Beauty Care FMCG CEOs: This could well be your largest opportunity and you need to act now

‘It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change’. Charles Darwin

‘The world is moving so fast nowadays that the man who says it can’t be done is generally interrupted by someone doing it’ Elbert Hubbard

Two weeks ago a senior executive of a large Beauty Care FMCG company asked me:

‘How can we succeed to drive sustainable profitable growth on mass beauty categories whereas:

  • Retailer price wars and competitive activities drive deflation in developed markets;
  • Direct-to-consumer and nimble disruptors are stealing shares on the most profitable part of our business
  • And consumption barriers in emerging markets (affordability, availability, accessibility) are still a challenge?’

My answer: There is naturally no one-size-fits-all answer but rather a series of short-, mid-, long-term levers that need to be reviewed and activated (cf. the below article)…

But going beyond your usual suspects that are revenue management/go-to-market/white-spaces, portfolio management/innovation, acquisitions… if you are looking at making a dent (and not incremental improvement) in your growth problem, you should look at a direct-to-consumer peer-to-peer model in emerging markets on your mass beauty categoriesThis could well be your largest single opportunity (multi-billion $ revenue) and become a significant chunk (>10%) of your company revenue over the next 5 years but you need to act now. Here is why:

If you are looking at making a dent (and not incremental improvement) in your growth problem, you should look at a direct-to-consumer peer-to-peer model in emerging markets on your mass beauty categories. This could well be your largest single opportunity (multi-billion $ revenue) over the next 5 years and become a significant chunk (>10%) of your company revenue but you need to act now

1. Direct-to-Consumer (DTC) Peer-to-Peer (P2P): an exponentially scalable business model that is already financially ripe on mass beauty categories

  • A DTC P2P business model is when a company sells directly to consumers (no retail intermediary) but through its own independent presenters/affiliates/consultants’ websites/social media. Think it like a 100% digital AVON or TUPPERWARE. Meetings are not held physically, there are virtual parties hosted on social media
  • The most successful example to-date is YOUNIQUE (founded in 2012, ~$400mn revenue achieved in 2016, considered to be profitable, no Venture Capital fund injected, sells mostly skincare and make-up products, ~200,000 independent presenters paid on a commission basis) that has been partly acquired by Coty (60% stake mid January 2017 for $600mn) – to know more, see the below article:
  • Such a business model is designed for exponential scale-up (leveraged assets, contract manufacturers, dynamic presenters base) while having low fixed cost/break-even point. Each presenter has its own website connected to its social media platforms while being connected to the Younique platform
  • YOUNIQUE demonstrated it could be a structurally profitable business at a time most other DTC players are struggling to break-even (Dollar Shave Club…)
  • YOUNIQUE ‘profit formula’ lies in relatively high pricing (comparable to Gemey Maybelline and the likes) and low to none marketing budget (independent presenters promote the brand and the products through word-of-mouth on social media) that create enough space in the P&L to accommodate cost of goods and last-mile-delivery costs while generating a profit. The presenter commission being roughly equivalent to retailer margin (+/- 30%)
  • Mass beauty categories are perfect for this type of business model as there are relatively high penetration, high margin, high spread between retail price and cost of goods, high cubic value, non perishable, not specifically regulated and those are emotionally engaging categories where word of mouth through social media can be extremely powerful

2. A multi-billion $ revenue opportunity or how to unlock the exponential potential of developing markets and address non-consumption barriers

  • The overall FMCG industry is expected to almost double by 2025 and ~80% of this global growth will come from what we call today developing markets. Key drivers are demographics but also increase in categories penetrations. This overall growth (across all categories) represents an additional $6 trillion revenue or the equivalent of around 200 L’Oreal, 540 Estee Lauder, 600 Coty and 680 Beiersdorf
  • Today developing markets growth potential is mostly constrained by the 3As (affordability, accessibility, availability). Driving category penetration is a challenge because of how fragmented are both the retail and the media environment and consecutively how difficult it is to reach a high percentage of the population
  • P2P DTC can help addressing effectively those non-consumption barriers for all the reasons mentioned in the first section
  • Beyond, the upside potential is significant also as the penetration of mobile phones, social media and soon 5G are expected to increase dramatically in developing markets. For example, in China the population that owns a smartphone is expected to move from 560mn in 2016 to 740mn in 2021, ie. +32%
  • If YOUNIQUE succeeded to reach $400mn sales within few years through mostly selling in the US, what could be the revenue potential of a similar business model in China, within the next 3-5 years? Beyond 5 years?
  • Think about the demographics, the leapfrogging to digital technologies (e-commerce sales are already greater in China than in the US with $376bn in 2016 and are expected to reach $840bn – a +220% in the next 5 years). In 2021, e-commerce sales in China will be almost double than the US one ($840bn against $485bn)

