Deep Dive: Value and Volatility (CPG Lending)

In the dynamic landscape of fintech lending, one leading lender initiated a strategic collaboration with 2PM. This partnership aimed to leverage 2PM’s deep insights into consumer behavior and brand performance, utilizing key data points to refine lenders’ approaches to credit offerings.

By analyzing detailed market data, the lender was better positioned to assess the financial health and potential of individual brands, enabling more informed decision-making processes. This collaboration not only underscores this particular lenders’ commitment to “outside-of-the-box” data-driven strategies but also enhances their capability to support sustainable brand growth in an increasingly competitive market. All is not well in the market.

Confirmed by subsequently published reports, the pressure on fintech lenders like Ampla is mounting. This is evidenced not only by their reported financial struggles but also by the outreach from competitors seeking to capitalize on Ampla’s vulnerabilities. A recent LinkedIn post by a Paperstack employee highlighted the concerns within the CPG industry and their competitor’s potential failure. It specifically acknowledged the deep financial challenges Ampla might be facing and extending a helping hand to those affected. This situation underscores a larger trend in the fintech sector, where companies are both competitors and crucial lifelines, offering necessary capital to businesses navigating the capital-intensive journey of eCommerce.

By analyzing detailed market data, the lender was better positioned to assess the financial health and potential of individual brands, enabling more informed decision-making processes. This collaboration not only underscores this particular lenders’ commitment to “outside-of-the-box” data-driven strategies but also enhances their capability to support sustainable brand growth in an increasingly competitive market.

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Ampla’s notable clients include:

  • MrBeast Feastables: A brand launched by the YouTube personality MrBeast, focusing on snacks.
  • Cuts: A clothing brand known for its high-quality men’s shirts.
  • Serenity Kids: A company that produces baby food.
  • Hatch: A brand offering sleep-related products.
  • Recess: A beverage company specializing in sparkling water infused with hemp and adaptogens.
  • Glamnetic: A beauty brand known for magnetic eyelashes.
  • Maev: A pet food company that provides raw dog food.
  • MM.LaFleur: A women’s clothing brand focusing on professional attire.
  • Toybox: A company that offers 3D printers designed for kids.
  • Wandering Bear: A coffee brand offering cold brew coffee.
  • Stately: A men’s fashion subscription service.
  • &Collar: A sustainable clothing brand.

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According to recent reports, the pressure on fintech lenders like Ampla is mounting. This is evidenced not only by their reported financial struggles but also by the outreach from competitors seeking to capitalize on Ampla’s vulnerabilities. A recent LinkedIn post by a Paperstack employee highlighted the concerns within the CPG industry and their competitor’s potential failure. It specifically acknowledged the deep financial challenges Ampla might be facing and extending a helping hand to those affected. This situation underscores a larger trend in the fintech sector, where companies are both competitors and crucial lifelines, offering necessary capital to businesses navigating the capital-intensive journey of eCommerce.

In addition to this particular blog from Paperstack, I’ve personally received similar messages a few of Ampla’s other competitors, each presenting their services as stable, long-term financial solutions. Other publications and smaller consultancies have reported similar activity. These interactions tell a tale. For one, they mark a significant shift in how digital capital is being approached in today’s market. The competitive market was difficult for these lenders, as early as February 2023 (according to this Betakit report on the growing lender – Paperstack). It can only be more difficult now.

Amid these conditions, Toronto’s Clearco and Dublin-based Wayflyer—two of the biggest FinTech firms providing revenue-based financing to e-commerce brands—have undergone significant layoffs. In Clearco’s case, the company has also changed CEOs and exited overseas markets, handing this portion of its business to London-based competitor Outfund.

The much smaller Paperstack faces the same conditions that forced bigger players to regroup, from mounting inflation and interest rates, which have made it difficult for many startups to raise capital, to slowing e-commerce growth.

