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For my first post on building a reading list, it's only appropriate that I kick things off with the book I send to every new hire, strategic partner, client, and new-to-CPG entrepreneur I work with: "Extra Virgin Olive Oil: The Truth In Your Kitchen" by David Neuman. I first crossed paths with David Neuman when one of my mentors, longtime category management expert Maria Reyes, had me sit in on a category review meeting with him. I remember that meeting vividly. Mr. Neuman had a commanding physical presence in the room, but he also possessed a unique ability to listen. He focused so intently on others' words that you felt his attention was almost tangible. At the same time, he delivered rebuttals and commentary with a booming voice and an air of confidence that clearly showed he knew his subject matter inside and out. As a 20-year-old sitting in the corner, I had no clue what he was talking about. But one thing was certain—HE knew exactly what he was talking about.

"EVOO" isn't your typical senior executive swan song that waxes poetic about cookie-cutter leadership techniques while bidding adieu to a long-tenured career. Instead, Mr. Neuman writes in a style that's equal parts memoir and how-to guide on building a retail-oriented brand. It's peppered with funny, sometimes aggravating examples of the distinct cultural differences between running a business in America versus the more Mediterranean/Euro-centric approach to relationship management. The moments where Mr. Neuman finds himself the veritable middleman—bridging the centuries-long muscle memory of Europeans running multigenerational companies with the more rigid, formulaic standards of the American grocery industry—leave the reader grateful they don't face that additional layer of complexity in running their own business.

The Importance of Transparency in Food Products

A central theme woven throughout the book is the crucial role of transparency in labeling and sourcing within the consumer goods industry. American consumers are becoming increasingly knowledgeable about their food choices each year, and Mr. Neuman's career spans the evolution from "it's just olive oil" to "is this virgin or extra virgin?" He delves into the painstaking educational efforts he undertook to become a voice in the informed consumer movement—a task that remains ongoing. This book not only provides valuable insights for anyone who cooks with olive oil but also offers a robust blueprint for CPG leaders in emerging or innovative categories. It demonstrates how embracing transparency across various aspects of product development can help create a strong educational framework for messaging.

Spotting And Avoiding Misinformation

Mr. Neuman dedicates significant attention to the misconceptions, myths, rumors, and outright falsehoods that have plagued the olive oil industry for centuries. He not only explores many of these in the book but also excels at translating intricate details—known only to olive oil experts—into concise, easily digestible information that can be quickly shared in a grocery store aisle. Recognizing that a consumer typically spends only 6 seconds reading a label or 12 seconds interacting at a store or event, this book excels at both identifying the roots of misinformation and providing top-notch examples of how to combat it in an approachable manner.

Quality Control in CPG

One of the most endearing aspects of the book is Mr. Neuman's genuine passion for quality—a trait often overlooked when scaling brands. While he covers the expected quality control processes, he also vividly illustrates the tough decisions required when quality is held in equal regard to revenue. He doesn't shy away from discussing the difficult choice of destroying products that might be considered "acceptable" for U.S. consumers, rather than compromising the brand's promise. It's a tough pill to swallow, but Mr. Neuman handles it incredibly well.

Consumer Education as a Competitive Advantage

As mentioned earlier, consumer education occupies a significant portion of "EVOO." What works well here isn't just the typical educational aspects woven into consumer-centric marketing efforts—such as white papers dressed up as advertorials or carefully co-authored articles in major publications with celebrity chefs—but also the more intimate side of consumer education. There's an emphasis on meeting consumers where they are and communicating with them in a way they understand. This skill, much like a muscle, needs to be trained and refined over time. Mr. Neuman not only preaches this approach but also practices it, as evidenced by his anecdotes of in-store demonstrations. My favorite story is when he noticed a shopper in the olive oil aisle, clearly overwhelmed by the endless choices. He took a brief moment to offer her a small tip on what to look for on a bottle to ensure a quality choice. It's crucial for brand builders to remember that consumers are your best—or worst—walking billboards. Even if not brand-specific, educating consumers at every opportunity about the nuances of a category elevates the entire category.

My Recommendation

There's a reason this is the first book I give to colleagues and partners when we start working together: it simplifies a complex industry while weaving together compelling personal and professional narratives. For consumers unfamiliar with the industry, it serves as a guidebook on selecting high-quality olive oil. More importantly, it fosters empathy for the intricate process of bringing products to grocery store shelves. For rank-and-file CPG employees, it offers a raw, behind-the-scenes look at the tough decisions senior executives face—decisions that may seem nonsensical or contrary to successful business management. Lastly, it provides senior leaders and entrepreneurs with a relatable tale from the trenches, encouraging them to step back and reassess their actions in light of their mission.

I hope you enjoy this book as much as I did. Here's to a great read and, perhaps, to inspiring a few more people on this planet to drizzle some EVOO on their vanilla bean ice cream.