Think about the demographics, the leapfrogging to digital technologies, in 2021, e-commerce sales in China will be almost double than the US one ($840bn against $485bn)

  • In addition, last mile delivery costs are expected to drop significantly within the next 5 years
  • In other words, the DTC P2P opportunity on beauty care in developing markets could well be a multi-billion $ opportunity within the next 5 years and become a significant chunk (>10%) of any Beauty FMCG companies revenue

DTC P2P opportunity on beauty care in developing markets could well be a multi-billion $ opportunity within the next 5 years and become a significant chunk (>10%) of any Beauty FMCG companies revenue

  • Three Squirels, a Chinese snack company, selling mostly through T-Mall (Alibaba platform) is a great example of this exponential leapfrog: in a matter of few years, it reached the $433mn yearly revenue mark

3. A Massive Transformative Purpose

  • Beyond financials and strategy, the appeal of a DTC P2P business model is that it empowers a community with a Massive Transformative Purpose. YOUNIQUE’s purpose for example is to:

‘Uplift, empower, validate, and ultimately build self-esteem in women around the world through high-quality products while also providing opportunities for personal growth and financial reward’

  • At a time when purpose is increasingly important for consumers, at a times when consumers are increasingly doubtful about large media campaigns, a digital direct-to-consumer peer-to-peer model with a strong purpose can really help unlocking growth and create value for all stakeholders involved starting with local communities

4. Create your Blue Ocean and escape the war of all against all in developed markets

Taking a step-back, a DTC P2P business model in developing markets can be an effective way to create your Blue Ocean and escape the war of all against all in developed markets. Deflationist pressure in developed markets fueled both by retailer price war and increasing competitive activities (driven by large companies but also new disruptive entrants) are not going to lose steam in a foreseeable future.

5. A necessary catch-up in developing markets

A number of Beauty FMCG companies are still under-exposed to developing markets:

  • Coty recorded only 22% of its revenue in the 2nd quarter of fiscal 2017 (Oct-Dec ’16) outside North America and Europe
  • Beiersdorf recorded only 30% of its revenue in 2016 outside Americas and Europe
  • L’Oreal recorded only 40% of its revenue in 2016 outside North America and Europe

Those performance are far from the best-in-class FMCG companies like Unilever that recorded 57% of its revenue in developing markets in 2016. Looking forward, FMCG companies that will be under-exposed to developing markets in the years to come will be at a massive disadvantage. Launching a DTC (P2P or not) business model in some developing markets could help beauty care companies playing catch-up

Coty recorded 20% of its revenue in developing markets, Beiersdorf 30%, L’Oreal 40%… Those performance are far from the best-in-class FMCG companies like Unilever that recorded 57% of its revenue in developing markets in 2016

6. The first mover advantage will be critical

Local competitors are not going to wait and sit tight on this. Local players have been growing much faster over the last years than foreign FMCG companies especially in China (actually 3.5 times faster according to Kantar WorldPanel between 2012 and 2015). For those local players, such a low capital intensive opportunity is a perfect way to build an overall eco-system and lock local consumers. The first mover advantage will be critical.

In the industrial age, the objective was to make it in the top 3 of each segment/industry to derive a sustainable profit: the key driver was economies of scale and the experience curve (a reduction of cost of goods of 20% every time production doubles), that was the famous ‘Rule of Three and Four’ (Henderson). The digital age on the contrary is a winner-takes-it-all world obeying the law of exponentials (think Google, AirBnB…). In this new world, first mover advantage is increasingly decisive.

7. A way to get exposure to DTC exponential growth while not harming your retailer relationship

At a time some FMCG CEOs are still hesitating on the course of actions to take on DTC. Launching a DTC business in developing markets is the perfect way to leverage its exponential potential while not harming your retailer relationship as the trade environment is much more fragmented in developing markets

So to bring it all together, DTC P2P could be a great lever to address a multi-billion $ opportunity in developing markets. Here is how concretely Beauty FMCG companies can go about it:

1. Pick your country carefully

Not all countries display the same opportunities. India e-commerce yearly revenue amounted in 2016 to $16bn, 24 times less than the yearly e-commerce sales in China on the same year. But a less mature e-commerce environment means also less competition and more upsides for those that are ready to build entirely new categories. Beyond India and China, a variety of other where-to-play exists: Malaysia, Indonesia…

The choice of the country is critical and it needs to be done on a case-by-case basis depending on your product portfolio and whether you have a base to build from in one of those countries: indeed expanding an existing brand that has potential through a DTC P2P model is one thing, creating a brand AND a business model from scratch is something different.