Fintech lenders are operating in an even higher-pressure environment marked by several intersecting challenges:

Macroeconomic Shifts: The end of historically low interest rates has significantly impacted fintech lenders, increasing their cost of capital and forcing them to reassess their lending models. As borrowing becomes more expensive and economic growth cools, both lenders and borrowers face heightened financial stress.

Increased Competition: As traditional banks tighten their lending standards, more businesses have turned to revenue-hungry fintech startups for solutions, intensifying the competition among these lenders. Each platform strives to offer more attractive, flexible, and innovative financing solutions to stand out, as evidenced by the proactive outreach efforts from companies like Paperstack, Ampla, Kickfurther, Clearco, Shopify, Stripe, and others.

Sector-Specific Challenges: For fintechs focusing on CPG brands, like Ampla, the shift in consumer behavior towards more cost-effective purchasing and the rise of white-label products presented additional hurdles. These changes affect the financial stability and growth prospects of their clientele, directly impacting the risk assessments and business models of the lenders.

Regulatory Environment: Increasing scrutiny from regulators on lending practices adds another layer of complexity, pushing fintechs to innovate within the confines of new financial regulations. This requires continuous adaptation and compliance efforts, further straining their resources.

Technological Advancements: To stay competitive, fintech lenders must continuously invest in technology to improve their financial products and services. This includes enhancing risk assessment models with AI and machine learning, and developing more user-friendly platforms that can integrate seamlessly with the businesses they serve.

These challenges collectively contribute to the high-pressure environment that defines the new era of digital capital. Fintech lenders are not only required to be financially robust but also agile and innovative, capable of quickly adapting to changing market conditions and customer needs.

The public and private outreach from companies like Paperstack is indicative of the broader strategic shifts occurring within the fintech sector. As companies vie for leadership in this tumultuous market, their ability to provide reliable, flexible, and efficient financial solutions will likely determine their success. For consumer businesses reliant on these financial services, the landscape offers both potential risks and rewards, emphasizing the importance of choosing partners that align with their long-term financial goals and operational needs.

The Core Target of the Fintech SAAS Lender

The core target industry is undergoing significant transformation due to evolving consumer behaviors and economic pressures, which in turn are impacting the CPG lending industry. In a recent deep dive on CPG, I reported:

The landscape for CPG brands is undergoing a seismic shift, marked by increased challenges in distribution avenues, market consolidation by retail giants, diminishing venture capital interest, and heightened cost pressures. This confluence of factors is rapidly closing the window of opportunity for CPG brands to achieve widespread distribution and visibility.

As the financial landscape shifts, fintech companies that specialize in lending to CPG brands are facing unique challenges but, also, new opportunities that necessitate strategic adaptation to stay competitive and relevant. Here are the key points influencing the changing role that debt financing is playing in the role of CPG brands and beyond.

By nature, this makes debt a much higher risk to the brand and the lender.

As eCommerce continues to expand, small retailers are finding the space increasingly challenging to navigate, contrary to the expectations set by eCommerce’s growing adoption. This complexity is rooted in various structural changes in consumer behaviors, market dynamics, and intensified competition, particularly from dominant industry players.

The CPG Struggle

The story of Foxtrot Market’s failure illustrates a critical issue many small eCommerce retailers face: misalignment with consumer expectations. Foxtrot aimed to differentiate itself with a unique, upscale product mix and aesthetic appeal but neglected to integrate essential items that meet daily consumer needs, which are crucial for driving repeat business in the convenience sector. This example highlights a broader narrative where small retailers struggle to balance unique offerings with the essential expectations of convenience and necessity. Their focus on specialty items rather than staples, combined with high operational costs from city center locations, rendered Foxtrot’s business model unsustainable in a highly competitive market.

Moreover, the digital advertising landscape, once a boon for small eCommerce ventures, has become prohibitively expensive. As costs escalate—with 96% of CPG companies managing spends across multiple networks—the already tight budgets of smaller players are further squeezed. Additionally, the consolidation of market power by retail giants such as Walmart, Costco, and Kroger further narrows the window for smaller brands to gain visibility and shelf space. Data show a significant concentration of CPG spending among these major players, which captures a substantial portion of U.S. CPG expenditures, creating formidable barriers for smaller companies.

