---
title: "The Rise of Niche Brands: How Can Big Brands Fight Back?"
description: "Consumer tastes have changed, but their underlying needs have not. By adopting new competitive strategies, large consumer companies can still outperform agile new rivals."
author: "杨立 陈茜"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2018-10-16"
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# The Rise of Niche Brands: How Can Big Brands Fight Back?

> Consumer tastes have changed, but their underlying needs have not. By adopting new competitive strategies, large consumer companies can still outperform agile new rivals.

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**Weed Guide:** Consumer tastes have changed, but their underlying needs have not. If they adopt new competitive strategies, large consumer companies can still outperform agile new rivals.
Today, an undeniable reality is that niche brands are taking market share from big brands. Consumers are applying Caudalie face cream after their morning shower, drinking Peet's coffee and eating Chobani yogurt for breakfast, having lunch at Pret A Manger, and unwinding in the evening with a Ballast Point craft beer.
It is generally believed that new consumers favor healthy, natural food and personal care products, with millennials especially valuing originality over mass production. To win back this new consumer base, large consumer goods companies have few options.
They could either develop niche brands at the risk of diluting focus and resources, or follow the example of 3G Capital (the parent of Burger King, Heinz, and Kraft) in acquiring big brands and boosting returns through deep cost-cutting. **In short, many believe the era of organic growth for big companies is over.**
**We disagree. Consumer tastes have changed, but their underlying needs have not.** With new competitive strategies, large consumer companies can still outperform agile new rivals. In other words, the giant Goliath can defeat the shepherd boy David.
First, they must grasp new trends in consumer needs, uncover unmet needs that niche brands are satisfying, and then build a stronger, complementary brand portfolio. We are surprised that almost no large consumer companies are doing this.
Second, they should learn from small brands and accelerate the adoption of new ways to communicate with consumers.
Third, in a fragmented world, the ability to efficiently meet diverse needs is a definitive competitive advantage.
Fourth, they need to learn the focus, internal collaboration, and speed of smaller competitors. These companies operate on agile principles in startup hubs worldwide, rapidly prototyping, testing, learning, and iterating.
If they do not adapt quickly, today's giants may be forgotten by consumers tomorrow.
Over the past 50 years, multinational consumer goods companies have created strong shareholder value by strengthening brands, expanding product portfolios, and steadily increasing market share and revenue. That was the era of big media, big retail, and big brands. About five years ago, smaller companies and brands began to take a share of the big brands' pie for the first time. Between 2011 and 2016, approximately $22 billion in industry sales in North America shifted from large to small companies. Europe experienced a similar shift.
Startups as a group seem to understand consumer needs better than large companies. This is because today's Davids have better slingshots: **outsourced production allows them to 'rent' manufacturing capacity, new distribution channels make it easier to enter the market with small volumes, and social media channels enable low-cost brand building. Startups have never been more successful in winning consumer support.**
**Consumer Needs**
The idea that consumer preferences have shifted is not without merit, but it is misplaced. Based on our research in this area and our work with global consumer companies over the past five years, we conclude that the fundamental drivers of consumer needs have not changed.
People have core needs and desires: they want to indulge or feel energized. They want to rest and relax. Many want healthy food and beverages. These are not new needs. What is new is the ability of startups to tap into these unmet needs profitably. Consider the development of energy drinks: Red Bull, Monster, and Rockstar did not discover new needs. They simply found excellent ways to satisfy existing needs, and changes in supply conditions allowed them to turn their ideas into successful businesses.
**The New Supply Economics**
In the era of big media, big retail, and big brands over the past 50 years, the playbook in the consumer sector focused on scale because scale reduced unit costs in procurement, manufacturing, brand marketing, trade spending, and overheads. Lower costs provided funds for innovation, key account management, and global functions, ultimately strengthening advantages over smaller competitors.
