At Charis Consumer Partners (my private investment firm focused on consumer packaged goods), we spend a lot of time thinking about the ever changing CPG landscape. As our friend, Ryan Caldbeck, points out in one of his epic Tweetstorms below, consumer tastes are “personalizing.”

In short, consumers are now highly educated about the attributes of the products they buy, the ingredients therein, and their impacts on health, experience, etc. For example, what was once the market for “sliced bread” has become a subset of micro-markets including things like keto bread, paleo bread, white bread, wheat bread, whole grain certified wheat bread, organic wheat bread, organic paleo bread, gluten free bread, Non-GMO wheat bread, bread made with ancient grains, etc.

Unless a brand can span across these need states and create a relationship with consumers based on credibility and experience, it is increasingly difficult for brands to build big businesses. Further compounding the issue of micro-preference, these new demand states are generally based on more natural, premium, specialty foods. This food is by nature harder to produce at scale, and more expensive due to more specialized labor and manufacturing processes. Thus, the price points for these foods are higher. This creates a great gulf between high income consumers who can afford to have such demand states and those who cannot. Thus, the days of Wonder Bread having access to 300 million consumers are gone. The market is split in half, and then the more affluent half is divided into fragments.

Before, a brand had to do the hard work of figuring out how to obtain distribution (getting grocery stores and Amazon to sell your product) and educate consumers about their proposition. The good news is that the grocery market has become increasingly competitive, so stores are willing to try new brands in the hopes of having something special to offer its consumers.

The bad news is that the costs of acquiring distribution and educating customers (the cost of customer acquisition, or “CAC” - we pronounce it “cack”) remain the same, but the reward is smaller. To differentiate from other brands, each new brand has to introduce a niche for itself to compete in. This means that, while the lifetime value (“LTV”) of a given customer may remain high (we believe people are still brand-loyal), the number of customers in its addressable market is limited.

Another bit of good news, however, is that the cost to educate customers is much lower in the age of digital media. Before you get up and do a dance, however, please reference items #8 and #9 from my takeaways from Mary Meeker’s internet trends report; it is getting more competitive and expensive every day.

To think about this in terms of a mathematical equation, the ratio of LTV/CAC times the number of customers in an addressable market tell you the potential value of the brand. Over time, if CAC rises, and number of customers fall, the overall brand potential is reduced substantially.

The implications? It’s only getting harder to build large brands. Accessing consumers through digital, particularly in food is not necessarily the answer we thought it was. Can anyone build a large business in the food space? Will lower income Americans ever be able to afford natural, specialty foods? We think so. I’ll tell you more about that in future newsletters.