Good Reading and Good Eating -John Henry

You can buy “Extra Virgin Olive Oil: The Truth In Your Kitchen” on Amazon, here.

Buy The Book Now!

“Mistakes Were Made” is a periodic newsletter by Socratic CPG that dives deep into a case study related to the CPG industry. The newsletter is lengthy and intended to be read over the course of a month and saved for reference as needed by entrepreneurs and team leads. These thought-provoking case studies are not one-size-fits-all prescriptions. All case studies are based on real-world observations; however, I have taken the liberty to anonymize (to protect the innocent) and add a touch of drama (to engage the reader). I hope you find them thought-provoking and entertaining.

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Executive Summary

Distributors play a crucial role in the Consumer Packaged Goods (CPG) industry as intermediaries between brands and retailers. They provide value by consolidating volume from numerous brands and items into centralized warehouses, known as distribution centers (DCs). This enables retailers to easily replenish their shelves with the right amount of each item and allows brands and manufacturers to efficiently ship large quantities of products to fewer destinations. In recent years, distributors have modernized their operations by developing professional sales teams and expanding their services beyond logistics and warehousing. They have also taken on the role of financial intermediaries, processing billions of dollars in payments between retailers and brands. Given the increasing reliance of retailers on distributors, it is crucial for brands to establish and maintain strong working relationships with their distributors.

In this case study, we will examine the sales impact of a change in the relationship with a key distributor at Brady's Bark, an organic chocolate snack company. Brady's Bark, with a 20-year history, established itself as the first brand to introduce an artisan-style chocolate bark snack made with organic fruits and nuts. This product was able to be produced on a large scale while maintaining consistent size and weight, which was important for national retailers. By developing a manufacturing process that replicated the appearance and texture of chocolate bark typically found in local candy or fudge shops, Brady's Bark successfully transcended the limitations of being a hyper-local product and built a national brand.

The Case

When Brady, the founder of Brady's Bark, first entered the retail industry, she initially targeted the natural channel. She recognized a gap in the market for a consistently sized, high-quality chocolate treat with an artisan touch. At the time, she was self-funding the business and dedicated her weekends to manufacturing the product and weekdays to selling it. With her empathetic and friendly selling approach, she quickly proved herself as a skilled salesperson. Brady understood that in order to scale her business, she needed to hire personnel for operations and manufacturing, allowing her to focus on sales. After all, the brand was her creation, and she was intimately familiar with every aspect of the product. The brand truly reflected her personality, and she embodied the essence of the brand.

As Brady's success continued to grow, she discovered that her largest distributor was assembling a sales team. This team would not only be incentivized to increase sales with retail partners, but also to increase the number of unique products (SKUs) that the distributor serviced. The distributor believed that having more SKUs purchased by a retailer would create a sense of "stickiness," making it difficult for the retailer to switch to a different distributor. (Note: In the United States, distribution is traditionally driven by retail. This means that if you want to sell your products to a specific retailer, you need to work with a designated distributor. In other locales, if you want to buy products from a specific brand, the retailer needs to purchase them from a designated distributor.)

Brady saw the creation of this sales team as a cost-effective way to expand her own sales efforts. She took advantage of this opportunity by attending regional sales team meetings and providing 15-minute "brand trainings." She armed the sales teams with samples, coupons, one-pagers, and special deals. Brady's friendly demeanor gained her many fans in the industry. Not only did the distributor's sales team begin promoting her product to their retail customers, but she also received numerous invitations for ride-alongs and category review meetings at natural chains across the country. Brady never missed a sales call and, within 5 years, achieved 90% distribution in the natural retail channel. This impressive accomplishment did not go unnoticed.

The natural channel has always been seen as the sandbox of the grocery industry. It is a nimble channel that fosters innovation and is quick to identify consumer trends' successes and failures well before they become mainstream. That is why traditional grocery stores like Kroger, Albertsons, and Publix, as well as Multi Outlet retailers like Walmart and Target, have always monitored the developments in the natural channel. They aim to leverage the successes of this channel and incorporate them into their own strategies as "safe bets."

Brady's 90% channel-wide distribution not only attracted the attention of super-regional and national retailers, but her consistent sales growth and ability to maintain product quality secured her success. As a result, Brady and her distributor sales team expanded their presence into non-natural stores nationwide, across all sales channels. After 15 years of establishing a natural brand, venturing beyond natural retail and entering the mainstream market, and with a strong e-commerce site, Brady's Bark achieved an annual gross revenue of $30 million. Brady herself became a shining example of success in the natural consumer packaged goods industry.

Throughout her growth, Brady carefully expanded her team in an asset-light approach while still leading her sales efforts. After a comprehensive business planning review led by her closest advisor, she realized that her success outside of the natural channel could be even greater if she allocated resources to expand her store count in those channels. With a profitable enough business, she was able to hire a qualified sales executive to take charge of this task. After an extensive search, she found a candidate who met all her requirements and assigned him the responsibility of expanding the store count in non-natural channels. After observing his performance for a year, Brady recognized his capability and promoted him to oversee sales across the entire company.

