2016 has come finally to an end and what a vintage it was for the FMCG industry.
Few highlights:
– The two movers & shakers of the last 15 years shaked again the industry through closing 2 historic deals (3G Capital with Ab-Inbev/SAB Miller and JAB Holding with P&G Beauty/Coty) in a quest for scale and consolidation
– If most companies have delivered dramatic profit improvements in 2016, few actually are on track to meet their revenue growth guidelines (RB, PepsiCo…). Adverse FX impact, pressure on trade margin from retailers in a deflationist environment are mainly to blame
– Direct-to-Consumer has continued its exponential progress (on the categories financially ripe for disruption) and the Unilever’s acquisition of Dollar Shave Club is just a testimony of that
2017 looks at least as exciting. Here are 10 thoughts for this coming year for the FMCG industry.
1. Finally GROWTH will be priority 1, 2 and 3 and business model innovation might just be the key
The focus will move away from cost savings to growth as traditional cost reduction tactics are now delivering diminishing returns (Zero Based Budget, organization delayering, sizing/pricing & shrinkflation tactics…), as most FMCG companies missed their growth targets in 2016 and as disruption threatens most large players. As one of the EUROPE CEO of a large FMCG company mentioned before Christmas:
What is the point to invest 80% of our resources in expanding profit margin – cutting cost, growing unit revenue through revenue management and incremental product launches – if our entire business model is threatened to be disrupted’ CEO EUROPE of a leading FMCG company
2. ESCAPE ‘THE WAR OF ALL AGAINST ALL’ OR ‘SHRINK TO GLORY’
Competition will continue to intensify along with pressure on profit. In a world where it becomes possible to reach consumers directly and where barriers-to-entry are getting lowered; competition will only increase. It will be increasingly the ‘War of all against all’ (Hobbes). Think category leapfrogging strategy enabled by DTC (Unilever/Dollar Shave Club on blades & razors), think AMAZON that will be in a position to command more and more trade margin with Dash Button, think private labels manufacturers that will be soon able to leapfrog also and challenge established FMCG companies (although they will have to learn progressively to build a brand and direct consumer relationship).
In this context, FMCG companies will have 2 choices:
1/ Either continue to apply ‘recipes from the past’ (dedicate 80% of their resources on traditional profit improvement tactics and linear/incremental innovation) and ‘shrink to glory’
2/ Or shift dramatically resources to capture ‘granular growth’ opportunities and innovate at scale with their business models
In a world where it becomes possible to reach consumers directly and where barriers-to-entry are getting lowered; competition will only increase. It will be increasingly the ‘War of all against all’. 2 options will remain: continue to apply recipes from the past and ‘shrink to glory’ or dramatically shift resources to capture ‘granular growth’ opportunities and innovate at scale with their business models
3. DIRECT-TO-CONSUMER (DTC) will be THE billion dollar dilemma for most CEOs
– Should we use it as a defensive (like P&G Laundry dollar club) or an offensive strategy (Unilever/Dollar Shave Club – PepsiCo foray into the meal-kit delivery business)? On new categories or on our existing ones?
– How to manage legacy relationships with retailers in a world where on average 99% of sales are still made through retailers either online or offline?
– Considering the very high multiples requested by DTC companies, should we acquire (like Unilever) or should we build from within DTC capabilities?
– Who should build those capabilities? Traditional business unit or business model innovation group at the edge (e.g. The Unilever Hatch House, Pernod Ricard’s Business Innovation Group)?
– How to put in place an organization that encourages speed, agility and (self)-disruption?
– Do we have the right leaders & talents in-house to drive this change and build those capabilities?
All those questions will be high on the CEO agenda in 2017 (most of the answers to those questions can be found in my previous posts – see at the end of this post)
How to manage legacy relationships with retailers in a world where on average 99% of sales are still made through retailers either online or offline? […] Considering the very high multiples requested by DTC companies, should we acquire (like Unilever) or should we build from within DTC capabilities? […] All those questions will be high on the CEO agenda in 2017
4. LAST MILE DILEVERY COST (LMDC) WILL CONTINUE TO DECREASE
As driverless vehicles, drones and delivery robots become increasingly a reality (Starship Robot, Uber’s scale-up plan for driverless vehicles, Amazon plans for drone delivery…), last-mile delivery costs will continue to drastically reduce and pave the way to mass DTC disruption across a whole range of categories.
