Having a Direct-to-Consumer (DTC) strategy is not optional anymore in 2017. Yet, it is surprising to see the number of FMCG CEOs that are still hesitating on the route to pursue. Over the last 12 months, I had the opportunity to discuss extensively DTC with FMCG executives, the same concerns came back again and again:
If all the above concerns are understandable, the facts suggest a much more balanced picture: not only it is critical to take actions now but it is even possible to leverage the exponential growth potential of DTC profitably without having to risk retailer relationship. Here is why and how.
1. DTC is already attractive on some categories (it is big, growing & sometimes already profitable)
DTC is small at a macro level (less than 1% share on Food categories) but already large on some categories… DTC is expected to reach 40% value shares on blades & razors in North America by 2020
DTC companies are currently growing at an exponential rate
Profitable business models do already exist but some have yet to turn a profit
– The theoritical gross profit: the gap between Retail Shelf Price (RSP) and Cost of Goods Sold (COGS) multiplied by the average number of items shipped per order minus the Last Miled Delivery Cost (LMDC) per shipment
– The pricing power/ability to resist to competitors’ deflationist pressure: which all comes down to the quality of the consumer eco-system (platform, apps, service/products…), the switching costs for consumers and the value of the alternatives.
2. DTC will only become increasingly attractive… all the profitable growth is ahead
Last Mile Delivery Cost (LMDC) could decrease by up to 90% in the next 2-3 years and will enable many categories to become financially ripe for DTC disruption. Considering that LMDC can account for up to 30% of net revenue in DTC channel. This will be a breakthrough improvement in DTC P&L
3. In fine DTC is only a channel and it is not the end game. It is about assembling a frictionless, unique and valuable consumer eco-system with high switching costs…. like Apple?
Few learnings to draw from the above chart:
Current profitability is rarely a good indicator of future profitability. Let’s take Facebook for example, it was not profitable in 2005 and it is now delivering a steady 35%+ EBIT. On the contrary, Uber continues to record losses after losses
That is why most FMCG DTC companies are currently trying to build unique consumer eco-system with high switching costs
That is why most FMCG DTC companies are currently trying to build unique consumer ecosystem with high switching costs. Younique’s products for example can be found only on the Younique platform and some are truy unique like the 3D Fiber Lashes. Products are recommended by trusted friends. When Honest Beauty made its first acquisition in 2015, it did not acquire a contract manufacturer or another brand, it acquired Alt12 Apps, the makers of popular apps such as Baby Bump, Pink Pad and Kidfolio.
FMCG companies that will succeed to create an omni-channel, frictionless, unique (with little alternatives) and valuable consumer ecosystem (products/services/platform/apps/connected objects…) with high switching costs will become the ultimate winners. Well, they might just start strangely looking like Apple…
FMCG companies that will succeed to create an omni-channel, frictionless, unique and valuable consumer ecosystem with high switching costs will become the ultimate winners. Well, they might just start strangely looking like Apple…
4. There is a variety of DTC models to choose from and understanding their respective pros/cons, their best fit with your business will be critical
There is not a single recipe for success in the DTC space but several as demonstrate the most successful companies in this space:
i. Younique is exclusively a peer-to-peer (P2P) DTC beauty company (a multi-level marketing company like Avon or Amway but exclusively digital that leverages 200,000+ independent presenters to sell its products online)
ii. Dollar Shave Club sells exclusively online through its own website whereas Harry’s sell online and in-store
iii. Beauty Counter is the ultimate omni-channel champion and sells on its own website, on some selected platforms, through retailers and through its own pop-up stores and has even 20,000+ presenters (peer-to-peer model)
Most FMCG leaders believe that getting into DTC comes down to selling one (sometimes even their own) category through their own website. The reality is that there is a diversity of models to choose from (from pure DTC through pure P2P DTC to fully omni-channel) to leverage the exponential growth potential of DTC and all have their respective pros/cons.
From pure DTC through P2P DTC to fully omni-channel, there is a diversity of models to choose from to leverage the exponential growth potential of DTC and all have their respective pros/cons
5. DTC does not have to come at the expense of your retailer relationship
Most FMCG leaders fear that launching a DTC business will damage their retailer relationship. This is not necessarily true if their company does not use their existing brands. Unilever succeeded to leapfrog to the blades & razors category with the Dollar Shave Club acquisition. Coty acquired Younique (skin-care, make-up). Both acquisitions enabled both companies to take advantage of the DTC exponential growth while offering plenty of value creation opportunities (scale-up to new countries, addition of margin accretive categories under the acquired brand name) with none to little retail exposure. Surely a time will come when those companies will be tempted to propose their own brands through this channel but it will be surprising to see them doing so in a near future as they might want first to ‘test the water’.