Due to Brady's longstanding relationship with her distributor and her decision to maintain natural channel sales during the first year of her new sales executive's tenure, she handled the typical growing pains with her distributor in her usual manner: professionally, pleasantly, and with a collaborative spirit. Internally, the employees at her distributor who worked with her always had confidence that Brady would address any problems that arose and that they would work together to find productive solutions. This exemplified the ideal relationship that every distributor desires with their brand partners.

To grant full autonomy to her recently promoted head of sales, Brady made a deliberate effort to refrain from interfering in the daily progress of the sales team. As the CEO, she shifted her oversight from receiving tactical weekly sales updates directly from her team to receiving monthly updates from her head of sales. This transition proved successful, as sales continued to grow, store counts in new channels met expectations, and Brady experienced a return to a more regular daily schedule that she had not enjoyed in over 16 years.

Just over a year into his new role as head of sales, Brady noticed that the updates she was receiving showed signs of slowing growth in new channels. Additionally, her sales in the natural channel consistently dipped below 1% year over year, resulting in losses. The head of sales started presenting updates with less quantitative analysis and more anecdotal notes on the industry trends, which seemed to justify the company's changing performance. Brady didn't see any cause for concern as everything seemed to align cohesively. They believed it was simply a change in market conditions that they were working on weathering, and were assured it would pass.

Brady observed several months of stagnant sales, but was not overly concerned as occasional plateaus are common, especially after achieving a significant market share in a category. Brady's primary focus was on maintaining the current trajectory and addressing any areas where her brand was underperforming. However, the results of category reviews conducted by retailers and distributors caught Brady off guard. She received a series of devastating results: Brady's Bark was losing shelf space in every major retailer in the market. While not as severe as complete discontinuation, the reduction in the brand's presence would have a significant negative impact on its performance and the company as a whole.

Brady immediately reached out to the category managers she knew to discuss the criteria they used to determine the need to scale back her presence. Disturbing feedback was received regarding a lack of transparency from her company and the increasing difficulty of working with Brady's Bark. Despite having built a successful category over the years, which now had enough players to sustain it, national retailers were not only considering the merits of a product, but also the ease of doing business with a brand partner when all other aspects were relatively equal. Ultimately, the reduction in the size of the Brady's Bark brand block on store shelves was a test conducted by retailers to gauge customer response to increased selection in the category. If the data shows positive results and Brady's Bark continues to be "difficult to work with," this reduction in shelf space could easily lead to the brand being completely removed from stores.

Aside from the anecdotal feedback from retailers, there seemed to be a more concerning common thread running through most of her conversations. Her distributor was sending its brand and item lists for the category to its retail partners before the category review periods, along with rankings and recommendations. However, Brady's Bark was no longer labeled as "Add/Keep" as it had been for years. Instead, the distributor recommended "Rationalize" for Brady's Bark. This recommendation was made company-wide during its own category review period, which the results stand for 12 months and is distributed to all retail partners as a value-added service. This dealt a devastating blow to Brady's Bark and its strategic plan for the future years.

Brady assigned her head of sales to coordinate a Top-To-Top meeting with the distributor. She wanted to have a discussion with the key decision makers present to understand the reasoning behind their decision. However, the distributor declined the request for a Top-To-Top and instead proposed an in-person meeting with the category manager, VP of category management (CM's boss), the buyer assigned to Brady's Bark, and VP of supply chain (Buyer's boss). Although they accepted this meeting, Brady knew that the distributor's refusal for a Top-To-Top, which had never happened before in their relationship, was not a positive sign. Despite not fully grasping the seriousness of the situation, she was prepared to actively engage and find a solution, as she had done in the past.

As our readers can already guess, this meeting did not go well for Brady's new head of sales. The distributor's team was clearly tired and frustrated with their working relationship after her departure from an active sales role, and they were not holding back on their honest feedback, with her present in the room. She quickly realized that her company had gone from being a collaborative, solution-based partner to the distributor, to becoming a confrontational, unaccountable vendor solely focused on results. There is a delicate balance between partnership and achieving results, and Brady's Bark, as a company, shifted heavily towards prioritizing results. Ironically, this imbalance had a negative impact on their overall performance.

Due to the long lead times associated with category reviews, Brady's Bark experienced a significant loss of market share in the category. Competitors not only gained ground, but those with unique offerings began to thrive. Winning and maintaining shelf space is often likened to a battle, where efforts can lead to rapid growth or loss. The space that Brady's Bark lost not only slowed the company's momentum in the year following a challenging category review cycle, but predicting how the next few years will unfold is nearly impossible. Can a quick pivot help minimize losses? Will the entry of competitors on the shelf further accelerate losses, or will consumers try the new options and realize they still prefer Brady's Bark? Consumer preferences are unpredictable, making it difficult to forecast.

