Espresso: Giles Brook, Why Challengers Can't Unlock Grocery Listings in Cost of Living Crisis

0:06When you're a minnow, you're trying to get a listing. and there are unfortunately some harsh realities if you are a startup challenger brand and you want to get into one of the big guys you are going to have to give more margin than the category average unless there is a completely incredible unique dynamic and a couple examples maybe like that were like little moons or a fever tree who had so much brown swell and power because they're doing so well a retailer's oh i'll give you another example prime right so take prime as an example yeah there could be examples where they actually haven't had to give the category average margin or else haven't had to give the other margin of the challenger brands because you know they were so on trend and so hot and that you know the supermarkets were desperately to get them in but typically for the majority of brands you just got to accept you're going to have to give more margin right than the category average because you know all every single category is having its space reduce every single category is having ranges rationalized and also importantly every single new product that goes into a fixture is having less and less time to prove itself used to be about a year i've known brands come out after 10 weeks now after not performing right you've got to go and you've got to perform but the the one message that i want to land and i'm seeing more and more and people talking about it is that be really clear from day one you have to operate a business with a certain level of gross margin and i i think i mentioned to you we talked about this last time yeah and obviously gross margin just for anybody listening it's just very simply the invoice price you charge a customer less your promotional discounts less what it costs you to both produce it and deliver it to that customer so just keep it as simple as that there are slightly different definitions but and typically in food and drink you want that to be minimum 30 ideally you'd want that to be 40 gold standards 50 and above right because if you're not generating good gross margin you're continually chasing your tail because either one you're running out of cash the whole time or else you just haven't got any money to invest in people in marketing in infrastructure and things like that and that's the number one thing i see where you know i pick up some some pnls and some businesses obviously i get quite a few investment memorandums where people are obviously fundraising and stuff and i'm seeing some gross margins in like i mean i hate to say it but like i see quite a few in like 15 20 20 25 i'm like you're just not you can't there's no sustainable business there you've got to make gross margin and i hate to say it but you know the meat alternatives you know i've seen these businesses with like single digit gross margins oh we think we can get it to 15 in the long term i'm like still nowhere enough because it's not a viable business because you've got no money you're not generating any money to then kind of build a business underneath it and that's my number one thing which is you know there may be an amazing listing for you but just make sure you can go in in a way where you know you can you know let's just say for example give an example without let's just say right i would generally say look try and make an average of 35 but let's be honest let's just say one of the top four supermarkets offered you a listing you're going to make 25 do it right if you go to all through negotiation you can't get a better deal do it but if that's more like 20 15 10 don't do it because that sort of size volumetric customer and the percentage of the mix means you're always going to be chasing your tail on margin and i know some people go oh yeah if i get it in now don't worry because i can go back because hopefully you know i could buy bigger packaging runs i can get cost of goods up and all stuff like that and do that analysis but typically you can't make it up enough and the and the scary thing is and this is the this is the elephant in the corner of the room is that you're gonna have to invest more every year because you'll have to increase your promotional spend rate cards go up for things like shelf ticketing or whether you want a gondola end or whatever and the cost of doing business will keep going up um and then there's also one other big harsh reality and it's something i've been fairly vocal about in the press recently is that multinationals over the last few years have been able to put through some pretty big cost price inflation increases multiple double digit ones startups and challenger brands have either had to only pass on partial or have had to shelve them because they haven't had the balance of power to push those through so again what that's essentially meant is that gross margins have been even further suppressed and i've really struggle with that one because you know yeah the big corporate suppliers can push through price increases there's obviously been some fallouts which has obviously been well documented in the press with certain products being taken off until it's been sorted out but when you're a small brand and you go in there and don't get me wrong i completely understand the pressure the buyers are on in the supermarkets and stuff but you know when i know there's guys who are trying to put single digit price increases through which is only a fraction of what they need to put through but it's still being told if you put that through then you're probably going to lose listings but we're not gonna have the same relationship and you need to basically you know forgo it that's tough because i think business moral and ethics i don't think that's right quick one guys espresso's got a brand new sponsor unleashed unleashes inventory management software that talks directly to your finance and econ software we use unleashed daily islands i I bloody love it.

