Source: HBG Brand Growth Research Institute (ID: howbrandsgrow)
Introduction: After this article was published, it sparked many heated discussions among peers, investors, and founders. Behind these discussions lies not only skepticism about the fluctuations in the consumer goods track but also confusion about a series of self-media articles commenting on the consumer goods industry.
Those of us in this industry are experiencing rapid changes every day that previous eras never witnessed. Consumer goods is an industry that is both traditional and ever-new; new consumer brands will always emerge, some will be quickly iterated, and others will rise rapidly. The wave of new consumption continues to surge.
The ebb of capital tide is, to some extent, a good thing for this industry. The heat of bad money driving out good, fueled by capital, is gradually cooling. Only those who can withstand the test of the times, respect basic industry laws, and possess solid systematic brand capabilities have the opportunity to plan and grow steadily.
Many consumer goods founders in the HBG Brand Research Institute neither rely on capital nor care much about external waves and public opinion. They continue to do their basic work well, growing quietly and steadily.
So, republishing this article today is also a hope that more consumer goods peers who respect basic industry laws and possess solid systematic brand capabilities can rise against the wind and get better and better.
Over the past few months, many investor friends have forwarded various articles about the decline of consumer goods, such as:
- "Capital can't invest in consumer goods anymore"
- "What happened to the consumer goods unicorns that burned hundreds of millions?"
- "The consumer goods industry has cooled down"
And so on... But who would have thought that two years ago, all articles said the opposite extreme:
- "The consumer goods track is hot, capital is flocking in."
- "Consumer goods is a once-in-a-lifetime good track unaffected by the pandemic."
- "How did emerging consumer brands become the No.1 in their subcategory within six months?"
Why has public opinion swung to the other extreme in just two years? Is capital finally clear-headed? Or is consumer goods really not a good track? Or can the current environment not produce brands that operate healthily?
Is it the macro environment that's bad, or is competition too fierce? Or is it the founding team's capability issue, or capital's impatience and short-sightedness?
Behind the divergent opinions, there are actually two underlying logics:
- Truth
- Stance
Does the truth of the industry matter? It depends on our stance.
Many of those currently decrying the consumer goods industry are precisely the media and capital that once touted it. It must be said that there are reasons related to stance.
Our stance determines what facts we see and what we proclaim. Stances also change over time; each period may have a different stance.
Here, we set aside all stances and objectively look at the truth of the consumer goods industry.
Is the consumer goods industry a good track?
Undoubtedly, it is absolutely a good track.
Whether proven by economic theory or evidenced by common real-world cases, the consumer goods industry has the following characteristics. It is precisely because of these characteristics that consumer goods becomes a relatively high-yield and safe investment track, and it allows generation after generation of young people to achieve worldly success through consumer goods entrepreneurship.
- It operates in a perfectly competitive market, relatively unaffected by resource monopolies.
- It is relatively unaffected by economic cycles.
- It is relatively unaffected by space and time.
- Entry barriers are relatively low.
- Demand is always strong and continuously upgrading.
- It is an industry that brings immediate cash flow.
- It is an industry that continuously iterates with updates.
Is the consumer goods industry easy to do?
To be honest, it is both easy and difficult.
The ease lies in the relatively low entry barriers; there are no essential technological, resource, financial, or scale barriers.
Thus, we observe that every era produces endless new brands, with many entrepreneurial opportunities and a considerable success rate. Most importantly, consumer goods is a cash-flow industry; as long as you work solidly, you can at least recover your cash flow.
But on the other hand, the consumer goods industry is also difficult, precisely because entry barriers are low, and there are no essential, long-lasting competitive advantages or barriers.
Many investors in consumer goods come from the internet sector and often bring internet investment logic into the consumer goods industry, believing that consumer goods has capital, scale, or technological barriers. But once they enter this industry, they are bewildered to find that consumer goods and internet industries are vastly different.
First, there is no so-called technological barrier in consumer goods. The technological advantages seen in marketing ads are often non-differentiated selling points. In the entire industry, everyone may use the same batch of OEM suppliers; top consumer brands almost all come from the same factories.
Second, there is no strict scale advantage in consumer goods. Leading brands cannot suppress competitors through scale because demand is ubiquitous and constantly iterating, supply chains are open and transparent, and there are many ways for marketing and channel penetration. It is impossible to monopolize through scale.
Third, consumer goods is not a one-and-done industry. It requires daily, persistent penetration to maintain sustained brand growth and expansion.
It is unlikely that you can start a consumer goods business and comfortably retire; unless you quickly sell off or do other capitalization processing.
To be honest, more than 70% of current consumer goods entrepreneurs are starting businesses with the endgame of "capitalization processing" in mind, rather than wanting to build a consumer brand of their own. They are just stuck because they cannot sell or merge for now, so they have to keep working day after day, diligently, in this consumer goods track.