Analysis: Relationships Have Consequences That You Influence

The algebra of success is straightforward, but the benchmarks you use to measure it can change. This was demonstrated in real life at Brady's Bark. As an organization, they entered the next phase of their brand lifecycle, where success meant growth. This growth was measured by increased store count, velocity, and revenue. However, after making a pivot, they had to quickly redefine success. Their new goals were to minimize losses, repair relationships, and save the business.

In the consumer packaged goods (CPG) industry, it is common to view middlemen, brokers, and distributors as intimidating figures. They handle the intricate aspects of the business that would otherwise make it challenging for new players to enter the CPG market. However, this should not give them a free pass for their historically tedious and sometimes outdated policies and processes, which can lead to errors and complications. Nevertheless, it is of utmost importance for brands to approach them as partners rather than adversaries.

The CPG industry may be small, but it holds a significant share of the population's daily spending power. It is a close-knit community where reputations matter. Therefore, it is essential to maintain strong relationships and approach everyone and every issue with respect. By orienting yourself and your team around partnerships, you will be surprised by how many people are willing to offer assistance without expecting anything in return.

Resources

Feel free to use these resources in your own decks and presentations.

Socratic CPG

Socratic CPG is a boutique consulting firm that specializes in supporting the success of Better For You focused consumer brands. Our areas of expertise include startup coaching, profitable scaling, asset light operations, and distribution strategies. For more information, please visit our website at www.socraticcpg.com or reach out to John Henry directly at JohnHenry@SocraticCPG.com.

“Mistakes Were Made” is a monthly newsletter by Socratic CPG that dives deep into a case study related to the CPG industry. The newsletter is lengthy and intended to be read over the course of a month and saved for reference as needed by entrepreneurs and team leads. These thought-provoking case studies are not one-size-fits-all prescriptions. All case studies are based on real-world observations; however, I have taken the liberty to anonymize (to protect the innocent) and add a touch of drama (to engage the reader). I hope you find them thought-provoking and entertaining.

Subscribe now

Disclaimer

While “Mistakes Were Made” is supposed to be a set of case studies amalgamated from experiences and cases witnessed by myself, this particular article will deviate from that format. The following is a skinnied down version of my real life experience becoming a category manager. In this instance, the singular “Marsha” represents the small handful of mentors who guided me through my journey of not only becoming a category manager, but also “growing up” in the corporate world. To those folks (they know who they are), I will forever be grateful. -John Henry

Executive Summary

A young category analyst is promoted to Category Manager and gains complete control of a small handful of categories for their retailer. In his first category review, he overloaded the categories with numerous options. While the vendor-facing work and building out such a wide-ranging assortment was exciting, he went took it too far. After two years, his bosses asked him to scale it back. They changed his reporting structure so that he would report to a category director with decades of retail category management experience. The director would mentor him on effectively managing a category and its vendor relationships. The first lesson was about the power of limiting choice.

During a single review period, the category manager streamlined the assortment to provide a A/B/C option for each set of items. This transformation significantly improved the category's financial and productivity performance. Customer feedback also became more positive, and cashiers noticed that customers were no longer complaining about not finding items at the checkout. Through a series of ups and downs, and with the patient guidance of his mentor, the category manager learned how to strike a balance between customer satisfaction, vendor performance, and financial performance.

Background

JB's Market is a super regional grocery chain with 10 stores located in the suburbs of Chicago. Known as JB's within its communities, this multigenerational family-owned chain has established itself as the heart of each community it serves. It's the kind of place where the butcher knows your dad's favorite steaks and the florist will remind you of your mom's birthday if they haven't seen you come in yet to buy her flowers and a card.

Our case study focuses on Henry, a young category analyst who has been with JB's for several years and was recently promoted to Category Manager. Henry deeply enjoyed his role as a category analyst and had demonstrated a genuine passion and talent for developing expertise in category management. The management team at the corporate office, located above their flagship store in a small set of offices, decided to assign Henry a group of non-volatile and relatively old-fashioned categories to manage independently. They wanted to provide him with an opportunity to prove himself, fully aware that even if he didn't succeed, it would be challenging for him to harm these categories. The assigned categories were: Shelf Stable Olives/Pickles/Peppers, Condiments (excluding BBQ sauce), and Canned Fruits/Vegetables.

While we will briefly touch on the first two years of Henry's tenure as a category manager, the majority of our focus will be on how his mentor, Marsha, guided him through the process of streamlining his assortment, navigating difficult vendor conversations, meeting corporate expectations, and the ultimate consequences of offering a limited but carefully curated selection on customer satisfaction, vendor satisfaction, and profitability.