2. Tailor an entirely new business model to the local needs

To be successful, it just cannot be a pure copy/paste from an existing portfolio or business model from a developed market. It would need to fit local requirements. Product specifications will have to be finely tailored to local needs to ensure 100% of costs are value added and products are ‘good enough’ and do not ‘overshoot consumer needs’ (design-to-value approach). Local or near sourcing will be a must for cost/affordability reasons and average transaction value will have to be high enough to accommodate logistics costs. Proposing a wide range of complementary products and services to drive the shopper basket size will be also important.

All of this will require new skills and new breed of talents to execute it.

3. Put at the core of your model your presenters community

This is critical. The heart of a DTC P2P model is its presenters. They need to be at the core of it. Every aspect of the business model needs to be thought to help presenters and make them more successful: product training, business and management tutorial, great incentive program…

4. Build on giants’ shoulders

  • The good news is you do not have to start from scratch and there are companies to learn from although no companies succeeded so far (and have attempted at scale as far as I know) to build a DTC P2P business model in developing markets
  • Success could be for example to transpose a business model like Coty’s YOUNIQUE to developing markets or to transform existing Peer-to-Peer model like the very successful Unilever Shakti program (see article below in the Harvard Business Review describing it really well) into a digital peer-to-peer platform

Either way, you should build on giants’ shoulders and avoid reinventing the wheel

 

How Unilever Reaches Rural Consumers in Emerging Markets

Consumer markets in the developing world are an enormous but still-untapped opportunity for companies seeking new sources of growth. Within that group is an even more overlooked opportunity: the rural consumer. By its sheer size, it has huge potential. Worldwide, there are 3.4 billion rural consumers and about 3 billion of them live in developing countries in Asia and Africa.

5. Start small and scale-up fast

Even if business model blueprints exist, business model innovation is a complex science and it requires many trials and errors. You would need to be ready to start small, iterate and scale up fast.

It may have taken Unilever 16 years to grow progressively its Shakti program to now 70,000 presenters in India serving 165,000 villages, in the digital age, the journey will take time but will be much faster

6. Acquire early or be ready to spend top dollars

Last, naturally the acquisition option is often the best one but in a world where the DTC companies valuation is sky-rocketing, it is critical to brief your M&A team and not hesitate to acquire at a very early stage, sometimes as early as seed-stage to get a good deal. Having M&A teams that understand the dynamics of a DTC P2P business model is also critical to get the valuation right.

Bringing it all together:

Let’s be clear, addressing this opportunity will not be a walk in the park. Many challenges will have to be overcome but in our times of acceleration and transition, we need to go beyond the general perception of Scarcity, we need to act with humility and put all scenarios on the table and we need to act with a sense of urgency as not acting is not an option. This is our exciting challenge for the years to come.

Let’s be clear, addressing this opportunity will not be a walk in the park. Many challenges will have to be overcome but in our times of acceleration and transition, we need to go beyond the general perception of Scarcity, we need to act with humility, put all scenarios on the table and we need to act with a sense of urgency as not acting is not an option. This is our exciting challenge for the years to come.

As often I will close this post with the opening quotes:

‘It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change’. Charles Darwin

‘The world is moving so fast nowadays that the man who says it can’t be done is generally interrupted by someone doing it’ Elbert Hubbard

Frederic Fernandez

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If you are interested in discussing more on the above, you can reach out at: frederic@fredericfernandezassociates.com

Frederic Fernandez does not own any stocks or financial instruments of any FMCG companies or companies mentioned in the above article. All the above information are public information.

About the author:

Frederic Fernandez is an expert and thought leader in the FMCG industry. He is the Managing Director of Frederic Fernandez & Associates a bespoke Strategy Consulting Firm exclusively focused on the FMCG industry. His focus areas are mainly in growth and profit turnaround, corporate strategy, direct-to-consumer and business model innovation in the FMCG industry. His passion is to help FMCG leaders co-creating the future of the industry and to develop, achieve and exceed the potential of their business. He spends his time advising Fortune 500 FMCG senior leaders globally. He is based in Zurich, Switzerland. He is also a sought-after speaker and speaks across the globe at trade associations and for corporate clients (CEO strategy meeting, yearly strategic reviews, senior management events) about the FMCG industry. Before joining the world of management consulting, he worked with Fortune 500 companies like Procter & Gamble, Reckitt Benckiser, PriceWaterhouseCoopers and Societe Generale in leadership positions across Europe (France, UK, Nordics, Germany, Switzerland, Austria), Central Africa and India.