Evolving consumer preferences complicate the entry of new or smaller brands into the market, particularly the preference for purchasing groceries from established retailer websites over new online marketplaces or direct brand channels. As eCommerce grows, especially in sectors like food and beverage, small retailers must navigate the challenging waters of gaining consumer trust and visibility amidst dominant competitors.

The landscape for entering eCommerce has also become tougher, with diminishing venture capital interest in new, unproven markets. The shift in economic conditions, increased interest rates, and a demanding profitability path have led to a more cautious approach from investors. This financial backdrop makes it increasingly difficult for small eCommerce retailers to secure the necessary capital for growth and sustainability. By nature, this makes debt a much higher risk to the brand and the lender.

Another dimension of the challenge for small retailers is the blurring of lines between high-end and mass-market offerings on major e-commerce platforms. The presence of luxury brands on platforms like Walmart underscores the difficulty of maintaining brand integrity and visibility in an overcrowded online space. This juxtaposition creates a confusing marketplace where small retailers struggle to position themselves effectively.

In an eCommerce environment described as “junkified,” (a direct quote to Vogue Business by Neil Saunders) where the proliferation of products overwhelms consumers, small retailers must find ways to stand out. The necessity for strategic innovation, effective curation, and clear brand positioning has never been more critical. Marketplaces need to balance the breadth of offerings with curation, ensuring consumers are not overwhelmed but rather guided to quality and relevant products.

These challenges collectively depict an eCommerce landscape that is becoming more complex and less accessible for small retailers, demanding a strategic recalibration and innovative approaches to consumer engagement, product offerings, and market positioning.

Consumer Shifts to Cost-Conscious Buying

Economic constraints have led consumers to become more cost-conscious, increasingly opting for white-label or generic products over branded goods. This shift is driven by a squeeze on household budgets, where affordability has begun to trump brand loyalty. A Forbes article from May 2024 highlighted that over half of consumers are concerned about their personal finances, influencing their purchasing decisions towards cheaper alternatives. This consumer behavior shift impacts the revenue streams and stability of CPG brands, which are critical factors that lenders consider when evaluating creditworthiness.

Impact on CPG Brands and Their Financing Needs

As CPG brands adjust to these market changes, their need for flexible and responsive financing solutions increases. Traditional lending models, which rely heavily on stable and predictable revenue streams, may no longer be adequate. Fintech lenders, therefore, need to adapt their products to accommodate fluctuations in CPG companies’ cash flows and provide more tailored financing options that can adjust to a more volatile market environment.

The Role of Fintech in Adapting Lending Practices

Fintech companies like Ampla have been at the forefront of providing innovative financial solutions tailored to the needs of CPG brands; this is both a gift and a curse. These companies leverage technology and data analytics to offer dynamic credit products that can adapt to rapid changes in the market. For example, fintech lenders might use advanced underwriting algorithms that take into account real-time sales data or seasonal fluctuations, allowing for more flexible repayment terms that align with a brand’s cash flow patterns.

Increased Competition and Market Pressure

The tightening of lending standards by big banks, as reported by Bloomberg in May 2024, is creating an additional layer of complexity. As banks become more conservative in their lending practices, particularly in response to economic instability and previous bank failures, CPG brands may find it more difficult to secure traditional financing.

Lenders have generally been tightening credit standards since the second quarter of 2022, following a string of high-profile regional bank failures. The Fed lifted its benchmark rate last year to a two-decade high in a bid to curb inflation, and high borrowing costs have weighed on businesses and households.

This situation presents both a challenge and an opportunity for fintech lenders. While it opens the door for these lenders to fill the gap left by banks, it also puts pressure on them to manage risk more effectively amid an increasingly competitive landscape.