Are today's emerging consumer brands really growing weakly as rumored?
Objectively, some new brands have temporarily stalled, but many new brands are still growing, just that investment conversion rates and profitability have not yet met capital's ideal requirements.
The speed or level of growth is only superficial. As an investor, what matters is not the superficial numbers but the essential drivers behind the growth speed. Without understanding the underlying logic and only staying at surface-level data evaluation, you will forever follow others, drifting with the tide, part of the herd.
In my past "HBG Systematic Brand Course," I have repeatedly dissected the essential drivers of brand growth, which is—big penetration. But big penetration alone is not enough; for efficient sustained growth, you must also build brand value assets. In past courses, I also dissected the systematic methods for building the foundation of brand value.
Currently, different brands may differ in tactical execution of big penetration, such as some being good at Douyin, others at offline. But at the strategic level of big penetration, all brands are the same: they are all racing against time to penetrate more new customers, achieving a superior level of big penetration than competitors.
A core issue here is the investment conversion rate of big penetration. Many authors of articles decrying consumer goods often do not personally operate consumer goods businesses but observe from the sidelines, making it hard to understand why conversion rates fluctuate.
The conversion rate of big penetration in consumer goods generally depends on three factors:
- Platform traffic rules
- Content quality
- The threshold value of big penetration
Many consumer brands are at a similar level in tactical execution of platform traffic rules, but differ in content quality. This includes whether the product matches the platform and scenario (the so-called match of people, goods, and place), as well as the attractiveness and conversion rate of the content itself.
Content also needs to be constantly updated. Platform rules change, competitors catch up, and consumers experience aesthetic fatigue, so teams must continuously update content.
Please note, when I say "non-stop," that is indeed the normal physical state of consumer goods peers. Once you enter the consumer goods industry, you must keep moving; you can't stop, like an arrow shot from a bow.
Additionally, many new consumer brands are not facing content issues, nor are they ignorant of platform rules, nor lacking in media buyers, but they simply haven't reached the threshold level of big penetration, which affects their conversion rates temporarily—this we call "threshold regret." In plain terms, because they haven't reached the threshold level of big penetration, unfortunately, they cannot achieve stable high conversion.
The existence of the threshold is something many onlookers who haven't operated consumer brands don't understand. They might think that as long as content is good enough, high conversion will follow. But in reality, this ideal situation doesn't exist. Even if a single ad placement achieves high conversion occasionally, it cannot guarantee long-term sustained high conversion.
The threshold is a fair existence. As long as a consumer brand's big penetration level hasn't reached a certain threshold, there won't be stable and efficient conversion. This is why continuous capital investment is crucial for consumer brands.
As long as you don't persist in big penetration, and as long as your big penetration level hasn't reached the threshold, don't have any fluke mentality, don't think you can get something for nothing.
Why do some brands in the same category have lower threshold levels, while others have higher ones?
This depends on the quality of the brand, product, and content. The better the brand, product, and content, the easier it is to reach the threshold level, and thus the easier it is to break through conversion bottlenecks.
This is the so-called "bad products need repeated persuasion, while good products speak for themselves" (of course, all based on big penetration).
Moreover, if a brand continuously accumulates and consolidates its brand value foundation during daily big penetration, the higher the degree of penetration, the stronger the brand dividend it enjoys, meaning higher sustained conversion rates.
This brings us to the issue of brand value foundation. In my past "HBG Systematic Brand Course," I repeatedly discussed the topic of building the brand value foundation.
Without a solid brand value foundation, the efficiency of big penetration will decrease over time; the more you penetrate, the harder it gets. The most fatal consequence is—without a solid brand value foundation, big penetration is likely to backfire.
Consumers will only see us as a traffic brand, one that does packaging and gimmicks but makes products with feet. Neither the industry nor consumers will respect such a brand.
Is data fraud common in the consumer goods industry?
Recently, many articles have attacked data fraud in the consumer goods industry. This issue is tricky because it is not a key strategic issue but a minor execution-level problem.
Truly savvy capital doesn't particularly care about these tactical execution issues. Only those with a mess in their heads, lacking underlying logic, and relying on personal limited business experience and strong emotions to observe the industry would pay special attention.
Because data is just a process; the process doesn't matter, what matters is the purpose the process aims to achieve.
If data is purely to deceive investors for financing or deceive consumers, then of course it's wrong, but smart capital often can see through such projects.
If capital discovers a consumer brand's fraud and still invests, there are only two possibilities—either bad or stupid.
Bad means "collective collusion" to deceive the next round of investors who will be "harvested." Stupid means thinking others are like themselves.
But if data is just a phased execution measure for a brand, to meet the threshold requirements of channels, platforms, or influencers, to give good products a chance for exposure, thereby leveraging more big penetration opportunities, and ultimately putting the brand on the right track, this is also a common rule in the industry, a result of mutual influence between platforms and brands.