Blowing Up The Assortment

When Henry first became a category manager, he became enthralled with the most exciting aspect of the role: brand building. The feeling of satisfaction and excitement a category manager experiences from being the first to introduce a product to the market, placing it on the shelf, and giving the dreamers behind the product a chance at success is immense. This thrill only grows stronger as a constant stream of vendors and brokers visit the office, their persuasive pitches creating an overwhelming sensation of power. However, for Henry, this enthusiasm turned into a two-year period of what could be best described as "assortment bloat." The store shelves began to reflect his personal preferences rather than meeting the actual needs of the customers. Having 8 different varieties of spicy pickles and 6 different types of canned green beans not only confuses customers trying to find what they want, but also adds complexity to vendor management and supply chains.

A One Cycle Course Correction

After a minor reporting change, Henry began working closely with his new boss, Marsha, to strike a balance between staying on trend, offering customer-centric choices, and maintaining a profitable assortment. Marsha first instructed him to analyze a 5-year dataset and identify the "stalwarts" within each category. Stalwarts refer to items and brands that act as anchors, allowing for experimentation without causing significant disruption to the category. To identify the stalwarts, Henry examined the data and singled out items that consistently generated a disproportionate share of sales over the entire reporting period. Once he had compiled this list, he had a foundation on which to build a new assortment strategy.

With the base established, Marsha then asked Henry to review each subcategory and select three options for each item based on quality and price: A, B, and C. A-items represented top-tier selections with high quality and high prices, while B-items offered good value for money with strong quality and price points. C-items were designated as value-based options. Henry was instructed to only select three SKUs for each type of item, unless he had a strong justification for adding more. In such cases, he had to rank the items and provide a written justification to Marsha explaining why additional SKUs were necessary for that particular type of item.

By requiring Henry to rank his selections and provide justifications for expanding the assortment, he realized that not all of his initial decisions could be justified. For the ones that could, he had conducted thorough research to support the decision to include more than three SKUs. This process prompted Henry to be more deliberate and methodical in his decision-making compared to previous years when he relied solely on his instincts without considering data or having any guidelines.

After completing the data review and vendor meetings as part of his category review process, Henry finalized his new assortment for the upcoming year. The assortment focused on a limited but carefully curated selection of choices per item. Items without significant innovation were typically limited to three SKUs of varying quality and price, while items with notable innovation had up to six SKUs. This streamlined approach not only made it easier and faster for consumers to make decisions but also allowed Henry to prioritize innovation when applicable.

Difficult Conversations Require Transparency

Once Henry finalized his assortment, he had to communicate his decisions to the vendor community. This task was challenging for Henry because in his first two years on the job, he had a tendency to say "yes" to anyone who presented something cool to put on his shelves. To help him with this, Marsha asked Henry to write down concise bullet points outlining the criteria he used to make his decisions. She also had him go through each subcategory and write at least two bullet points detailing what he is looking for in the future.

Marsha understood that there would always be pushback from brand sales teams when they received a decision that didn't favor them. By having Henry take the time to document his guidelines and expectations, he not only created a set of rules for reference during those conversations, but he also became more confident in communicating his expectations. When faced with pushback, Henry was less likely to back down from his decisions because he was well-informed and confident in his decision-making process.

Finally, the time came for Henry to communicate his discontinuation notifications. Instead of sending a blanket email with an Excel file to all vendors and brokers, Marsha advised him to provide an honest and transparent response to each brand, explaining why he made his decision. Following Marsha's advice, Henry wrote an email to each brand, informing them of the news and sharing the criteria he used to make his decision. He also included his two bullet points outlining what he was looking for in the future.

The CPG industry is small, and trust and honesty are essential for building successful billion-dollar brands and retailers. Henry's personalized discontinuation notices not only provided transparency on why brands didn't make the cut, but also offered each brand a roadmap of his expectations for future consideration. Brand salespeople appreciated and respected the effort and honesty Henry put into communicating his decisions. Additionally, Henry made their job easier for the following year by providing guidance on how they could adjust their offerings for a better chance of placement in the future.

Analysis: Strong Results and Stronger Relationships

After the category reset, feedback started pouring in. The initial feedback came from customers and store associates. Customers found everything they were looking for, spent less time deciding what to buy, and associates spent less time assisting customers with product selection. Operationally, shelves were restocked more quickly, store-level reordering became easier and faster, and the reduced number of unique SKUs decreased out-of-stock situations. Both in-store and in the backroom, the feedback was overwhelmingly positive.

Internally and financially, Henry's refined assortment met the expectations set for him. Total category sales increased, partly because customers were no longer experiencing decision paralysis. Category margins also grew year over year at a faster pace than expected. This was due to making it easier for consumers to "upgrade" to higher-quality items and the significant reduction in spoilage with fewer options but more facings. These factors greatly improved Henry's category's SKU productivity, a key performance indicator for him as a category manager.