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Even nothing comes of it. and even better news you'll get your first month free if you reference hungry thank you what's even worse by the way is us and again because i was i'm in portfolio i speak to a lot of people on a weekly basis because they're always like people always happy people want to talk to me and just kind of confidentially chat with me on stuff and what's even worse is it's quite a few well there's at least five brands that i've spoken to in the last two weeks who are saying can you give me some advice i said well i'll try and they basically swallowed all the inflation because they're told wasn't going to be allowed to put any more through and then they've done that so they're not moving the cost price and as we know and i'll be really clear on this install pricing is a hundred percent the decision of a retailer yeah but you imagine being a startup business where you're making less and less and you've been told you can't put any inflation through and then even though they've not changed their cost price they're now seeing that that retailer has now changed their shelf ticket price up by 10 20 30 percent because as a business they're either not making as much money so they're going well just bang that up or else they're using that money then to try and price fight on the bigger you know kind of kvi on the big items to you know fight kvi so uh key key key volume or key value item so you know that will be typically you know or you you know like the the grocer does a top 33 baskets all those sort of products that go into that basket where they have to be price match everybody else and obviously there's the you know the big supermarkets are always against discounters on trying to be as you know as competitive against that that takes a lot of money and of course that money's got to come from somewhere so hence why you start seeing some other challenger brands and stuff their numbers have been you know they're they're on they're on shelf prices going up even though they haven't moved their cost their cost price and even though they haven't you know and they've swaned the impression and i get it from a buyer's perspective but god from a business ethics and values point of view i struggle with that how do we solve that problem i know it's it's it's again there's probably a lot of nuance and no right or wrong in this but i think if you zoom out it's like i think the brands are going to lose because they're either going to go bust yeah the retailers are going to lose because they're going to lose the zest in the life of the challenger brands if we look at it over a 20-year period but like how do you how do you think brands solve that how do you think i the moment and it's something i've been talking about i think there's almost like there's a perfect storm and i've called it like you call it either the three c's or the four c's which you've had you know you've had covid yeah you've had you know crisis with ukraine you've had a cost of living crisis generally and then also you've had climate volatility which has caused a lot of issues you know both in terms of just general demand as well as quality prices and that sort stuff and that cocktail there has been an absolute nightmare for everybody but particularly for startups and you know if you look at today if you're a startup and i talk about this i think it's a lot of entrepreneurs who i knew were going to set up businesses some of them challenging whether they actually are today because the risks are so high relative to the diminishing returns or diminishing rewards that they're really challenging what they're worth doing and you know i talk about things like you know they can't pass inflation on which is pretty difficult i've been in this business now doing what i'm doing now for 25 years i cannot think of a more challenging time to raise money and try to get funds is so difficult and if you can get funds you're having to really really drop your valuations and they're also coming with anemic terms i you know what the conditions that come around it aren't you know i'm good and then also then if you just step back and think well you've then got the government who have changed the rules around things like r &d research and design and design um credits so they're more difficult to get that support entrepreneurs relief you know rishi sunak back in 2020 drops it by 90 obviously it used to be the first 10 million that's the first 1 million you sat there with all these dynamics and you're like as an entrepreneur or as a budding entrepreneur you're like i'm not sure i'm gonna do this anymore and it's tough and it's tough and i i very vocal i think the government needs to step in and support more heavily there's a few pockets of things happening but not nowhere near enough you know i don't think they can necessarily get involved with the inflation conversation we just had albeit i think over time i hope the supermarket leaders and stuff will make sure that small suppliers treated fairly in in in discussions like that because i think they should be thank you so so much for listening it honestly means the world to me i hope you enjoyed your morning coffee and go and have an amazing day let's be having ya if you want the full episode it will be in the show notes a link will be in the show notes the full episode thank you so much please stay friends as well it means the world to me