‘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:
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 categories. This 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
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)
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
‘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’
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.
A number of Beauty FMCG companies are still under-exposed to developing markets:
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
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.
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:
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.
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.
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…
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.
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
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
To follow him, please click Here
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.