As big-box retailers cut prices, CPG startups are also facing pressure to lower costs

While many of these price cuts were issued on private label products or items belonging to national brands, startup founders say that the message they consistently hear from buyers is that they are focused on providing value to price-conscious customers. That means buyers want startups to drop their prices too.

Cutting costs and improving margins can be difficult for young brands without an economy of scale. However, grocery startups say the effort to pass on the savings is worth the investment — not only to make retail buyers happy, but also to drive more product trials and higher velocity. 

‘There is a real pressure’

Proper Good, a ready-to-eat meal brand known for its shelf-stable soups and overnight oats, entered Walmart in 2022 after launching as a direct-to-consumer brand in 2020. 

Since getting into physical stores, Proper Good co-founder Christopher Jane said the company’s research showed that pricing was the main barrier for customers not repurchasing the product after trying it. Jane said it’s no surprise that retailers are pushing all types of grocery brands to push down their prices. 

“There is a real pressure, especially with everyday essentials, where people are still being squeezed due to inflation,” Jane said. “Buyers obviously have this sentiment, but it’s also consumers asking for more affordable options.”

So, Proper Good has been working to lower its prices. As of this month, Proper Good soup costs $4.98 at Walmart, down from $5.98. The breakfast items are now $2.98, down from $3.99. The change coincides with the brand increasing the number of SKUs available at Walmart, as well as doubling its Walmart store count.

“We worked with the supply chain and removed packaging components that were adding a lot of costs,” Jane said. Some of this also comes with the economy of scale, he added, in which the company is able to save nearly 20% on raw materials and ingredients compared to Proper Good’s early days at the height of the pandemic. 

“We’re now big enough to meet the minimums for printed films, so we can get rid of the box that covered the package,” he said. The increase in printed film orders helped save 30% on packaging costs. And moving from a six-pack to a 10-pack case orders saved another 5% to 10% per unit. 

As Proper Good was working to lower its prices, it was also getting enough conversion data from Walmart to know that shaving off $1 per item would be worth the effort. “Sharing that data helps us put a bullseye on what price we can target,” Jane said. “[Walmart] also been helpful in decisions like flavor and packaging changes.” 

Tweaking production and marketing costs 

Coconut spread brand Kokada is another brand that’s betting on price reductions to excite both retailers and shoppers.

Kokada co-founder Breanna Golestani said over the last year, the company heard a lot of feedback from its buyers at Wegmans and Sprouts about providing more value for price-conscious shoppers in the nut butter aisle. Having launched in 2021, the band made multiple tweaks to drive down the cost of goods sold.

Golestani said Kokada’s goal was to bring down the full MSRP price rather than fall into a cycle of doing promotional discounting. That goes for the existing Kokada products at retailers like Sprouts and Wegmans, as well as products like the new dunks, a snack pack that combines its coconut spread with pretzels. “The shelf product on that is $1.99, which is really aggressive for a startup,” she said. “But we said we’re only going to discount once a year for back-to-school.” 

In order to lower the prices of its core coconut spreads, Golestani said the company had to “pull a couple of levers.” At Sprouts, for instance, over the last six months, the price of a Kokada jar dropped from $11.99 to $10.49 and finally to $9.99 in recent weeks.

In order to do so, Kokada had to renegotiate production costs with suppliers, which was helped by the brand’s volumes getting bigger. Another way to pass on the savings to customers was to shrink trade spend, Golestani said, which includes budgets for in-store promotions, demos and retail network ads. “It felt a little uncomfortable to shrink that spend since we’re such a weird product, but so far, it’s been going well,” she said. 

Balancing short-term benefits with long-term investments

Overall, brands that recently dropped their MSRP at the suggestion of retailers said the effort is worth it, even if there’s a risk that it could create a race to the bottom long-term.

Better-for-you candy startup Behave dropped its prices at the end of last year after reformulating and changing its packaging. The company reduced its price from $5 per pouch to $3.50 as it prepared to launch in chains like Wegmans after selling at specialty stores like Erewhon.  

“It’s really common to see downward pressure on pricing from retailers,” Behave founder Mayssa Chehata said, especially as a brand moves from natural and specialty into conventional and mass retail. “Luckily, we’ve sold well and are in line or below our category now at $3.50, so there hasn’t been as much pressure since our price reduction last year,” she said. “But before, we heard it a lot from retailers.”

This year, Chehata said, the company has been able to maintain healthy margins and sell well at the new price. “But as we start conversations with new and larger, more conventional retailers, there is a world where we’d come down slightly for certain channels,” she said.

Knowing when to drive prices down is a balancing act for startups trying to make buyers happy.

Alek Koenig, CEO of cash flow management platform Settle, said that there’s no best approach to price reductions other than understanding what is going into your production costs. 

“Price cuts usually have short-term benefits but in the long run could become a race to the bottom, which often hurts all parties involved more than helps,” Koenig said. But not all price cuts are inherently bad, especially as brands move from acquiring online customers to retail shoppers. 

Jane of Proper Good said it’s still too early to tell just how much cutting prices will impact the brand’s velocity.

But the investment in lowering prices is a long-term strategy to be on par with mass-market brands, while still maintaining premium quality. Jane said that offering a better-for-you option that’s under $5 puts the brand in direct competition with national brands like Campbell’s.

“The idea is to give people the option to have our food daily, as opposed to a treat,” Jane said.