Lastly, Henry's relationships with vendors and brokers had an immeasurable impact as he continued to have honest and transparent conversations about his strategy. Openly sharing his thought process and aligning his thinking with theirs fostered teamwork and collaboration, even when not working together directly. This approach not only benefited Henry but also elevated JB's Market's reputation in the industry as Marsha's vendor management approach was implemented organization-wide.

Related Reading

TED | Sheena Iyengar: How To Make Choosing Easier

In 2015 my own category management mentor gave me this video of Sheena Iyengar discussing her research on choice. It is still required viewing for anyone I work with that is either entering category management or is the decision maker at a brand that has to rationalize their assortment.

Progressive Grocer | Small Formats’ Big Future in Retail

Steven Duffy, a grocery and retail design expert, walks through the key factors driving the change in store sizes. This is an incredibly insightful peek behind the curtain as to the influences driving store size (and ultimately assortment size) decisions in retailers of all formats and sizes.

Supply Chain Quarterly | SKU rationalization: Finding the right balance between too many and too few

A lengthy, but incredibly detailed, white paper laying out the push and pull forces surrounding SKU rationalization. This white paper includes rationales, formulas, and real data around reducing SKU counts.

Resources

Feel free to use these resources in your own decks and presentations.

Socratic CPG

Socratic CPG is a boutique consulting firm that specializes in supporting the success of Better For You focused consumer brands. Our areas of expertise include startup coaching, profitable scaling, asset light operations, and distribution strategies. For more information, please visit our website at www.socraticcpg.com or reach out to John Henry directly at JohnHenry@SocraticCPG.com.

“Mistakes Were Made” is a monthly newsletter by Socratic CPG that dives deep into a case study related to the CPG industry. The newsletter is lengthy and intended to be read over the course of a month and saved for reference as needed by entrepreneurs and team leads. These thought-provoking case studies are not one-size-fits-all prescriptions. All case studies are based on real-world observations; however, I have taken the liberty to anonymize (to protect the innocent) and add a touch of drama (to engage the reader). I hope you find them thought-provoking and entertaining.

Subscribe now

Executive Summary

Item changes are often necessary during an item's lifecycle and can result from customer feedback, regulatory concerns, or profit motives. Due to the complex nature of the CPG ecosystem, the success of an item change is not measured solely by whether the update was pushed to the shelf. Instead, success is determined by evaluating whether the process was smooth and whether the costs, both in terms of time and money, were appropriately forecasted. In short, the more seamless the change for the brand, its partners, distributors, retailers, and consumers, the more successful the change was.

Neville And His 2oz Catnip

Neville is the CEO of a shelf-stable cat food company selling D2C and B2B. Two years ago, Neville’s company introduced a line of catnip to their assortment, but the co-packer that had the capability to fill their specific jars and the capacity to take them on in the timeframe they needed was unable to completely fill the 2oz jar due to the straw-like consistency of the catnip. Neville’s company decided that expediency was critical and made the decision to under-fill the containers with approximately 1.9oz measure and labeled the jars accordingly. They determined it was better to slightly under-fill each jar and call it out on the label than to possibly overfill the jars, causing quality concerns with completely closing the lids. Reaching a full 2oz fill would be a project they would continue to tackle once the product was in the market.

After two years in the market, Neville has confirmed that the item has a strong market fit and has become a core part of their portfolio. During this time, his team has occasionally attempted to find a solution for a full 2oz fill. They have worked with their co-packer on a multi-year volume guarantee, contingent on the co-packer investing in upgrading the filling machine to prevent overflowing and ensure proper lid sealing. Neville directs his team to commit to the co-packer's terms and begin the process of changing the item.

Neville's teams are anchored by their senior executives: a CMO who leads sales and marketing, a COO who focuses solely on manufacturing and logistics, and a CFO who leads finance and operations. With enough VC funding to not have to focus on being scrappy, Neville's organizational design thesis centered around "expert brute strength," and he hired his three lieutenants as hyper-focused experts in their respective realms. He gave his lieutenants similar direction in building out their teams, focusing on candidates who were experts and hyper-focused on the competency of their role. Neville's company was now stacked with highly compensated and highly functioning contributors who were solely focused on their respective competencies. While the talent pool of the organization was undoubtedly strong, a weakness throughout the organization was cross-functional compatibility. However, this was accepted as a necessary evil and teams would muscle through how to work together on an "as needed" basis.

After Neville's decision to move ahead with extended terms with the catnip co-packer, each executive began their respective tasks. The CFO amended the agreement and developed KPIs to stay on track with the new terms. The COO immediately placed production orders with the co-packer and contacted inventory liquidators for the 1.9oz filled product. The CMO made design and creative adjustments and instructed the sales team to submit the changes to brokers, distributors, and retailers. With the team's firepower and the slight adjustment being made, Neville and the CFO forecasted the change would be executed within six weeks.

