CPG Business Plans Vs Reality
The day after you launch your new consumer package goods product, your business plan takes a back seat to your cash flow projection. The CPG business plan is a great way to theorize how things are expected to unfold in the marketplace. It’s a great way to get investors excited about your new product. But it’s a dangerous way to run your business.
There are so many surprises, and so many unforeseen roadblocks, and so many assumptions that you made that are just plain wrong, that adhering to any rigid plan can be the death of your brand. The day after you launch, you are confronted with the sobering reality that you must make sales, and make them fast, in order to pay your bills before you use up what little capital you have.
Don’t get us wrong. Business plans are a great way to think about your business. They are a great way to identify the moving parts, and a great way to identify and project costs. But those projections quickly take a backseat to the realities of doing business in the marketplace. The best business plans we have seen include many contingency plans for when things don’t work out as anticipated, which is most of the time!
The magic word everybody wants to see these days is “business model.” But when you’re selling your product in bricks and mortar retail, your model is pretty much predetermined. You don’t have the luxury, for instance, of a subscription or membership model. Your model is going to be selling through distributors to retailers, or directly to retailers, even though your end-user is the general public.
Think Twice about Selling Directly to Consumers
Retail product producers who attempt to sell directly to the general public are in constant conflict with their retailers because online sales are a race to the bottom price-wise. And if retailers see a price out there lower than the one they can charge and still make a profit, they will discontinue your product. So this discussion is based on indirect sales, yes, through middlemen. It is still the fastest way to build a CPG brand. But it is fraught with many unforeseen challenges that generally don’t show up in the CPG business plan.
Start Small and Learn
Basically, throughout the business start-up phase, you are flying by the seat of your pants, making judgment calls on a daily basis that may be way outside the parameters of your business plan, but are absolutely necessary to the survival of your brand. This is exactly why we recommend starting small and rolling out in a very limited marketplace, and take notes, tons of notes!
Creating a successful business, in its simplest terms, is making more revenue than your expenses. In these days of VCs and the “scale fast and fail fast” mentality, it’s ironic that many investors will review and approve a business plan that omits or oversimplifies some of the most critical requirements for success. We know these are critical because we found out the hard way building the Barefoot Wine brand. Everything we know cost us plenty of both time and money to find out!
Don’t Forget the Retailers
Too many hopeful startups develop a false sense of security because their investors have funded their business plan. They think that somehow the investors know more than they do about what they will be up against when they validate their plan. Many times it’s simply not the case. More than likely, the investors, like the startups, are enamored with what they see as the potential demand for the product and overlook what’s required to access, satisfy, and supply that demand. The focus seems to be on the end-user. It’s as if a good product by itself will cause everything necessary between the producer and the end-user to somehow take care of itself. It simply does not work that way!
Key Elements in a CPG Business Plan
As experienced CPG brand producers who have successfully built and sold a national brand, we are painfully aware of what’s missing in most CPG business plans. As advisors today, here are the key elements (often missing or understated) that we look for in a new client’s business plan:
1. Access to Market
Unfortunately, most CPG startups don’t research the market in advance to discover where there is room for a new, different, or improved product before they finish their designs. Especially when their business idea is disruptive, they can run into objections like, “We don’t have room for any new products,” or “We don’t know what category to put it in,” or even, “We’ve never made any money on anything like that before!”
The question is, how are you going to gain access to the market in the first place? Have you spelled it out in your business plan? You may discover, as we did, that the void is at a different price point, in a different package, or in a different category than you had previously imagined. For instance, what we were selling most after five years in the marketplace was very different than what we had to produce to get into the marketplace.
Access to market is not a given. On the contrary, it is a moving target that changes with the times and the success of other brands and their products. Successful businesses discover and target voids, some of which pop up unexpectedly.
This research should be completed prior to completing your CPG business plan, and certainly prior to completing the initial products with which you intend to get started. Discover the ideal product-market fit before you start spending time and money trying to be all things to all people, or worse, trying to sell what you want to sell – regardless of what the market has room for today.
2. Cost of Sales
We like to say, “To start with, don’t sell any further from your house than you can drive, apologize, and return in one day!” And for good reason! You have to understand the cost of sales associated with your product, not just the cost of goods, but the cost of sales! How much does it cost you to make the sale, and more importantly, how much does it cost you to sustain the sale.
What does it cost, for instance, to pay for a representative and all their expenses to present your products to a chain store buyer, and then present them to the category managers in each of that chain store’s outlets? How much does it cost to perform in-store demonstrations of your products, provide free samples, and solicit customers from each outlet’s market area to come in and buy your product?
Also, what does it cost to provide the merchandising and inventory management to prevent your products from going out of stock, probably the number one CPG brand killer?