Starship robot made its first delivery in London on Dec 2nd 2016 and it is just the beginning
The only question a FMCG CEO needs to ask itself is not whether LMDC will make DTC financially attractive on his/her categories but when will it happen and whether his/her company will be ready at that time
5. DTC + LMDC + 3D Printing = Disruption at scale
If most of the FMCG companies have started to experience with DTC. The really disruptive business model innovations will only appear when DTC will be combined with low (to zero) last mile delivery cost and 3D printing/decentralized manufacturing. With a cost that is currently halving every year, 3D printed prototype and new value chain will continue to emerge in 2017. In the meantime, ADIDAS announced finally that its 333$ 3D printed shoes will hit the market in January 2017 in limited edition. Not yet an economic viable & scalable option for sure but we are at the dawn of a new era for consumer value chain
Not yet an economic viable & scalable option for sure but we are at the dawn of a new era for consumer value chain
6. NURTURING DIRECT CONSUMER RELATIONSHIP AS ULTIMATE BARRIER-TO-ENTRY
In this rapidly evolving environement, the consumer relationship will become the ultimate barrier-to-entry and marketing will shift focus from demand generated activities to consumer-relationship building activities. More and more FMCG companies will increase their investment in 2017 in: Apps, chatbot powered consumer communities, DTC capabilities, subscription based and service based programs…
Sephora is a great example, it launched in December for Christmas its Artificial Intelligence powered shopping assistant BeautyBot: an app recommending to its users products based on a dialogue (see video below)
7. THE NEED FOR A DEDICATED 3P STRATEGY ONLINE VS OFF-LINE
E-commerce will continue to grow ahead of brick & mortar sales and will require increasingly a customized/dedicated 3P (Price-Promotion-Product) strategy online vs offline to maximize volume/unit revenue. If over the last 5 years, FMCG companies have largely copied/pasted their 3P strategy from offline to online, this is now becoming increasingly ineffective/dangerous (risk of dynamic pricing contaminating offline…) and we see an increasing number of players de-syncing their 3P strategy. The case for a dedicated 3P strategy needs to be made on a category basis but available data suggests a financial pay-out to de-sync within reason the 3P strategies online vs offline
Ecommerce will continue to grow ahead of brick & mortar sales and will require increasingly a customized/dedicated 3P (Price-Promotion-Product) strategy online vs offline to maximize volume/unit revenue
8. THE EXPONENTIAL RISE OF CONNECTED OBJECTS AND ARTIFICAL INTELLIGENCE WILL CONTINUE
If AMAZON is at the forefront of this (Dash-button, current roll-out of the AMAZON GO store format that is expected to disrupt retail with its AI – see video below),
more an more companies are releasing products connected to Internet that leverages Artifical Intelligence. Mattel (the toy maker) made bold announcement this week on the Las Vegas CES 2017 announcing the launch of Aritostle – no more no less than the equivalent of Amazon’s Echo for kids
No doubt that we will see more of this in 2017
9. CONSOLIDATION WILL CONTINUE, ESPECIALLY IN THE FOOD INDUSTRY
All those exponential technologies are great but the traditional dynamics of the industry will continue with even more consolidation. Food industry is set to see more consolidation in 2017. It should not be a surprise for everyone, 2 years after KRAFT acquired HEINZ, KRAFT-HEINZ will likely make an acquisition in 2017. No crystal ball or insider information there just repeated rumors making the headlines. The following companies keep being mentioned in the press as being potential targets: Mondelez, General Mills, Kellogg’s.
10. A BRAND NEW ORGANIZATIONAL PARADIGM WILL EMERGE
FMCG CEOs and CHRO will increasingly realize that the matrix organization has reached its limits and that not only a brand new organizational paradigm is needed but also a brand new leadership. The billion dollar questions will be:
– How to excel at both starting-up AND scaling-up businesses?
– How to encourage (self)-disruption at pace?
Reconciling those dilemma will be critical. Attempts will include:
– the recruitment of a more diverse workforce, including past entrepreneurs and start-up employees
– The implementation of flater, more autonomous organizational structure while breaking down large organizations into smaller units
– The set-up of business model innovation group at the edge to drive (self-)disruption
– The set-up of a Chief Entrepreneur Officer role to lead (self)-disruption
– A progressive end to the 100% ‘promotion from within’ culture in some companies
This new organizational paradigm needs still to be co-created and it is one of our exciting challenge for 2017
FMCG CEOs and CHRO will increasingly realize that the matrix organization has reached its limits and that not only a brand new organizational paradigm is needed but also a brand new leadership – This new organizational paradigm needs still to be co-created and it is one of our exciting challenge for 2017
I wish everyone a fantastic year 2017. I have no doubt it will be again a hugely exciting one.
If you are interested in hearing more on the above, you can reach out at frederic@fredericfernandezassociates.com or attend one of my upcoming Senior Executive FMCG Conferences (each limited strictly to 20 attendees and reserved to senior FMCG executives on a pure first come/first serve basis – the attendance is free) – upcoming topics/dates for Q1 2017 include:
Q1 2017 Topic: FMCG CEOs: Managing (finally) for growth or how to stop ‘shrinking to glory’
– Zurich, Friday, March 17th from 8 to 10 am at Hotel Grand Hyatt
– Geneva, Friday 24th from 8 to 10 am at Hotel Des Bergues Four Seasons
I deliver also speeches on request on the future of the FMCG industry.
Frederic
To follow him, please click Here
About the author:
Frederic Fernandez is an expert and thought leader in the FMCG industry. He is the Managing Director and Partner 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 senior FMCG leaders across Europe, Middle East and Africa (EMEA). Before joining the world of management consulting, he spent more than 10 years working 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.