I’m moving files

February 26, 2015

Many of my posts have links to Word, Excel, and PowerPoint files.  Due to OneDrive’s unreliability, I am moving all of that to Google Drive.  I should have them back up in a week or so.  If there are specific files you want to review, let me know and I will send to you.

I got this Quora question and here’s my answer.

When I look at CPG investments, my goal is to know the following:

1.  Is this product/idea differentiated in the marketplace and how easy is it for the competition to copy/replicate that differentiation?
2.  Does the team know what they are doing to grow the opportunity?
3.  What’s the plan to get the opportunity to 20% EBIDTA?

To accomplish the above, I need the following metrics, in this order, with the basis at the product unit level that the end consumer would purchase:

  1. Current sales in units/door/week by channel;
  2. SRP – suggested retail price of the item by channel;
  3. Repurchase rate;
  4. Retailer margin (%);
  5. Wholesale revenue;
  6. Returns;
  7. COGS;
  8. Gross margin (wholesale revenue – COGS);
  9. Tradespend;
  10. Marketing costs;
  11. Sales costs, incl. broker fees;
  12. Logistics and retailer penalties;
  13. All other operating costs;
  14. Net;
  15. Cash investment.

The above is structured like a basic P&L.  The metrics are less important because in most cases, they will not be to where they should be.  What’s more important is the qualitative discussions on each metric to help me get to my 3 goals listed above.  With the above metrics and a 30-minute discussion, I can usually know if this is a good opportunity for me.

Sales/Units/Door/Week and SRP by channel

This is a core metric to understand how the product is performing in the marketplace.  It will be different for each product category, but a good metric for many grocery categories is 1 unit/door/week. If this is average, does this product exceed that or is it below that?  If so, why?  If above, is it a unique product different enough from the competition?  If above, is the company doing some kind of in-store or external marketing that is driving sales?  If below, why?  Is the company’s marketing not effective?  Is it a commodity product getting lost in the clutter of all other commodity products?  Is SRP too high, too low?  Why?

These are exactly the kinds of questions category buyers ask in determining whether to take on new products, expand existing ones into more stores, or discontinue them out in favor of another product.  Even if a product is meeting sales threshold does not mean it won’t get discontinued.  Another better product could come along or one with better marketing.  The company needs to know its category and competitors and trends very well to try and position against this.

When I say “by channel” above, I mean I want to know SRP and margins by channel – grocery, drug, mass, club, etc..  Even if the company is not selling in these channels, what would SRP be in those channels, against the retailer margin?  Eventually, I would want to see them sell to the other channels to get more growth.  This is important to know now because setting SRP relative to margin and EBIDTA has to be done in the context of looking at other channels, because even though it might work in one channel, it will break in other channels, so you want to get that right from the start.

Repurchase Rate

This metric can only be derived with accuracy if the company has a direct-to-consumer (D2C) component (i.e.: sell via their website).  And it is very important to know because if the company has a low repurchase rate – and I assume if in grocery stores it’s a consummable product, so there should be repeat purchasing – then the company has a structural problem and eventually it will fail when it runs out of new consumers.  Having a D2C component is very important to know information like this.  I look at repurchase rate in context of 12-months from initial purchase.  Another similar metric is customer lifetime value, but I limit to 12-months.

If only in retail, the best way to gauge this number is through specialty or smaller chains that the company has been selling in for awhile.  If succeeding, then you might infer that there is a good repurchase rate.  However, the caveat there is that the product is not in an impulse-buy store location, like the checkstand area.  If so, then be careful.

Retailer Margin (%).

For grocery, the target is 35% – the difference between wholesale and SRP, or the retailers markup.  Is it higher or lower than this and why?  If lower, then to expand to other chains, it will have to go higher, meaning it eats into EBITDA.  If higher, why?  Is it because its a new product and the category buyer wanted more margin because of the risk?  Or, is it because the company is not marketing or not marketing well to support sales, so the category buyer wants more margin?

Returns

Usually will be 1-4% for small companies in smaller retailers.  It should not be higher than that. If so, why?  Dig in to understand what is going on.

COGS

For smaller CPG’s in food, selling organic, this figure is easily in the 50-70% range.  The key to ask is not necessarily where it is now, but can the company get it down over time with increased volume?  They should be able to get it to the 30-40% range – closer to 40 if an organic product. Again, this is for consummables.

Tradespend

On average, for all CPG consummables, its 13.5%.  If higher why, if lower, why?  What is the company doing to warrant it being higher or lower?  It’s almost always higher the first year in a retail chain, then goes down.  What are the specific factors in tradespend that is causing this number to be what it is?  Experienced CPG people will know how to negotiate this number down over time.  Does this company know how to do this? Note: diving into this area will really tell you if the company knows what they are doing or not, in my experience.

Marketing Costs

This goes with tradespend, because in-store marketing is in tradespend. But external marketing (what the company does independent of the retailer) is everything else.  For small companies, marketing should really be direct response drive, in my opinion.  By DR marketing, your marketing has to drive sales and you have to be able to measure it to see if its working.  You can’t just throw dollars at brand marketing like large CPG companies because you will run out of money before they have an effect, in my experience.  With DR marketing, you need to know how many dollars are spent and what sales that brings in – simple equation called MER (marketing efficiency ratio).  A ratio of 2 or more more is what you want, but it takes time to get there to optimize marketing.  A CPG company that knows how to do this can leverage it into retail growth very well.

Sales costs, incl. broker fees

Broker fees is what I really want to get at.  Goal is to get to 5% with no monthly upfront payment.  Hard to do for smaller companies, but that is the goal.