Of course, we hope that as the industry matures, platform conditions and rules become fairer and more transparent, and the competitive environment becomes more mature, the probability of data fraud in the entire industry will decrease (hopefully).
Are there still relatively healthy consumer brands?
This depends on our definition standards.
If we follow current capital standards—reaching monthly sales of 10 million in three months, breaking even, becoming category No.1 in a year, and going public in two years—then forget it, there are no brands that "survive" or "thrive."
If we follow the normal laws of the consumer goods industry, there are still quite a few brands that meet healthy standards. It's just that capital is not satisfied with the normal laws of consumer goods and always expects higher returns and faster monetization.
So here's a question: what are the normal standards?
Generally, the consumer goods industry has its own growth laws, brand laws, and financial laws.
In the broader industry, each subcategory may differ slightly, but the laws of the overall category are similar—from 0 to 1 requires upfront investment in marketing and channel penetration; there is no ideal situation of output without input.
After crossing from 0 to 1, some brands may enter a healthy financial cycle, but others may experience a period of loss-making growth before reaching a healthy financial state.
In reality, the process of brand growth is not smooth sailing but full of twists and detours. The quality of a team is not the ability to sustain growth but the ability to continuously correct course, because sustained growth is a result, not a cause.
Continuous adjustment, iteration, evolution, and correction are the core capabilities that truly drive sustained brand growth.
In this sense, when investing, the team capability to look at is not the team's glorious past or record of sustained success, but the team's resilience in the face of setbacks, and whether it has strong capabilities for evolution, iteration, adjustment, and correction after encountering setbacks or detours.
Here, we can refer to China's greatest entrepreneurial team, the CPC. The strength of this team is not in "always being right," but in its powerful ability to correct, learn, and evolve.
Are there still new and old brands worth investing in now?
As answered above, there are definitely brands worth investing in, but the question is whether capital can still invest now.
From capital's perspective, the consumer goods industry seems "cold," but from the perspective of consumer goods operators, their feelings towards capital are also cold. So, feelings are mutual, but business goes on as usual.
Business is not easily changed by capital or feelings; good business should be done as it is. After all, if it can be influenced by capital or feelings, it's not a good business.
Currently, not only emerging brands are growing, but traditional brands are also not to be outdone, busy with their "second spring." Many traditional brands, over the past 10 to 20 years, have accumulated strong capital advantages, supply chain advantages, and channel advantages. They are also desperately updating traditional brands and developing new ones.
Old brands are not as outdated and backward as people imagine. Many founders of traditional old brands are still young at heart, ambitious, diligent, and open-minded. They have quietly laid out many new moves, and these moves are things that emerging brands may not be able to achieve without five to ten years. This is the competitive advantage that time brings to traditional brands.
Even many traditional brands have started investing in, incubating, and acquiring emerging brands—from this perspective, it accelerates capital involution.
Now it's not just pure financial investors competing for projects in the market; there are also many industry investors who know the industry well. Their biggest advantage is not the "broad net" of traditional investment institutions, but "high returns and success rates."
To some extent, the ebb of capital is actually a good thing for the consumer goods industry, greatly reducing the probability of bad money driving out good.
Those "bad money brands" that relied solely on large capital investment and rapid spending for growth may, after losing capital support, fall into decline, pause, or voluntarily give up. Meanwhile, those "good money brands" that don't rely heavily on capital and continue to develop quietly will have relatively healthy competitive space.
So, at this time, it's more worthwhile for capital to discover the true good money brands. The tide washes away the sand, revealing the true gold.
Why is the voice of decline so loud now?
What are people's stances?
As we said earlier, everyone's words stem from their stance, and everyone's views are influenced by where they sit.
The current voices decrying consumer goods are essentially the same as the voices touting consumer goods two years ago; both aim to gain more traffic, attention, money, and resources. Because touting consumer goods can bring traffic and money, and decrying consumer goods can also bring traffic and money.
There is also a very interesting phenomenon now: the investment community has introduced many experts from large foreign companies like Procter & Gamble. In the current situation where consumer goods "seemingly" becomes more difficult, these experts can also provide some empowerment and assistance to the industry.
But it's inevitable that there is increasing involution; every investment institution has hired P&G talent, and they inevitably compete internally. From an outsider's perspective, this post-investment management involution may also drive the renewal, iteration, adjustment, and correction of the entire capital community.
In short, for capital and the consumer goods industry, "coldness" is mutual, and involution is also mutual. Good brands are not lacking, and good businesses are everywhere.
Whether for consumer goods peers or investors, the capability to hone is to abandon fancy gimmicks, be wary of emotionalism, return to underlying logic, and continuously correct and evolve.
Are you "watching" me?