**Scale brought cost advantages and barriers to entry, but these advantages are now crumbling.** Small companies are increasingly able to match or surpass larger competitors in four key areas. Their advantages are mainly in the following aspects:
**First, asset-light production.** Small consumer companies no longer need to own production facilities; they can rent capacity from contract manufacturers. Through outsourcing, small companies can achieve low-cost, small-batch production.
Michel et Augustin, originally a French bakery company, expanded into drinking yogurt by purchasing or renting additional factory capacity. The factory owners achieved scale production, while Michel et Augustin focused on trade and sales. The company achieved a compound annual growth rate of 26% from 2008 to 2015.
**Second, new distribution channels.** Small companies were once blocked by large retailers, which could only carry a limited number of brands, and the growth of private labels narrowed the channel further. Today, new retail channels are growing rapidly, especially in premium stores, convenience stores, and online channels, where there are many interested consumers. For example, Whole Foods has launched natural, organic fast-food small brands in the US, Canada, and the UK. In France, retailers Biocoop and Naturalia have launched similar product lines. On Amazon and other online marketplaces, shelf space is unlimited, and small brands are often as visible as big brands.
Some new channels offer small companies marketing opportunities, business tools, and data insights that were previously in the hands of large companies. For example, Amazon provides marketing and consumer insight services, product sponsorship opportunities, and pay-as-you-go computing resources, helping small companies find their target customers.
**Third, low marketing costs.** Social and digital media give small companies the opportunity to build their brands and attract new consumers without paying large upfront media costs. Unlike global consumer brands, small companies do not necessarily need to acquire customers through paid media such as TV ads. Instead, they try to build connections with individuals and target consumer groups, using social and digital media to reduce marketing costs.
**Fourth, internal collaboration.** In brand building, small companies are often faster and more creative than multinationals. Founder-led companies are focused and efficient, without the internal transaction costs of large companies. Therefore, small companies are more agile and respond to consumer needs more quickly.
**David may win a few battles, but Goliath is still Goliath.**
Large companies must return to basics—understanding customer needs, creating products that meet those needs, and building brand engagement. In doing so, they need to learn to manage complexity rather than eliminate it. Additionally, they must break down functional silos that hinder agility and speed.
These are not new goals, but given the new competitive landscape, achieving them is urgent. To this end, companies need to act on four fronts.
**1. Upgrade from consumer research to demand science**
Large consumer companies typically have multiple brands, which means the success of one product can be offset by failures elsewhere in the portfolio. It doesn't have to be this way; the key is for companies to change their understanding of market segmentation.
**Traditional consumer research is too blunt to maximize growth across a portfolio.** It assumes consumers can be divided into meaningful segments based on demographics, attitudes, or usage levels, leading to questions like "Let's understand the needs of millennials in East China." This assumption implies that all millennials in East China have similar needs, and that these needs are the same on Tuesday morning as on Saturday night.
**In segmentation, we should adopt a demand-centric growth (DCG) approach rather than a consumer-centric one.** DCG does not start with assumptions about segments but rather analyzes and segments the market.
This process generates a set of "demand spaces" or demand segments, which represent distinct sets of target consumer needs. These demand spaces can be defined by multiple factors, such as setting—date, time, whether the consumer is alone at home or out with friends—as well as ethnicity, gender, age, and attitudes.
For example, a young female office worker feels a bit hungry in the afternoon and needs a non-fattening snack for energy. A sporty middle school student who has just done intense exercise in the morning has overlapping needs. A rigorous analytical model determines which variables best predict consumer needs.
For each demand space, DCG also provides insights into the key drivers of demand and how to capture it. The data is clear: within a demand space, brands that best meet key consumer needs perform best in the market.
DCG can re-energize growth for companies. A leading fast-food company had extensive data on different demographic backgrounds, attitude profiles, or consumption patterns, which it used to analyze its own and competitors' products. Despite these efforts, the company's main brand continued to lose market share to small companies, and when it launched new brands, they cannibalized the old ones.
