Consumer goods industry undergoing sustainability revolution

The Craftory, co-founders, Ernesto Schmitt

Ground-breaking technology has changed the world over recent decades and next it is the turn of consumer goods to undergo a revolution and make a significantly positive impact on people’s lives.

This is the view of Ernesto Schmitt, co-founder of The Craftory, whose venture capital firm is investing in companies that make these consumer goods, which positively impact the categories in which they serve. The objective is to help these challenger brands disrupt the global incumbents who are struggling to adapt their businesses to the increasing demands for sustainability and ethical practices.

He cites the likes of major CPG (Consumer Packed Goods) companies including P&G, Unilever, Kraft and Heinz as having developing their products based on functional requirements and constantly working on ever greater efficiencies of production in order to achieve ever-lower prices.

“We’ve reached the stage of $1 cleaning products but there are consequences of this – it’s bad for the environment. The CPG industry is all about function and efficiency. The challenge is about dealing with the consequences of this,” says Schmitt.

One answer is the growth of smaller challenger brands that are developing new sustainably produced products: “A lot of the world would go for a sustainable alternative but it’s out of reach [financially] and they will rely on efficient products [from big CPG]. But for 30/40/50% of people they will be searching for a better alternative. It’s the bold brands that are setting the pace and consumers will change to these better alternatives.”

To help the challenger brands grow The Craftory raised a $375 million fund in 2018 to invest in companies that have typically reached £10 million in annual sales and now need to navigate the tough task of scaling up to £100-200 million in revenues.

“It’s at this stage when companies can fail. We can help them grow to £200 million by helping them with their strategy, product development, digital toolkit, manufacturing and logistics,” he says.

Such a hands-on approach sets The Craftory apart, according to Schmitt, who says it is “not a typical VC”. Not only does it act as “mentor and consigliere” but the structure of the fund is different. “Over the past 20 years I’ve created a dozen ventures and have seen the severe limitations of [investor] capital. It was often at odds with these growth ventures. I thought there must be another way. At The Craftory we’ve no fixed exit dates or multiples to achieve,” he explains.

To date the company’s investments are split two-thirds in the US and one-third Europe spread across the target categories of health & beauty, food, household goods and personal care. The portfolio currently includes: NotCo, Seed, Dyper, TomboyX, and Who Gives a Crap.

Brands increasingly approach The Craftory looking for investment but the business also actively tracks 5,500 brands using a toolkit combining in-house developed tools and licenced solutions to monitor a batch of relevant data points that are accessed by a dashboard.

Although there is no defined exit timeframes for the portfolio companies Schmitt says the beauty of the space is that the large CPG companies have a tough task to transform their businesses to a more sustainable focus and a primary route is through the acquisition of challenger brands.

This activity can be seen at Unilever where its Prestige division is aggressively adding to its portfolio of premium, mission-driven brands with acquisitions over recent years including Paula’s Choice, Dermalogica and REN.

Schmitt will certainly be hoping for more such activity and it is surely the case that this is exactly what will happen as the global CPG firms come under increasing pressure to buy their way to change

Glynn Davis, editor, Retail Insider