3. Distribution Management
And if that’s not enough, have you considered what the cost to oversee, police, and assist your distributors to keep your goods in stock and moving? What kind of programming dollars are you ready to commit to get and keep your products top of mind with their salespeople?
How often do you and your team have to visit your distributors throughout your market area? What is the cost of all this schmoozing, training, and presenting?
Have you thought about hiring a cost accountant to help you ascertain these kinds of sales support costs in different markets? More importantly, are your expansion plans and growth strategies based on an understanding of these territorial cost differences, including taxes, freight, packaging, and compliance issues?
4. Retail Environment
Does your business plan take into consideration what is necessary for your products to achieve shelf space in the retail stores? We’ve actually seen a business plan for a brilliant CPG product with a statement for how those products would be sold that simply said, “Will be sold at retail.” Really?
You or your people have to personally make most of the sales for the first several years. Not only that, but if your product doesn’t sell right off the bat at the rate the buyers want to see, it will be discontinued from that chain – forever.
The retail environment is harsh. We highly recommend that you study the physical restrictions, such as lighting, spacing, labeling, and packaging requirements. Work within those parameters. We like to say, “When it comes to CPG products, package design is more of a solution than a creation.” Make sure your business plan justifies every creative decision by the environment in which it will be forced to perform. For instance, can it be seen from 4 feet away in poor lighting next to 100 other products vying for your customer’s attention?
5. Cost of Turnover
You will never see a line item in a CPG business plan that says turnover $2 million in five years. Yet, if that’s all it costs you, you’re lucky. Most new business plans gloss over the company’s attitude and policies toward employees. They minimize or fail to address what it’s going to take to keep your employees engaged, empowered, and loyal.
When you lose an employee, you lose more than a worker or the training you have invested. You lose more than the cost to replace that employee with all the repetitive false starts you will go through with applicants until you find a keeper.
You will lose your key relationships with vendors that are keeping your costs down. You’ll lose your corporate intel which your lost employee will take along to your competitor. You will lose many of your buyers who are more interested in maintaining the personal relationship they have built with your former representative than in the product they were selling.
Does your business plan identify the policies and procedures that you will put in place to mitigate these losses? Just because you have a great idea, does that mean you’re qualified to hire, train, incentivize, and retain your key people?
6. Cost of Overhead
Too many startups focus on premature purchases of assets and overhead at the expense of sales and resourcefulness. Any reoccurring monthly cost in the early stages should be avoided if at all possible. Why set yourself up with offices, production facilities, warehouses, personnel, and equipment until you have achieved the positive cash flow necessary to justify them?
Does your business plan demonstrate an expansion model where sales justify overhead? Or does it assume that sales will occur so rapidly that they will achieve a positive cash flow before you get to the end of your runway?
This is perhaps the biggest mistake we see in a business plan. Rather than outsourcing as much as possible and focusing on sales, many tend to be unnecessarily top-heavy. They tend to be brought down by the weight of their own overhead.
7. Cost of Discontinuance
The Startup Phase
If you can get through the startup phase, you will have achieved a few large buyers and can now pay your bills. This is good news and bad news. The good news is you now have a viable business idea. The bad news is you are beholden to a few large buyers. In effect, they have you over the barrel. Once they understand this, they can extort you for lower pricing under the threat of discontinuance which they know can put you out of business.
The Build-up Phase
The build-up phase is also dangerous because any one of those Big Boys out there buying your products can suddenly discontinue them. This has a double-barreled effect. First, your company must have enough reserves, and a low enough overhead, that it can stay in business and take the big hit. Second, you now get the reputation of being a nonstarter with a specific retail chain. Your competition will be quick to warn other buyers in advance of your presentation. This can dramatically hurt your reputation.
Your CPG business plan must show that you will have the resources to sustain such a discontinuance. A portion of your revenue must be held in reserve for such an occurrence.
The Build-out Phase
But wait, there’s more! Now that you know you are being held hostage by a few big buyers, you are under tremendous pressure to expand as fast as you can to mitigate the risk of “having all your eggs in one basket.” This is the build-out phase and this is where most CPG brands fail.
Does your CPG business plan take all of the above “hidden” costs into consideration? Do you think your investors have enough experience in selling CPG brands through retail that they themselves understand the implications of growth and cash flow management? Does your business plan respect the value of caution, resourcefulness, and practicality? Or does it put your product on a pedestal and attempt to prove the demand from the general public? Does it discount, or worse, ignore these very real costs?
When you are writing a business plan for a CPG product launch, be sure to outline the accommodations, strategies, and precautions you intend to make to launch and sustain a successful business. Seek an experienced advisor. Don’t find yourself upside down saying, “I did not know that!”