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To effectively serve CPG brands under these new conditions, fintech lenders are increasingly looking towards strategic collaborations. For instance, partnerships between fintechs and retail data aggregators can provide deeper insights into consumer trends, brand performance, and market dynamics, enhancing the lenders’ ability to assess risk and customize financial products. Moreover, as CPG brands seek to differentiate themselves in a crowded market, fintech solutions that can support innovative retail strategies—such as DTC models and online marketplaces—become particularly valuable.

The evolving CPG industry, marked by a shift towards more price-sensitive consumer behaviors and the resultant impact on brand stability and growth prospects, is significantly influencing the CPG lending industry. Fintech lenders are responding with more adaptive, innovative, and risk-aware lending solutions that align more closely with the current needs of CPG brands, ultimately reshaping the landscape of financial services in this sector.

By Web Smith

Member Brief: The Death of H.E.N.R.Y.

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Deep Dive: The Big Moment for Small CPG

Foxtrot Market’s failure stemmed from fundamental misalignments with the convenience store model. Initially, Foxtrot aimed to differentiate with a unique, upscale product mix and aesthetic appeal. However, their strategy overlooked the essential role of meeting everyday consumer needs which is crucial for driving frequent customer visits. Foxtrot focused on specialty items rather than staples like bread, milk, and convenient services, which are critical for repeat business in the convenience sector. What is Foxtrot? The neighborhood stop focused on locally sourced products, foodservice, grab-and-go item in a “cozy, upscale neighborhood market feel.”

While Foxtrot offered an appealing store design and high-end products, it failed to integrate essential convenience items and services that fulfill daily consumer needs and compete with traditional and app-based delivery services. The lack of basic convenience store elements, such as walk-in coolers and gas pumps, and the shift towards city center locations with high rents and declining foot traffic, further strained their operations.

Ultimately, Foxtrot’s business model was not sustainable in the highly competitive convenience store market. I believe that Foxtrot’s failure is a part of a much larger narrative that also includes the potential shelving of TikTok as an advertising channel, retail media’s increasing costs (96% of CPGs are managing spend on three or more networks), and the galvanizing of CPG distribution at the top of the market (Walmart, Costco, and Kroger).

But there is another valuable insight to consider here, CPG has abandoned affordability. And as a result, outside of closed circle of an exceptional food, drink, and snack food brands, the window is closing.

The landscape for CPG brands is undergoing a seismic shift, marked by increased challenges in distribution avenues, market consolidation by retail giants, diminishing venture capital interest, and heightened cost pressures. This confluence of factors is rapidly closing the window of opportunity for CPG brands to achieve widespread distribution and visibility. In the Argument for CPG Investing, I laid out the promising prospects for investing in the grocery, CPG, and meal delivery sectors, projecting significant growth and advising strategic investment.

By 2027, food and beverage are expected to constitute 21.5% of eCommerce, up from less than 14%, illustrating a major shift towards grocery and food CPG as smarter investments compared to the unstable fashion and accessory sectors. However, a significant caveat in the marketability of CPG products through major channels is the consumers’ overwhelming preference for purchasing groceries from established retailer websites and apps, as opposed to new-age online marketplaces or direct brand channels. This preference indicates a deep trust in traditional grocery retailers, which poses a challenge for new entrants or smaller brands in gaining significant market traction independently. I went on to explain that mega retailers like Kroger and Walmart lead in leveraging their established platforms for online grocery sales, illustrating the importance of these major channels in shaping the digital grocery landscape. This dynamic creates a barrier for new brands and underscores the critical role of strategic partnerships and platform choice in the success of CPG companies in the eCommerce realm.

The Retail Dominance of Major Players

Recent data by Supermarket News reveals a significant concentration of CPG spending, with Walmart alone capturing over 21% of all U.S. CPG expenditures. This dominance is closely followed by Costco and Kroger, creating formidable barriers for smaller CPG companies seeking shelf space. The retailer preference is regional, according to data found on Numerator:

Food and mass retailers capture over half of all CPG sales across the country, but channel preferences differ regionally. Shoppers in the Western United States spend significantly more at club retailers, Midwesterners favor mass merchandisers, Southerners have slightly less distinct preferences, but over-index at dollar stores, while shoppers in the Northeast spend more at traditional grocery stores.