All teams worked efficiently and completed the change by week six. The internal metric of completion was determined as the moment old inventory was liquidated, and new inventory was slotted into the warehouse within days of each other in the final week. On Thursday afternoon, the COO informed Neville and the other executives that the change was complete, and congratulations were delivered. Neville felt strong in his conviction that his organizational design thesis continues to stand the test of scaling up a growing firm.

During week 7, purchase orders from distributors and retailers start coming in, but they still refer to the 1.9oz description. The customer service team responsible for entering the orders assumes that superficial details take a long time to be updated on item descriptions, so they do not raise any concerns to the sales or operations teams. Similarly, the operations team determines on their own that they can fill the orders with the new product they have in stock, and ships them to their destination.

By week 8, the first purchase orders placed after the internal change was finalized and deemed successful begin to arrive at the docks of distributors and retailers. Here, the products are inspected, counted, and checked into their respective systems. During the check-in process, the UPC is verified (in this case, it remained the same because the change in size was less than 20%) as well as the size.

However, the physical size of the item on the dock (now labeled 2.0 oz) does not match the size in the system (1.9 oz). As a result, the system will not allow the pallets of product to be checked in, and the receiving departments reject them. These pallets of product are subsequently quarantined within the warehouse and added to the list of daily issues that need to be processed within 24 hours.

Neville's logistics team has started receiving emails from customer receiving docks indicating that the pallets are being rejected due to disparities in item specifications. The team needs to make arrangements for the product to be returned to Neville's warehouse. They have started the process of scheduling logistics services to bring the product back while also escalating the issue internally.

Due to their efficiency, Neville's logistics team consistently schedules these return deliveries for the morning following each issue that arises. As a result, the pallets are quickly returned to Neville's warehouse.

Due to the significant costs associated with carrying inventory, the Consumer Packaged Goods (CPG) industry has adopted a "just-in-time" logistics model. Under this model, customers (distributors or retailers) calculate their average daily volume sold, the amount of inventory they have on hand, and the lead time required to fulfill a replenishment order. They then place a purchase order with their vendor (in this case, Neville) on a day that ensures they will have "just enough" inventory to get them through a few more days when the product is delivered to their warehouse. Although this approach can be challenging and requires accurate forecasting models, it reduces warehouse inventory costs and minimizes the risk of product spoilage or expiration. Therefore, transitioning to a just-in-time model is considered a worthwhile investment. This inventory and logistics model is used not only by distributors but also by retailers, as it reduces the size of back rooms required to store inventory in stores and the size of their own warehouses.

By week nine, Neville's sales team began receiving emails from its brokers, distributors, and retailers stating that their catnip was no longer in stock in warehouses and there was empty shelf space in retail stores. As the days passed, the number of concerned emails and phone calls only increased. Neville and his team had done an excellent job over the last two years of increasing their market share in the catnip category. They had consistent repeat customers, and every major retailer in the country either already had their product on their shelves or was in the process of doing so. However, they were now out of stock nationwide. Distributor racks were empty, and competitors were double-stocking their slots on retail shelves with the empty space left by Neville's product. Neville is not only losing customers today, but also a significant percentage of customers who transition to other brands today may not transition back to Neville's catnip once it is back in stock. The most aggravating part is that Neville is sitting on a warehouse full of freshly produced product, and the only way it can leave the loading dock is through e-commerce orders.

What went wrong? How quickly can this be resolved? Could this have been prevented?

Analysis

Internal Factors

Silo’d nature of COO and CMO structures

The most obvious point of failure in Neville's organization is the siloed nature of its functions. Such silos often form due to a lack of cooperation among teams or leadership, but in Neville's case, there was no surface-level animosity among them. The problem was that Neville opted for a company full of hyper-focused experts, instead of an organizational design of experts as a center of gravity with well-rounded "pros" surrounding them. While this can create excellent work products, it also creates a culture of staying in one's lane and never venturing out to think beyond one's own realm. In the consumer packaged goods industry, an organization needs to think four or five orders beyond to survive.

Reliance on the COO for a single KPI of success

Neville's organization doesn't promote cross-functional work, and as a result, Neville and the CFO didn't consider the need for multiple KPIs across a prolonged timeline to accurately measure the success of changing the catnip item. After getting input only from the COO on the operational steps involved in the change, they set a completion date and deemed it a success. Although it was reasonable to draw a line in the sand at 6 weeks for "internal transition, phase 1," the critical failure was stopping the process there. If Neville and the CFO had consulted with the CMO as extensively as they did with the COO, they would have realized that a "phase 2" was necessary, with KPIs aligned with customer execution on a slightly longer timeline.

