‘The future is already here – it’s just not evenly distributed’ – William Gibson
I believe we have never lived in so exciting times in the history of FMCG. FMCG industry will change more over the next 5-10 years than during the past 200 years. That is in those times I think that we will recognize the true leaders and innovators.
FMCG industry will change more over the next 5-10 years than during the past 200 years
1. Connecting the dots from disruptive innovations to disruptive business models
Most of the discussions I had over the last 6 months with FMCG senior leaders were about digital disruption. If everybody agrees that the digital revolution is changing the way we are doing business (digital marketing, rise of e-commerce…), very few FMCG leaders today understand fully the scale of the change. Most leaders believe that FMCG is a high barrier to entry business, the biggest barriers being having a strong brand, strong relationship with retailers and having unique manufacturing assets. Most FMCG leaders believe that what is currently happening to the recruitment industry (LinkedIn), short period accomodation business (AirBnB), taxi (UBER), banking (rise of a myriad of niche fintech start-ups) will NEVER happen to the FMCG industry. This is WRONG. We can build a brand for nothing on YOUTUBE, we can short-cut retailers with little investments through setting-up a web-shop and a warehouse in a cheap suburb, we can source high quality products from a myriad of private labels suppliers that have excess capacity.
FMCG leaders believe that what is currently happening with LinkedIn, AirBnB, Uber.. will NEVER happen to the FMCG industry because they have unique assets (brands, plants, retailer relationship). This is WRONG. We can build a brand for nothing on YOUTUBE, we can short-cut retailers with small investment through setting-up a web-shop and a warehouse in a cheap suburb, we can source high quality products from a myriad of private labels suppliers that have excess capacity
Let’s be clear, the FMCG industry will change more over the next 5-10 years than during the past 200 years:
– the first wave of disruption has started with the rise of online direct-to-consumer business model. It concerns mainly FMCG companies that display a high enough spread between their retail price and their cost of good sold to allow an online direct-to-consumer business model to thrive. This first wave has already started and it will continue to gain momentum as ‘digital penetration’ will increase and as ‘last mile transportation’ and warehousingcost will decrease with technology (think drones delivery and robots operated warehouses). Attractive candidates for disruption will be: blades & razors, beauty & cosmetics, condoms, fresh food sourced directly from farms… Basically all categories that have all or a combination of the following characteristics: a high value by cubic meter, a great spread between cost of goods sold and retail price, a long or manageable shelf life, limited regulatory requirements.
The first wave of disruption has started with the rise of online direct-to-consumer business model
– the second wave will start when 3D printing technology will come to maturity by 2020 or potentially earlier, it will be the rise of a new breed of FMCG that will master digital platform, hardware (decentralized manufacturing machine like 3D home machine) and softwares (services, content, Apps) . At that time, transportation costs and spread between the retail price and cost of goods sold will not be decisive anymore. New entrants will gain the opportunity to shortcut entirely the whole value chain delivering huge benefits to the consumers.
The second wave will start when 3D printing technology will come to maturity by 2020 or potentially earlier, it will be the rise of a new breed of FMCG that will master digital platform, hardware (decentralized manufacturing machine like 3D home machine) and softwares (services, content, recipes accessible through Apps) .
Think about a Lego competitor that will sell a 3D printing brick machine and where instructions and plans could be downloaded like an App. Think about 3D printing a pizza. Think about the largest household (laundry detergent) and beauty care (shampoo) categories in the world worth hundreds of billion $ that use 80% common ingredients (surfactants, preservatives, perfume) – why not then having at home a machine doing all those SKUs . Think about dairy, a digital platform will connect directly farmers and consumers, 3D printer or machines will help consumers at home converting fresh milk into yogurt, cream, curds. Dairy FMCG will have to connect seamlessly a broad supply base of farmers with consumers, to guarantee quality and to sell hardwares (3D machine) and softwares (downloadable recipes like Apps). Technology will enable to match decentralized supply and demand and to drive unecessary costs out (milk transportation to the plants, manufacturing, transportation to retailer warehouse, warehousing, retail stores…). Think how it could eliminate food waste across the supply chain through connecting directly supply and demand. Those new models will not replace overnight our current world but they wil grow very fast as they will provide cheaper and more convenient options to consumers, exactly like Dollar Shave Club.
