Feb 26, 2019 · 47m · a16z
a16z Podcast | Who's Down with CPG, DTC? (And Micro-Brands Too?)
0:00 / 0:00
▶ Watch on YouTube →
gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of the a16z Podcast, host Sonal Chokshi, Andreessen Horowitz General Partner Jeff Jordan, and CircleUp CEO Ryan Caldbeck analyze shifting trends in Consumer Packaged Goods (CPG), Direct-to-Consumer (DTC) economics, and micro-brands. They explore how changing consumer demands, physical retail realities, and quantitative data analytics are reshaping product innovation and venture investment.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. The host holds 21.6% of the talking time here. How this is scored →
The host as informed peer 5.1 Guest teaching 3.3 Guest disagreement 1.7 The host pushing back 2.6
speaking balance: gold is the host, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 8:45 Guest re-frames DTC as an R&D lab rather than a standalone channel
Ryan directly pushes back against the host's premise that DTC isn't working, arguing forcefully that it functions as a critical testing channel constrained by physical atoms.
Hardest push from the host ▶ 7:44 Host refuses framing on DTC difficultySonal explicitly refuses to accept the premise that DTC businesses struggle, using meme monetization as a direct counter-analogy to press the guests.
Biggest teaching moment ▶ 38:48 Guest educates host on dismal CPG R&D spendingRyan schools Sonal with stark data showing CPG spending on R&D sits at just 2% compared to tech's 14%, catching the host entirely off guard.
The host holds their own ▶ 14:33 Host invokes Baumol's cost diseaseSonal demonstrates strong theoretical economic expertise by connecting grocery store margin compression to Baumol's cost disease in healthcare and education.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | The host as informed peer | Guest teaching | Guest disagreement | The host pushing back | Why |
|---|---|---|---|---|---|---|
| DTC Realities and Rising Acquisition Costs | 3 | 4 | 1 | 3 | Sonal asks probing questions about why Unilever bought Native Deodorant rather than developing an in-house brand. The guests explain customer acquisition costs and why CPG incumbents buy innovation. | |
| Incumbent CPG Stagnation vs Emerging Brands | 5 | 2 | 1 | 1 | Sonal demonstrates cultural and industry knowledge by identifying Steve Jobs' famous quote recruiting John Sculley from Pepsi and framing big CPG as a corporate training ground. | |
| The Physical Realities of Retail Expansion | 5 | 5 | 3 | 7 | Sonal explicitly pushes back on the premise that DTC is inherently difficult, comparing product monetization to meme culture. Ryan reframes DTC as an R&D testing channel constrained by physical atoms. | |
| Data Blind Spots and Instacart Performance Marketing | 4 | 5 | 2 | 2 | Sonal cites her experience at Xerox PARC regarding CPG data blind spots. Ryan educates her on why credit card data fails to reveal individual SKUs or customer identities. | |
| Grocery Store Margins and Local Distribution Models | 7 | 2 | 2 | 2 | Sonal demonstrates strong conceptual domain expertise by introducing Baumol's cost disease to explain low-margin structural costs and highlighting grocery innovation in China. | |
| Assortment Optimization and the Retail Buyer Problem | 5 | 4 | 2 | 3 | Sonal draws a thoughtful parallel to Anthropologie's retail curation model. The guests explain how retail buyers rely on personal taste over data in selecting products. | |
| Aggregating Unstructured CPG Data | 6 | 2 | 1 | 1 | Sonal draws on technical knowledge by bringing up NLP entity resolution to explain cross-source data aggregation problems. | |
| The Rise and Economics of Micro-Brands | 4 | 3 | 2 | 2 | Sonal questions whether micro-brands are media hype. Ryan clarifies that he prefers 'emerging brands' because 'micro' implies small scale rather than channel. | |
| Market Proliferation vs Single Brand Scale | 5 | 2 | 2 | 3 | Sonal offers a sharp distinction in the consumer debate, noting that consumers do not want fewer choices but rather relevant choices presented accurately. | |
| Data Ingestion Hurdles in Legacy Retail | 6 | 3 | 1 | 1 | Sonal makes an insightful comparison between traditional CPG data adoption hurdles and Detroit automakers trying to transition into autonomous vehicles. | |
| CPG Cost-Cutting and the R&D Squeeze | 5 | 5 | 1 | 1 | Ryan surprises Sonal by revealing CPG companies spend only 2% on R&D versus 14% in tech, which Sonal correctly attributes to activist investor cost-cutting pressures. | |
| Quantitative Venture Capital in CPG | 6 | 3 | 2 | 5 | Sonal challenges the quant VC model in CPG, asking if algorithmic investing misses outsized outlier winners and citing SaaS developer heat and alternative data. |
Statements from this episode (27)
Jordan: Fewer than five U.S. e-commerce companies hit $1B and stay profitable
“So, you know, one of the big secrets in e-commerce is virtually no companies get big and make money in the United States on e-commerce. I can name five e-commerce companies in the U.S. After two decades of investing and God knows how many tens of billions of d…”
Caldbeck: DTC customer acquisition costs often jump tenfold within two years
“We see a lot of DTC companies raise money, you know, with a CAC, let's call it 10 dollars, 30 dollars, and then over the course of the subsequent two years, it raises literally sometimes by an order of magnitude, and that is just killing their profitability.”
