The Supply Side: Niche brands took share from large CPG players in 2020

Consumers hunkering down at home during the pandemic spent more on food consumed at home. Many of them also reached for smaller, niche brands as supply chain disruptions meant national consumer packaged goods (CPG) manufacturers had a hard time keeping products on grocery shelves.

IRI research found small and extra-small CPG manufacturers and private-label brands gained market share over larger food manufacturers during 2020. According to the study, the CPG industry had $933 billion of total U.S. sales in 2020. Large manufacturers collectively lost 1.3 share points, or $12.1 billion in sales, to smaller players due to channel shifts, supply constraints and category shifts.

“The consumer shift toward smaller manufacturers and private label products is something that IRI has been documenting for several years, and we saw the trend accelerate during the COVID-19 pandemic,” noted Dr. Krishnakumar Davey, president of Strategic Analytics for IRI. “Many large manufacturers were not able to meet the surge in demand caused by the COVID-19 pandemic in the second quarter when they lost most share to smaller players who seized on this opportunity.”

He said several brands attracted several new buyers as in-home consumption surged. By the third quarter of 2020, he said large manufacturers fared relatively better but still lost a significant share of 1.3 points versus a year ago. He said second-quarter losses were 1.9 share points lower the same period in 2019. The fourth quarter saw some improvement and reversion to historical trends with large manufacturers losing 0.8 points compared to a year ago.

“While some of the 2020 consumption trends will continue with consumers working from home at least part time, away-from-home consumption will continue to gain back lost share. We expect smaller and mid-sized players to continue to gain share from large manufacturers,” Davey added.

Large CPG manufacturers dominate the convenience store segment, and softness in the category accounted for 0.5 share points of the decline for large manufacturers overall last year, Davey said.

IRI found smaller manufacturers gained market share in nine out of 10 departments, except for the home care department. Smaller manufacturers accelerated their market share in beverage alcohol, frozen food and center-of-the-store food categories with products catered to distinct needs. Niche product manufacturers also showed market share gains in general merchandise and health and beauty departments. Within non-edible categories, small manufacturers playing in high-demand categories, such as hygiene, personal care and health and wellness, saw high growth, according to the IRI report. As consumers spent more time at home, breakfast categories, frozen fruit, snacks and shelf-stable products also saw growth for smaller niche manufacturers.

Davey said many small manufacturers took advantage of the opportunity that arose from larger product makers not meeting the surge in demand for paper products and hygiene-related products. The trend also holds in edible categories, where consumers shifted toward smaller or niche brands or picked up whatever was available on the shelf.

IRI’s analysis of e-commerce data also shows similar trends. Many smaller manufacturers, particularly in shelf-stable food and beverage products, pet care and personal grooming products, grew much faster.

“Looking ahead, we anticipate that consumer mobility will increase substantially over the next few months, and the convenience channel will bounce back as economic activity, especially construction-related activities, improves, providing a strong tailwind for large manufacturers,” Davey said.

Retail insiders recently weighed in on a RetailWire blog about why they thought consumers turned to small CPG brands in recent years and if the trend will continue. They also shared how retailers might try and mitigate these product shortfalls.

“The three worst words in retail are ‘out of stock,’ and this has enabled smaller brands to better develop their presence at the expense of larger brands because of their ability to be nimble while responding in omnichannel retail presence,” Kai Clark, CEO of American Retail Consultants, noted in the blog.

Walmart CEO Doug McMillon said recently, out-of-stocks in 2020 were higher than acceptable as demand outpaced supply in many categories. He said there was no way to predict the heightened demand as consumers stocked up on food, games and healthcare aids. McMillon said the out-of-stocks were made worse in part because of the retail giant’s efforts to reduce inventory over the past several years. He said Walmart worked with suppliers to mitigate out-of-stocks in essential categories such as hand sanitizer and face masks, which were in short supply as the pandemic began to worsen in the early spring of 2020.

There were toilet paper out-of-stocks at epic proportions during 2020, and niche supplier Dude Products saw a significant uptick in sales of their Dude Wipes in big box stores like Walmart this past year. Ryan Meegan, a founder of Dude Products, told the Northwest Arkansas Business Journal in July that the company saw an uptick in U.S. sales amid the early months of COVID. He said keeping up with the demand was challenging, but manufacturers have done a great job keeping the product flowing.

“It was sobering to walk in a retailer amid consumers’ frantic buying and see empty bins in the toilet paper aisle,” he said.

He said the product scarcity likely helped Dude pick up new customers who might not have previously tried the brand. Meegan said working with Walmart has been a great opportunity, and having the products sold by Walmart puts them close to millions of consumers. He said getting the deal with Walmart also helped the company scale up and add jobs in Chicago, while the manufacturing takes place in Northwest Arkansas.

While consumers may have turned to niche brands when they could not find standard items in stock, some retail insiders say the move to organic, niche products is not new. Michael Terpkosh, president of City Square Partners, said consumers have been looking for new and different brands for years.

“They are tired of the over-marketed, bland, mega brands they grew up with. Today’s consumer wants more natural/organic items, more ethnic foods, and more diversity in what they buy. Smaller brands and private labels have answered these needs and want through innovation, a better understanding of the consumer and being more nimble,” he said.

A poll conducted by RetailWire last month found 71% of retail insiders believed large CPGs would continue to lose share to smaller, niche product makers in the future.

EDITOR’S NOTE: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.