External Factors

90 Day change notice, underweighted sales input

The item was rejected at the receiving dock and ultimately ran out of stock on shelves across the country due to a required notice period that prevented the slightly updated item from being accepted into respective systems immediately. In Neville's case, a majority of his distributors and retailers had 90-day notice periods. This meant that the updated product could not be accepted by warehouses or stores until 90 days after Neville's sales team or brokers submitted the respective change-forms to their customers. Unfortunately, this notice period was not taken into consideration when determining the sole KPI that would determine when the project was complete.

Because the COO was tasked with liquidating the 1.9oz product when the 2oz product was produced, there was nothing to fall back on to fill orders during the notice period. This resulted in the product going out of stock very quickly.

Recommendation

When conducting a post-mortem for Neville's project, it was quickly determined that three factors played equal parts in the new version of the catnip going out of stock at retail. Therefore, not much time was really needed.

When building out a process that Neville's organization can follow for item changes in the future, we need to be aware of his preference for expert-only instead of expert-centered organization building.

Core Themes to Consider Before Tackling Item Changes

When starting these projects, senior executives should emphasize the following themes in their instructions and reiterate them frequently:

• Open lines of communication

  • Keep the lines of communication open by providing regular updates on the project to your boss, teammates, and counterparts in other business functions.

• Comprehensive note-taking

  • Every contributor and executive assigned to the project should take comprehensive notes throughout the process and store them in a communal location for everyone to review. Notes should include conversations with vendors, suppliers, service providers, customers, and internal stakeholders. Team members should take a few minutes each day to review new notes and consider whether they impact their role in the project or if they might affect another team member's role.

Tackling Item Changes

Operations

• Does this require a UPC change? Seek professional legal advice only.

• Initial lead times for updated labels and/or packaging

Sales

• Fact gathering calls with your brokers.

  • Discuss the details of the change with the relevant stakeholders and obtain their high-level thoughts on the requirements for implementation.

  • Internal Takeaway: In two weeks, the sales team should have a plan for how to implement a clean item change with each of their key customers. This plan should include identifying internal stakeholders responsible for form filling, established internal points of contact for manufacturing, logistics, marketing, and finance, timelines for updating the sales deck, sell sheet, and spec sheet, form submission dates, and effective dates. In addition, the sales team should compile a comprehensive cost readout for each key customer, including distributors. While exact numbers are preferable, a formula used by each customer to determine the cost of the change should suffice. This readout should include submission fees, execution/implementation fees, reset/planogram fees, and the formula for how the cost is shared on excess inventory counted on the effective date.

  • External Takeaway: In one week (inclusive of the Internal Takeaway), brokers should have a comprehensive list of all customers and their requirements for item changes. This list should include timelines, key points of contact, flat fees, formulas for variable fees, and respective forms for each customer in which they are required.

• Work backwards to build submission deadlines for all distributors, retailers, and other partners that require it.

Marketing

• Do the labels require updating? Answer with a simple YES or NO.

• Build workflows and timelines for art updates.

• Build workflows and timelines for copy updates.

• Take inventory of marketing assets and determine what needs to be updated and what needs to be disposed of.

• Create a timeline for website updates.

• Designate a quarterback for online and ecommerce asset, copy, and description updates.

Finance

• Conduct an analysis to compare the liquidation and sell-through of old products.

  • This analysis should involve collaboration between sales and operations.

  • No action should be taken until the analysis is reviewed by all stakeholders and the most appropriate path for your business is decided upon.

• Forecast write-downs for raw materials, existing inventory, agreement breaks, and any other applicable costs related to the soon-to-be old product.

  • This needs to be cross-collaborative between sales and ops

• Update your COGS analysis and clearly communicate the margin impact

Related Reading

HBR | Stock-Outs Cause Walkouts

Although published in 2004, this short read is filled with insightful anecdotes that offer additional perspective on the inner workings of retailers.

WSJ | Inside Apple’s Spectacular Failure to Build a Key Part for Its New iPhones

Apple is known for being tight-lipped about internal politics, so the details surrounding their failure to design a silicon chip are a rare treat for leaders interested in the “processes of process.”

Toronto Star | What is ‘skimpflation’? Food companies are swapping ingredients with lower-quality substitutes to cut costs, experts say

A textbook case of not all item changes requiring public notice, the Toronto Star does a good job of discussing "skimpflation" and how ingredient changes are more common than consumers might think.

Mashed | Dark Meat McDonald's Chicken Nuggets Used To Be A Thing

This is a fun and quick read that explains the fact that McDonald's Chicken McNuggets used to contain dark meat. Just a little trivia for you!

Resources

Feel free to use these resources in your own decks and presentations.

Socratic CPG

Socratic CPG is a boutique consulting firm that specializes in supporting the success of Better For You focused consumer brands. Our areas of expertise include startup coaching, profitable scaling, asset light operations, and distribution strategies. For more information, please visit our website at www.socraticcpg.com or reach out to John Henry directly at JohnHenry@SocraticCPG.com.