In the natural channel it will be 8-15% with a $500-800 monthly payment to good brokers. Over time, you can get the monthly payment to go away and with volume, get the % down.

I care less about the costs now and more about who the brokers are, what are they doing and are they good ones (I can usually tell by knowing how the brokers work by asking the company questions about them).  Good brokers are key to growing in retail.  You want relationships with good ones.

Logistics and retailer penalties

Goal is to get to 5-7%, or even lower if possible.  If higher, why?  This is another area that by digging in, will tell me if the company really knows what they are doing on an operating level.  Companies with less experience or with weak operations will have higher logistics and retailer penalties.  This area can kill a company if not under control.  This area might not be a problem now, but its a sleeper land mine because it could become a problem if internal processes and systems are inadequate.

All other operating costs

I usually don’t dive into any other cost areas. The above is what I really need to get to my 3 goals.

Net

What is the EBITDA?  Goal is 20%.  Now, let me say that 20% is my goal.  It does not necessarily mean that is the goal of other companies.  I like 20% because it gives me room for error, because there will always be error. In general, if its less than 10%, that’s a problem, because errors will eat into that fast.  If not at 20%, then what is going on above to impact this?  Based on the above discussion, I would be able to understand better what is needed to get to 20% EBITDA and if the company has the expertise to make it happen.  However, I see opportunities all the time that will never get to 20%.  Does not make them bad ones, just maybe not ones I would consider.
Put the above into a simple excel model and as you play with all the variables, you will see its impact on EBIDTA.

Cash Investment

What will my cash investment do for the company to get it towards 20% EBITDA? Or, if its at 20% now, what will my investment do for growth?  If my investment won’t get it there, will the company need more investment?  If so, can they raise money from other investors besides me?  Do they have a differentiated opportunity and a good team that would be attractive to other investors?

Growing CPG companies, especially those in retail, even at positive EBITDA, often need more and more cash to growth.  So, even if goal EBIDTA is reached, growth still means more cash will be needed.  Can they get it?

What’s the exit?  How do I get my money back?  Because growing CPG companies, especially in retail, need cash to fund growth, don’t expect your investment to come from EBITDA distributions to investors, at least any day soon. And selling a company is really really hard and very few are able to do that.

Disclosure: I have not received any compensation for writing this post. I have no material connection to brands, products or services that I have mentioned. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255.

This is my primary tool for analyzing direct response campaigns.  Its fairly simple, but has a lot of data that can be viewed on the same screen, along with my immediate goal metrics and long-term goal metrics.

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This is the key tool I use for determining my pricing across all channels, while keeping the retailer margins and my margins in balance.  Its a relatively easy tool, but takes time to implement correctly.  Of all the tools I use in CPG, this one I spend the most time on and is maybe the most important tool of any that I use.

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This is a question from a business acquaintance:

I’ve been approached by a network and their TV show about featuring our line in a commercial as part of an episode. The rub is that they want a $50k “scheduling fee” from us in order to do the segment. This would be a big bet for us, about 6-9 months of marketing budget and I’m trying to figure out if it’s worth entertaining. The show will air twice nationally in the same time slot and our segment would be 5-6 minutes long featuring our products and telling a story about why people should care about the ingredients in their products (and highlighting our brand as a gold standard). They also provided me with the attached deck which breaks down their viewership. Overall, I’m trying to figure out if it’s worth it (or even potentially worth it) and you’re the only person I’ve met that’s done anything like this. 

My answer:

My take is that as a small company, this kind of spend must yield measurable results in sales dollars. Branding value is hard to measure, especially when you are a small company. If you were in 30K+ retail outlets and doing 30mm a year in sales, then certainly, opportunities like this might represent great branding value. So, that said, I put on my direct marketing lens to see what kind of metrics I need to at least breakeven on my $50K spend.

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There are several posts on this website about the definition of a company vision and elements that go into developing one. A question on my mind recently is how to develop a vision for a company that is honoring to the Lord. Here’s a couple of thoughts that came to me based on scripture reading and prayer.

How do we build companies so that they are consistent with the designs of God for our lives?

In general, we humans are much more attuned to this world and its norms, customs and culture, so we end up building our businesses based on them, not on God’s designs.

For example, take the food industry. We use seed that have been genetically modified, grown on factory-farms prevalent with pesticides, transported thousands of miles, which is resource intensive, further modified and processed in plants, and packaged in material, much of which does not get recycled but ends up in landfills. This industrialized system has evolved since the 1940’s to give us most of our food that we eat today. It is largely unsustainable given the resources it consumes. Do we think this is in keeping with God’s design for how we get our food? I don’t think so.

Think of your industry. From scriptural study and prayer, what do you think is He telling you about the designs for how business is done in your industry. What is His vision for your company that is in keeping with His designs for how business should be done in your industry?

How do we adjust our business to God’s standard rather than adjusting God’s standard to our business.

I have found that if I do not stay consistent in my reading and study of scripture, I end up compromising God’s standards for how I should live my life and run my businesses and I don’t even realize it.  It is very easy to drift and allow this world to distract us from God’s standards. .

Think of your industry. From scriptural study and prayer, what would be God’s standard for how business should be done in your industry? What is His vision for your company that is in keeping with His standards for how business should be done?

What is God’s view of leadership and greatness versus the world’s view of leadership and greatness?

Think of your industry. From scriptural study and prayer, what do you think is His vision for your company is that is in keeping with His view of leadership and greatness?

I gave a 1 hour workshop at a conference on this subject.  The course outline and notes and the classroom-style video presentation are included below.

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