Across the U.S., the top five retailers for CPG spending are Walmart (21.2%), Costco (7.8%), Kroger (6.9%), Amazon (5.3%), and Albertsons (4.3%). The dominance of these retailers not only limits the visibility of smaller brands but also dictates the terms of market engagement, often favoring established brands with proven sales records. One great example of this is electrolyte-based CPG brand LMNT:

Disclaimer: 2PM is an investor in LMNT

LMNT has exemplified how a strategic combination of native eCommerce and broad distribution through giants like Walmart and Amazon can catapult a CPG brand to profitable, enterprise-level growth. Initially leveraging its direct-to-consumer model, LMNT established a robust online presence that facilitated direct relationships with consumers, fostering brand loyalty and collecting invaluable customer data. This strong foundation enabled them to expand into extensive retail distribution channels effectively.

The introduction of LMNT-based sparkling waters is a calculated move to capitalize on their established market presence and the operational synergies provided by Walmart and Amazon. These platforms not only offer massive visibility but also ensure streamlined logistics and distribution, crucial for meeting the demand spikes typical for successful CPG products.

With a potent mix of strong brand identity, high consumer awareness, and a passionate fanbase, LMNT has crafted a winning playbook for CPG growth. This strategy is particularly effective in today’s competitive market, where establishing a significant retail and digital footprint is essential for long-term success.

The Impact of Venture-backed Retail Closures

The closure of Foxtrot market highlights the volatility and uncertainty facing new market entrants reliant on such platforms for growth. Foxtrot was instrumental in testing and promoting innovative CPG products like Graza, giving nascent brands crucial consumer exposure. According to a recent AdExchanger article and described by Paul Voge, CEO of Aura Bora, “There are very few retailers willing to roll the dice on a new brand with unproven sales, track record, margins etc.” The loss of such an incubator platform exacerbates the challenge for emerging brands to find supportive retail environments conducive to growth and experimentation. The retailer was ideologically aligned with many of the DTC brands that it was known to feature:

Foxtrot was of the same age and temperament as its digital-native brands, says Becca Millstein, co-founder and CEO of the DTC darling tinned fish brand Fishwife. “It shared our mindset of real nimbleness and creativity and fast growth, which is somewhat unique to startup culture.”

The marriage between VC and DTC brands has faced significant challenges in recent years primarily due to a shift in the economic landscape and evolving market dynamics. Initially, DTC brands thrived, leveraging VC funding to grow rapidly without the immediate need for profitability. This strategy capitalized on low digital marketing costs and the novelty of direct online sales, which promised higher margins by bypassing traditional retailers.

However, as interest rates increased and the economic environment tightened, the sustainability of these DTC brands came under scrutiny. Investors, who were once content with growth at any cost, began demanding viable paths to profitability. Simultaneously, the cost of digital advertising surged, diminishing the return on investment for customer acquisition and inflating the cost of maintaining growth.

This influenced the growth of retail media as a pathway for growth.

These factors, combined with a realignment of consumer spending away from non-essential purchases, led to a recalibration of the value of DTC brands, many of which saw their market valuations plummet or had to revert to private ownership to restructure away from public market pressures. This reality check marked a significant downturn in the VC-DTC relationship, highlighting the need for DTC models to adapt to a more financially sustainable approach.

Consumer Dynamics and Economic Pressures

The current economic climate further complicates the landscape. While some premium brands like Unilever and Reckitt Benckiser are experiencing growth, others face stiff resistance. Nestlé, for instance, reported a decline in sales volumes, which the company attributes to “weak US demand as well as intense price competition in the frozen food category” (eMarketer, 2024). This bifurcation in consumer behavior reflects a broader trend where a segment of the market gravitates toward premium brands, while a larger and far more substantial portion continues to favor private labels and discount alternatives amid ongoing economic uncertainties and inflation.