DCG analysis helped the company reveal nine distinct demand spaces based on demand content rather than ethnicity, age, or usage patterns. The company targeted one brand in each specific demand space. This precise focus on demand drove sales growth, and splitting brands into different demand spaces limited their impact on each other. The fast-food manufacturer finally ended years of stagnation, with sales growing 3% annually for several years and market value increasing by more than $3 billion.
**2. Radically transform consumer engagement models**
The shift from the era of big retail and big media requires new consumer engagement models. Historically, in the pursuit of scale, most brands tended to maximize their customer base at the expense of personalized needs. **Digital tools and big data are now breaking the trade-off between 'reach' and 'richness' because they enable affordable, effective personalized connections at scale.**
Many consumer companies have begun digital transformations, focusing on precision advertising, customization, and viral marketing. While these new capabilities are valuable—they can increase the efficiency and value of media spending by up to 40%—they are unlikely to create lasting competitive advantage.
The next step is for companies to strive to build individual connections with their millions of customers. Big data and artificial intelligence (AI) bring us closer to the holy grail of "one-to-one" marketing.
**Data is a prerequisite for customization, and large companies are better positioned than small ones to collect and aggregate large datasets.** They have a natural scale advantage over smaller peers and can generate proprietary data through multiple content, e-commerce, and customer relationship channels.
For example, Kraft gains consumer insights from chocolate and dessert enthusiasts through its own website, while Danone gathers rich data from pregnant women and young mothers via its site. In contrast, smaller companies must acquire data from Google, Facebook, Amazon, and other third parties at higher cost, and these insights are often less relevant.
L'Oréal, the world's largest cosmetics company, is building relationships with millions of customers through a wide range of digital activities. For instance, more than 20 million people have downloaded L'Oréal's MakeupGenius app. The app allows consumers to "try on" cosmetics, turning an iPhone screen into a virtual mirror and generating a profile. L'Oréal has partnered with the startup platform Founders Factory to facilitate investments in digital startups like insitU, which creates personalized natural skincare products.
These new approaches enable L'Oréal to sell products directly to consumers, drive traffic to stores (thereby increasing its value to retailers), quickly test new products or content, and gain real-time insights from a vast consumer base.
Developing personalized connections at scale is not easy. It requires transforming the marketing function and adopting new ways of working. For example, L'Oréal has hired 1,600 digital experts; in addition, 14,000 employees have received digital training.
**3. Embrace value-creating complexity**
In a fragmented world, niche brands targeting attractive demand spaces outperform big brands that try to appeal to everyone. But for large companies, addressing multiple target groups with multiple brands and products inevitably brings complexity in product and channel strategy. **A strictly demand-centric approach helps identify complexity that creates value versus complexity that adds cost, inefficiency, and loss of focus. This approach relies on two factors.**
**First, segment the long tail.** Traditional consumer companies often try to eliminate low-volume brands to focus on bestsellers. But in today's fragmented world, this practice can stifle growth. Demand-centric insights can help companies identify which smaller brands have room to grow if properly repositioned, enhanced, and expanded. In our experience, many small brands have a loyal following and can be more clearly targeted within attractive demand spaces. For these, the extra complexity is worth it. Brands lacking demand are candidates for elimination.
**Second, reduce product complexity without reducing variety.** The long tail applies not only to brands but also to variations within brands. Variety in size, flavor, and quantity can increase customer loyalty and sales. But companies often launch products without fully understanding the complexity, cost, or impact on customer value.
Understanding the difference between beneficial variety and useless complexity can help global consumer companies capture profitable growth spaces and avoid cash traps. Through DCG analysis, companies can pinpoint consumer value and then diversify products to meet those needs. They can also use supply chain insights to standardize the most expensive product components. Thus, companies can reduce portfolio complexity while meeting consumer demand for variety.
This combination of market and supply chain insights allows companies to identify "platforms" that achieve the optimal balance of value and cost. These platforms can serve as the basis for products that meet new customer needs, price points, channels, or areas with minimal additional complexity.
