Issue #115: Dear Large CPGs

Last week, Mondelēz announced it was acquiring a majority stake in Undercover Snacks. For those who aren’t aware of Undercover Snacks, you are missing out; it is a fantastic product. They make the chocolate-covered quinoa crisps, super crunchy and chocolatey, with less of the bad stuff. Consumers have resonated with the product, which has allowed them to scale to many retailers, like Kroger, Whole Foods Market, Walmart, CVS, Target, Costco, and more. Undercover was also super smart about driving trial with consumers, as the product is a little unique at first. They went the airline route, partnering with United Airlines to hand out over 125M samples since 2023. Talk about the power of sampling, estimates have them at about $100M in annual revenue.

It is no secret why Mondelez was sniffing around. However, what I want to focus on here is what Mondelez is doing right. More CPGs should follow their path. As mentioned, Undercover is doing about $100M in sales. Oreo, the crown jewel of the Mondelez portfolio, does over $5B in revenue throughout the world, with about $2B coming in the United States. The price Mondelez paid has not been released, although I would bet it was likely in the $250-500M range. As much as I love the brand, I am not saying it will replicate the success of Oreo, but the pathway to $500M-$1B is very much attainable. That is enough to pay back the purchase price, and more. On the flip side, it is an outcome that will greatly reward the founders and investors. They had raised roughly $14M in outside capital.

This is just one example of why it is good for brands to sell before fully scaling. The pure dollars outlaid matter more than the multiples. In a similar vein, I look to the sale of Goodles to Barilla. In the US alone, not including the other markets Barilla is active in, consumers are spending a couple of billion annually on mac and cheese. This is also before potential product line expansions, like sauce, refrigerated meals, and other pantry noodles (ramen, etc.). Goodles was doing ~$190M in annual revenue and was purchased for $750M, a roughly 4x multiple. A steeper multiple than what Mondelez likely paid, but still a low enough total dollar amount where the payback is there.

Let’s contrast this with Poppi, which has been in the news for Pepsi reducing the earn-out, meaning Pepsi doesn’t think it will hit performance triggers. Pepsi paid a tad under $2B for a brand doing $500M in annual revenue. Soda is a massive market, and there are plenty of billion-dollar-plus brands, but it becomes exponentially harder to continue to grow the business as you get bigger and bigger. As you can see with the Poppi outcome, it is very hard! If you concentrate all the risk into one bet, in some ways it is harder than spreading it around. If Pepsi had spent the same money on 3-5 brands, would they be in the same spot? It is hard to say, but my hypothesis is that they would have been better off. These brands are underestimating their power and ability to drive sales. A product in their distribution network is able to generate additional sales, but only when below a certain scale.

If this was the pitch to large CPGs, stay tuned as I make the pitch to founders on how they should operate next week. Would love to hear everyone’s thoughts in the replies!

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