. That took the razor blade up a notch. Then they added the single blade to the side. That also took the razor up a notch (order may be reversed between the two). Then they did nothing for 10 years. Competitors caught up and made a 3 blade razor a commodity.

Tide: Tide is the same as it was 20 years ago (I think... if not they've failed to convince me. If i search for "Tide" on Google the product that pops up is "Original). While others were making environmentally friendly / more natural detergents, P&G missed it. There was a good article a few weeks ago about how the budget customer has moved to private label, the high end customer has moved to these new brands (Method, Seventh Generation, etc), and Tide is stuck in a shrinking middle. P&G thought it was a fad and hoped it would pass. I can't seem to find it now, but this article is from 1994, the same year Seventh Generation launched their retail detergent. It looks like Tide finally became phosphate free in 2015. http://www.independent.co.uk/news/uk/detergents-are-bad-for-health-and-environment-study-says-people-wash-clothes-too-often-1422265.html

Coke: Coke is terribly unhealthy. I'm surprised Coke doesn't acquire more concept companies and push them through their distribution. I keep thinking Coke or Pepsi will buy La Croix. Instead they're pushing Dasani sparkling, which nobody wants (including Kroger based on shelf space). While Coke was pushing sweet drinks and trying to find the next artificial sugar, some tiny little soda beverage created a bubbly drink that tastes good without any sweeteners.

 

Long story short, I don't think there's anything particularly new here. I think it has less to do with the distribution system and more that they haven't innovated. Any product that doesn't innovate either gets disrupted or becomes commoditized (Heinz ketchup being a rare exception).

[vinod1]

The moat of the consumer packaged goods (CPG) companies is being weakened due to many technological changes.

 

For one, entry barriers for new firms has been lowered. Now it is easy for a company to do many of the basic functions:

 

1) Easy to startup a new company with low capital. Use AWS for your IT infrastructure. Outsource manufacturing to a Chinese company.

 

2) Lower cost to promote the company. Use YouTube to distribute the video at low cost. Use Facebook to promote the product.

 

3) Sell directly online.

 

These small companies have much lower cost structures. What this does is enable small companies to develop either niche products or lower cost products and strip away users from the big CPG companies at the margins. Some of these niche products might even make it big.

 

A second factor is that at least in developed countries, there is little quality difference between many of the branded CPG products and generic store label products.

 

These factors are going to be a headwind for the CPG companies. This is what I think is happening to P&G as well.

 

Vinod