A food manufacturer used this approach to address complexity in its biscuit portfolio. Research showed that the company produced many different sizes of biscuits, but consumers did not value this variety. It also allowed complexity to creep into raw material sourcing and packaging design. The manufacturer then reduced the number of product specifications by nearly 60% while reducing inventory by 15%. This move lowered cost of goods sold by 4% to 7% and increased sales by 2%. Additionally, it freed up resources to direct toward new products to meet other attractive demands.
**4. Reshape corporate DNA**
Most large consumer goods companies are organized to exploit global scale, efficiency, and control. They tend to have rigid functional silos, bureaucratic mechanisms and processes, and complex management matrices. The result is slow decision-making, distance from actual customer concerns, weak collaboration, and lower employee engagement.
In contrast, entrepreneurial companies focused on relatively narrow product portfolios and markets have founders on the front lines, able to communicate their vision, goals, and passion directly to the team, and receive continuous feedback from the field and front lines. Their organizational structures are dynamic, not managed by functional silos, strict hierarchies, and cumbersome processes, but rather by moving people to where the work is and constantly adapting to priorities and the changing world around them.
Large companies cannot match the organizational structures of younger competitors, but they can fundamentally change their processes, structures, and ways of working to adapt to the new competitive environment.
**Large companies can adopt agile principles to manage many small companies.** Agile teams are fast, cross-functional, experimental, and autonomous. They are managed by product "owners" who ensure the consumer is at the core of key decisions. These teams operate in a culture of iterative "test and learn" with frequent feedback—once they find a winning formula, their cross-functional teams can scale it quickly. These practices, originating in software development, also apply to banks and airlines.
Large consumer companies are also experimenting with agile methods. For example, marketing organizations are beginning to break down product-based silos and dynamically deploy resources across the portfolio. For instance, one company trains newly hired assistant brand managers for two years and then assigns them to multiple projects selected based on the company's strategic goals and the employees' skills and development goals.
Organizational shifts like these bring multiple dividends. By enhancing agility and experimentation, companies not only grow faster but also become more attractive to top talent, and leaner organizational models bring cost benefits.
Many industry commentators and analysts believe that the advantages of scale are fading and that large consumer companies face a long, slow, painful war of attrition. We disagree. **The game does not always favor small companies. But large consumer companies need a new playbook to thrive in today's strategic environment.** The four-part agenda outlined above is grand and ambitious, but only those companies that can truly put it into action will reap the rewards.
*This article was first published in the August 20, 2018 issue of Caijing magazine. Authors: Yang Li, Chen Qian.
**On October 23-24, the 2018 China FMCG City Distribution Logistics Conference, hosted by New Distribution, will be held in Changsha. Industry leaders have sent their blessings; click the video to watch; more details at the end of the article.**
**2018 China FMCG City Distribution Logistics Conference** will invite industry experts, FMCG warehousing and distribution specialists, and distributors transitioning to unified warehousing and distribution platforms to discuss and answer questions about future trends in FMCG city distribution logistics and practical cases of distributor transformation, under the theme "New Distribution, New City Distribution." We hope to bring you different inspiration and thinking! The specific agenda is as follows:
**List of Participating Companies**
In no particular order
Hunan Zonglan Diandan Network Technology Co., Ltd.
Jingbang (Wuhan) International Freight Forwarding Co., Ltd.
Mengniu Dairy
Qinghai Hanxiang E-commerce Co., Ltd.
Unilever Service (Hefei) Co., Ltd. Shanghai Branch
Huicong
Hunan Xuan'ang Food Co., Ltd.
Guangzhou Tongdaoren Information Technology Co., Ltd.
Qingdao 888 Trading Co., Ltd.
Uni-President Enterprises (China) Investment Co., Ltd.
Hunan Province Zhongxiang Gongpei Logistics Co., Ltd.