Jordan: Legacy CPG giants have lost the ability to innovate
“The CBG companies, large ones have lost the ability to innovate.”
Jordan: Big CPG and big pharma share identical externalized innovation models
“So it and biotech are kind of the same. The big pharma companies are buying their innovation. The big CPG companies are buying their innovation.”
Caldbeck: Direct-to-consumer is best used as a product iteration channel
“So when we say it doesn't work, I think it is an incredible channel for iterating on a product. I think it drives innovation. I can find my consumer base and I can test a new product. Next month I can test a different product. That's very different than the of…”
Jordan: Growth-challenged DTC brands are turning to offline retail
“All the companies that are getting challenged, growing, continuing to grow DTC sales are turning to offline retail in different forms. Every company I've worked with is trying to do that because incremental sales.”
Caldbeck: Failed physical retail expansion can kill early CPG companies
“So if you think of like the CPG products, they're selling through a third party, the retailer. Now they have to make a much bigger bet. They can't usually just start in five safe ways. So they have to start in 200. Now when you start in 200, flipping that and …”
Caldbeck: Credit card data shows merchant total sales, not SKU-level purchases
“The problem with credit card data is it can tell you what the retailer is selling, not what was bought at the retailer. So I can see what Nordstrom.com sales were last month. I can't see what pairs of jeans were bought there.”
Jordan: Instacart's triple-sided revenue model made it compelling to a16z
“One of the key things that was compelling about Instacart to us is that they have a revenue stream from the consumer, revenue stream from the grocery retail partner, and a revenue stream from CBG companies who are interested in accessing the consumer.”
Jordan: Instacart offers CPG brands their first performance marketing channel
“Why the CBG companies were so interested in that is it's the first performance marketing they've ever seen.”
Caldbeck: Physical grocery stores will endure for at least 20 years
“I think grocery stores are here for the very, very long term. Very long term meaning next 20 years at least.”
Caldbeck: Grocery operates on thin 2-3% net margins, limiting tech disruption
“Grocery today, two, three percent net margin business. That's hard to strip out a lot of costs from that.”
Jordan: a16z invested in Instacart viewing grocery stores as distributed warehouses
“We made the Instacart investment in the belief that the grocery stores are there. It's distributed. They have distributed little warehouses.”
Caldbeck: Traditional retail data providers cover under 5% of CPG brands
“You've got a couple retail level sales providers that on average track 20, 30,000 Products or companies rather each. There's about a million and a half out there. A million and a half, and they cover less than five percent of them.”
Jordan: Physical retail buyers select products using instinct, not data
“I mean, it's hard to understate how blind most buyers at most physical retailers are right now. Yeah. They're just kind of, it's instinct.”
Caldbeck: Consumer receipt apps fail to capture long-tail CPG data
“The challenge has been many of them tap out at five, ten million consumers, at least here in the U.S. The problem with that level is that then that's such a small portion of the pot of the overall population that you're not capturing the long tail of companies…”
Caldbeck: Offline retailers are eliminating or lowering product slotting fees
“Many of the offline retailers are eliminating or lowering slotting fees.”
Jordan: eBay required $11M minimum spend for TV advertising campaigns
“When I was Managing eBay, you know, we were doing TV, and it was a million dollars to produce an ad, and then, you know, ten million dollars to distribute it with a frequency that the brand people thought was efficient. So, eleven million dollars was the ante …”
Caldbeck: Future CPG brands won't reach multi-billion-dollar scale
“There will be more of them, but they will get to a smaller level. So what I mean is it lasts 10 or 15 years, the brands that won, Chobani, et cetera, you can build multi-billion dollar businesses. I'm skeptical if that's true in CPG going forward.”
Jordan: The total grocery market is growing 1% to 2% annually
“I mean, it's almost math because the total grocery market's growing one or two percent a year. If the number of brands proliferate, the average revenue per brand should come down.”
Caldbeck: Web data covers 30-50x more CPG brands than legacy sources
“Covers 30 to 50 times as many companies as your existing data source does.”
Caldbeck: Large CPG companies spend only 2% of sales on R&D
“So today, large CPG spends about two percent of sales on R&D.”
Caldbeck: Quantitative VC will emerge in CPG, but is impossible in tech
“In CPG specifically, there will be quantitative VC firms... We think that that is possible in some industries in the private markets. We don't think it's possible in tech.”
Caldbeck: Consumer sector winners grow in highly similar, predictable ways
“When you look at the winners and consumer, the previous winners looked really similar. That might have been a different, might have been a different magnitude, but they grew in really, really similar ways.”
Jordan: Kind Bar's core innovation was see-through packaging showing real food
“The biggest innovation for Kind Bar, from my perspective, is it's see-through, and you can see that there's real food in it.”
Jordan: Tech's biggest winners initially look like non-obvious niche ideas
“Most of the huge winners are lightning strikes. Facebook was the second or third social network, but you know, no one was thinking social networks when they talk about a trillion dollar company. EBay was Collectibles online, weird Facebook, hot or not, you kno…”