Both acquisitions enabled both companies to take advantage of the DTC exponential growth while offering plenty of value creation opportunities with none to little retail exposure
6. Successful FMCG companies will be master at balancing both offensive and defensive DTC strategies while minimizing the impact on their retailer relationship
7. Build or acquire? This is litterally the billion-dollar question
This is litterally the billion-dollar question for many large FMCG companies. To be clear, there is no one-size-fits-all answer. Usually, ‘buy’ is the recommended option if the following statements are true:
In reality, some companies are moving forward with ‘buy AND build’ at the same time to hedge their bets like Unilever and L’Oreal
In reality, some companies are moving forward with ‘buy AND build’ at the same time to hedge their bets. Unilever is a good example. It started its business model innovation group/incubator (The Hatch House) to nurture the Dollar Shave Club acquisition and it is also working on building from within DTC business models. L’Oreal struck a partnership with the Founders Factory to identify/acquire 5 beauty start-ups per year AND build from scratch 2 others. This is a good way to get the best of both worlds: getting a quick head-start while starting building knowledge in the organization.
Assessing the value of a DTC business remains an extremely difficult task: exponential growth and quickly evolving profitability make it a difficult exercise
The biggest challenge for large FMCG companies remain to find the ‘right’ acquisition for their business at the ‘right’ cost that will enable a sensible value creation case. Assessing the value of a DTC business remains an extremely difficult task: exponential growth and quickly evolving profitability make it a difficult exercise.
6. Let’s be clear, to reap the benefits of DTC, the key challenge will be to make the culture/organization evolve, not to amend the strategy
Strategy will most likely not be the most difficult part of the journey. The below chart summarizes well the organization/culture challenges/dilemmas FMCG organizations will face while tacking this new challenge
Some companies have started to tackle those dilemmas with more or less success:
7. The Jon Moeller’s objection (Group CFO Procter & Gamble)
On October 25th 2016, Jon Moeller, Group CFO of Procter & Gamble declared in an interview with financial analysts: ‘Direct-to-consumer accounts only for 0.3% on the categories we play in globally’, ‘It has to be put in perspective’, ‘How many people do you know,’ he said, ‘that want to satisfy their household shopping needs in a month or two by going to 40 different websites with 40 different passwords and 40 different packages that arrive at 40 different times?’
Good points… few thoughts though:
Don’t we think that companies that will succeed to build a valuable eco-system on well targeted consumer groups will not only succeed to survive but also to thrive?
Companies that will pass on DTC will miss the opportunity to build direct consumer relationship and acquire priceless consumer data which will become no more no less the ultimate competitive advantage in the digital disruption age
In this context, how to go pragmatically about it? How to get started?
In our experience, few pragmatic yet decisive moves can give an organization a head-start
i. GET A CLEAR STRATEGY: determine which categories/consumer groups to defend/to attack and how
Which categories could be the best vehicles to build a winning consumer eco-system?
All those activities can be performed by in-house or external consultants, by a business model innovation group at the edge (if it exists) or even by a black-ops team in some radical cases
ii. GET READY TO EXECUTE: Determine a clear governance to execute those strategies (existing business units, business model innovation group at the edge,which incentives/KPIs, partnership with external incubators…) and determine how best the organization can balance present/future while leveraging common assets/know-how and remaining fast/agile. Only a qualitative assessment combining both strategy and culture can bring a meaningful answer
Only a qualitative assessment combining both strategy and culture can bring a meaningful answer
iii. LEVERAGE M&A: give a clear brief (targeted consumer group, categories, size, growth rate, quality of the consumer ecosystem) to the M&A group to gear up the identification of a suitable acquisition target. In this exercise, it is critical to have a specific methodology to assess the value of those targeted exponential companies that incorporates exponential dynamics (growth and evolving profitability) and that assesses the quality of their consumer eco-system/pricing power. Acquiring companies that are still ‘below the radar’ (less than 1% market share) is still the best way to create exponential value. Too many M&A organizations fail to determine the full value potential of such deals.
It is critical to have a specific methodology to assess the value of those targeted exponential companies, incorporating exponential dynamics and assessing the quality of their consumer eco-sytem/future pricing power… too many M&A organizations fail to determine the full value potential of such deals
iv. LEVERAGE YOUR CONSUMER DATA AND TURN IT INTO YOUR ULTIMATE COMPETITIVE ADVANTAGE: Too many FMCG companies still do not leverage systematically all their first-party data. Not only it is a lost opportunity to optimize exponentially marketing ROI with programmatic buying but it is also a missed opportunity to build valuable consumer eco-system. In the digital disruption age, consumer data will become the ultimate barrier-to-entry
v. BUILD AN EXPERIMENTATION CULTURE FAVORING SPEED OVER PERFECTION: From training employees the Lean Start-up principles like GE did through changing the corporate values and the standard hire profiles to amending organizational and incentives structure; there are many levers available. Only a case by case assessment enables to identify the most effective ones.
At a time when more and more FMCG companies struggle to grow organically, DTC is a must-do and all FMCG CEOs must have a robust game-plan
As often, I will finish this post with a quote, this time from Lawrence J. Peter (Peter’s Almanac, 1977):
‘Some problems are so complex that you have to be highly intelligent and well informed just to be undecided about them’
If you are interested in hearing and discussing more on the above, you can reach out at email@example.com or attend one of my upcoming Senior Executive FMCG Conferences (each limited strictly to 20 attendees and exclusively 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 2017 from 8 to 10 am at Hotel Grand Hyatt
– Geneva, Friday 24th 2017 from 8 to 10 am at Hotel Des Bergues Four Seasons
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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 Fortune 500 FMCG 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, top 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.