Foxtrot Market’s failure stemmed from fundamental misalignments with the convenience store model but also, larger economic pressures contributed.

In today’s economic landscape, rising cost pressures are heightening the demand for affordable products over luxury goods, a shift driven by several compelling factors. First, inflation rates have surged globally, significantly impacting household budgets. In the U.S., the Consumer Price Index (CPI) rose 6.5% over the past year, marking a substantial increase in the cost of living and squeezing consumer spending power (U.S. Bureau of Labor Statistics, 2023). As disposable incomes shrink, consumers are increasingly seeking value-driven purchases, rather than premium, high-cost options.

Moreover, wage growth has not kept pace with inflation, effectively eroding real incomes. This disparity between wage increases and inflation rates compels consumers to prioritize essential and budget-friendly goods. According to a Pew Research Center analysis, about 70% of Americans consider inflation a major threat to their financial well-being, influencing their shift towards more economically priced products.

The economic uncertainty spurred by these trends has led to a cautious consumer approach. Luxury goods (to include CPG), often considered discretionary expenditures, are among the first to be curtailed in times of financial strain. In contrast, affordable products are perceived as both necessary and prudent choices in uncertain economic times, supporting the need for companies to adjust their product offerings to meet the increasing demand for affordability.

Waning Investment and the Need for Marketing Innovation

With cooling interest from venture capital and tighter debt markets, the financial squeeze forces CPG companies to rethink their strategies and seek out new methods for consumer engagement and product launch. Innovative marketing and product diversification are becoming critical as brands navigate the complexities of a market where traditional advertising costs are escalating and traditional retail platforms are becoming less accessible.

The potential ban or divestiture of TikTok in the U.S. could also significantly disrupt the marketing strategies of many brands, particularly those that have leveraged the platform’s unique algorithm for product discovery and customer engagement. TikTok has become a vital tool for reaching younger demographics, who often discover new products through viral content and influencer collaborations. The platform’s highly personalized content feed effectively captures user attention, making it an invaluable asset for brands aiming to introduce new products or reinvigorate interest in existing ones. According to a recently published report on Consumer Goods:

According to a TikTok CPG Insights survey conducted last year, 79% of millennials and 75% of Gen-Zers discover new CPG products more often after joining TikTok, and 3 in 4 make the majority of their household purchase decisions right on the platform. Of all CPG products being marketed on TikTok, the top three categories are Food & Beverage (91%), Personal Care (80%), and Household Care (73%).

Permanently losing TikTok could stifle these brands’ ability to reach large audiences quickly and cost-effectively, as no other platform offers the same level of organic reach and engagement. Consequently, brands might face higher marketing costs and lower efficiency in their campaigns elsewhere. This could hinder not only discovery but also repeat purchases, as TikTok’s continuous engagement keeps products top of mind among consumers, encouraging them to come back and buy again.

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DTC investment in 2021 reached $5 billion. By 2023, that number fell to $130 million. Meanwhile, Walmart has launched its proxy to the luxury CPG brands that rely so heavily on Foxtrot, Thrive Market, TikTok and retail media: it’s called BetterGoods.

While Walmart executives said they weren’t marketing Better Goods specifically to higher-income consumers, they acknowledged that the assortment might appeal to those shoppers.

Looking forward, the ability of CPG brands to thrive will hinge on their adaptability to these evolving market conditions. The consolidation of retail power, changing consumer preferences, and economic pressures demand a strategic recalibration from CPG brands. Success in this new era will likely depend on leveraging digital marketing channels, understanding nuanced consumer behaviors, and delivering innovative products that resonate with a diverse consumer base. The path forward for CPG brands is fraught with challenges but also ripe with opportunities for those that can navigate this complex landscape with agility and strategic insight.

By Web Smith