Shenglong Ingredients
COSCO Shipping Logistics Warehousing and Distribution Co., Ltd.
Guangxi Yongpai Liquor Co., Ltd.
Shangqiu Kangrong Trading Co., Ltd.
Jinan Dingzhong Economic and Trade Co., Ltd.
Liaoning Bimai Agricultural Technology Co., Ltd.
Kunming Xiongjia Trading Co., Ltd.
Shaanxi Houheng Trading Co., Ltd.
Guangzhou Dingwo Enterprise Information Consulting Co., Ltd.
Shaodong Jiajiale Trading Firm
Boda Trading
Industrial Bank Changsha Branch
Wuhan Muchén Convenience Store Chain Co., Ltd.
Fujian Fuxing Yuncang Logistics Co., Ltd.
Guizhou Yilimi E-commerce Co., Ltd.
Jiangxi Xiao Laodi E-commerce Co., Ltd.
Jinshan Koufu
Shanxi Taihang Yuanjing Supply Chain Management Co., Ltd.
Shanxi Dezhun Supply Chain Management Co., Ltd.
Shaoyang Tongdeli Trading (Xiangbang Logistics)
Huanfu
Tongda Express City Distribution
Beijing Xinjingxiang Food Co., Ltd.
Wuhan Huizhong Tianhong Liquor Co., Ltd.
Changsha Paide Biotechnology Co., Ltd.
Chao'an Tuqiang
Guizhou Yihe Bopin Supply Chain Management Co., Ltd.
Jiangxi Kang'en Industrial Development Co., Ltd.
Xiangtan County Yisuhe Town Yuhua Paper Store
Luoyang Yuanlang Trading Co., Ltd.
Tongchuan Yaozhou District Huayuan Supermarket Co., Ltd.
Hunan Yongfu Jiujiu Trading Co., Ltd.
Zhejiang Chengchengtong Logistics Co., Ltd.
Chongqing Kaiguo Materials Trading Co., Ltd.
Beijing Xianmaixianmai Data Technology Co., Ltd.
Hanchuan Qixing Trading Co., Ltd.
Tongxin Jiuzhiru Trading Co., Ltd.
Guizhou Meiguo Guoguo Network Technology Co., Ltd.
Hubei Anjie Logistics Co., Ltd.
Hubei Kuaixiao Hulian Technology Development Co., Ltd.
......
**Distributor Transformation Representatives (Proposed)**
In no particular order
Jiangsu Huashang City Distribution Network Co., Ltd. Chairman, Rong Jun
Hubei Yijiaren Logistics Co., Ltd. Chairman, Wang Bo
Sichuan Chengdu Xingrenxing Trading Co., Ltd. General Manager, Jiang Shuming
Shandong Yunbang Warehousing and Logistics Co., Ltd. Chairman, Liu Jichen
Chongqing Lingyu Consumer Goods Supply Chain Management Co., Ltd. Chairman, Tu Mingyu
Guangzhou Zhongshan Wanrong Marketing Co., Ltd. Chairman, Yang Su
Sichuan Bajie Supply Chain Management Co., Ltd. Chairman, Yuan Xia
Hubei Pengdun Meiyitian Supply Chain Management Co., Ltd. Co-founder, Li Qiangyun
Henan Xuchang Jiulegou E-commerce Co., Ltd. Chairman, Zhang Jianyong
Hebei Changyi Logistics Co., Ltd. Founder, Ma Haichao
Hebei (Chengde) Wulian Yuncang Co., Ltd. General Manager, Meng Yucun
Xinjiang Urumqi Su'an Jinchi Logistics Co., Ltd. Chairman, Zhang Xun
Jilin Sansheng Lianguo Chairman, Zhang Hailing
Hebei Dunjie Supply Chain Management Co., Ltd. Founder, Qiang Huitao
Hunan Damei Supply Chain Management Co., Ltd. General Manager, Liao Lei
......
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