When you look at the startup opportunities in the Consumer Packaged Goods (CPG) industry, it seems like they are everywhere. Despite experiencing a slow-down in growth over recent years, the CPG industry is still one of the largest sectors in the USA, valued at approximately $2 trillion per year according to Investopedia. CPG products are defined as used daily by average consumers that require routine replacement or replenishment, such as food, beverages, clothes, makeup, and household products. Growing trends like organic, sustainably sourced and locally produced perhaps favor smaller, nimbler companies. And yet 80% of food startups fail. Why?

While demand for CPGs largely remains constant, this is nevertheless a highly competitive sector, due to high market saturation and low consumer switching costs, where consumers can easily and cheaply switch their brand loyalties. McKinsey & Company in a November, 2021 research briefing provides some insights on the CPG industry. In recent years, while e-commerce has accounted for 65 percent of growth, traditional channels still represent the largest share of sales in the consumer market. The COVID-19 crisis reshaped the market landscape by forcing customers to change the way they buy with the creation of a number of new ‘microchannels’. Lastly, while consumer companies have made significant investments in technology, service levels haven’t improved. The complexity of multiple channels and supply chain issues have either led to out of stock or excess inventory problems.

McKinsey makes the case that startups today, if they wish to succeed need better end-to-end planning based on the following principles:

Cross-functional integration. Companies must coordinate planning activities in a comprehensive way to produce the best decisions for the entire value chain.

Shorter planning cycles. Traditional monthly planning cycles might accelerate to weekly cycles or even continuous-planning processes to enable the agility required. To reduce supply chain disruptions, brands may need to consider onshoring.

Advanced analytics. This helps to improve planning quality by, for example, enabling better demand forecasts, production planning, scheduling, and workforce planning.

A higher degree of automation. Systems and algorithms that support the automation of standard tasks and trigger interventions based on ‘basic’ deviations, will allow planners to focus on exception management and decision making.

Full supply-chain visibility. Real-time data and sales performance transparency along the entire supply chain (for example, with inventories and orders) will help companies identify risks and exceptions early on and develop potential countermeasures including profit-maximizing decisions.

In order to better understand the how a food startup in the CPG space might navigate its way to success, we turned to Matt Clifford, a two time CPG entrepreneur with Barnana (banana, plantain based snacks) and Cando (keto krisp bars). In looking back over his 10 years in the CPG industry, here is Matt’s advice for entrepreneurs who want to enter this marketplace today and succeed.

1. Omni Channel strategy. Startups need to develop an omni channel strategy which also includes a heavy retail brick and mortar focus. This ‘anywhere, anytime’ capability to serve the consumer has to be based on excellent planning, supply chain and distribution processes and metrics. Moving quicker with this kind of strategy might give an edge to a faster, first mover startup than a traditional CPG brick and mortar brand. Innovate first, move nimbly, launch locally and fail fast.

2. Build and own your brand. Gone are the days of influencers driving brand growth and celebrity brand partnerships. Brands experiencing outsized growth today are coming from content creators. Think Mr. Beast (Feastables) Emma Chamberlain (Chamberlain Coffee) and Logan Paul (Prime hydration); these brands are developing high affinity consumers from existing loyal fan bases based on the founders brand and not influencers or celebrities.

3. Investors are hungry for profitable food. Food is sexy on both Main Street and Wall Street. Despite record inflation and supply chain issues, large cap food and beverages has outperformed all major indices in 2022. Simultaneously, early stage cash burning startups, once considered ‘food darlings’ like Beyond Meat and Oatly, are trading at massive discounts to their peers. This reversion to profitable safe investments is putting capital pressures on early food and beverage startups and will likely create a short-term vacuum on the velocity of innovation. In summary, you will likely see less innovation on shelf at retail in the next 12-18 months than you have seen in the past.

4. Understand your customer. Nostalgia is back. Based on our learned knowledge and customer insights, Gen Z is far more willing and interested in supporting legacy food brands that have a feel-good nostalgia. Think Sour Patch Kids, Oreos, Reese’s Peanut Butter Cups, etc. They are more interested in comfort and reminders of their youth’s happiness then millennials are. Millennials seem to care more about environmental virtue signaling and overall health, far more that Gen Z does. So, its not enough that your startup food or drink is good for customers, you might have to make them smile.