Think about a Lego competitor that will sell a 3D printing brick machine and where instructions and plans could be downloaded like an App. Or think about a dairy FMCG, it will have to connect seamlessly a broad supply base of farmers directly with consumers, to guarantee quality and to sell hardwares (3D machines that will make yogurt, cream, curd… at home) and softwares (downloadable recipes like Apps).
This second wave will hit most categories. Most of the innovations I mentioned above exist already at experimental stage (3D milk machine, 3D brick machine…). We have long passed the point to discuss whether the whole industry will be disrupted or not, the key question is to determine which categories will be hit first and who will be the winners.
We have long passed the point to discuss whether the whole industry will be disrupted or not, the key question is to determine which categories will be hit first and who will be the winners
Frontiers will be increasingly blurred between retailers and FMCG and it will be a war of all against all like once wrote Thomas Hobbes. Retailers will refuse to see large ‘traffic building’ categories like diapers, fresh foods, beauty moving gradually out of their control to a direct model and will engage into a frontal battle with suppliers. Let’s take Pampers for example. It is impossible to buy on the Pampers website diapers, there is a shopping cart icon but if you click on it, you are invited to go shopping to the closest retailer. If you get back to your Google page search, you can find the same diapers on sell at: www.diapers.com… a website that is owned now for 2 years by AMAZON. Only small categories with limited penetration using specific ingredients will be spared by this 2nd revolution and will be concerned only by the 1st revolution: shoe polish, stain remover…
Frontiers will be increasingly blurred between retailers and FMCG and it will be ‘a war of all agains all’
This is a brand new world emerging and it is getting shaped right now. The ‘2nd revolution FMCG’ will have to master an ecosystem made mainly of 3 things to be successful: a network/digital platform, a hardware and softwares.
This is what looks like a foreseeable near future. Now let’s look like at the present to see how fast those changes take place and how can FMCG leaders do to get ready.
2. How Dollar Shave Club and others are disrupting Gillette blades & razors
This is a typical example of the first wave disruption. Blades & razors are the perfect target for an online direct-to-consumer disruptor:
– It displays a great spread between cost of goods sold and retail price
– It is a large category (>15 bn$ retail value globally)
– It is cheap to ship as it is small volume and high value
– It is relatively easy to source good quality blades and razors from low cost countries with moderate transportation cost
All those reasons explain why and how a duo of entrepreneurs with no brand, no manufacturing assets, no relationships with retailers and with initially as little as 20,000$ in their pocket succeeded to start from scratch a challenger to Gillette and seized 6% market share of the very profitable blades & razors business in the US within 36 months and reach almost 150m$ revenue in 2015. In 2012, his first YOUTUBE video gathered 19 million views, it offered cheap online subscriptions for blades and razors sourced from south east Asia. 3 years after, Dollar Shave Club became the number 2 blades & razors brand in the US market outselling Schick (The Energizer Company’s brand).
This is how a duo of entrepreneurs with initially no brand, no manufacturing assets, no relationships with retailers and with as little as 20,000$ in their pocket succeeded to build a 150m$ business in 36 months and became #2 in the US market
And it is only the beginning. Since Dollar Shave Club started their online subscription model, half a dozen start-ups followed driving deflation (blades and razors online players sell up to 2 to 3 times cheaper their products than Gillette products in store) in the market and taking agressively shares. Experts now estimate that 40% of the US blades and razors business will be online by 2020. The US blades and razors category was worth 3bn$ in 2014. Off-line, Gillette enjoys 60% market share. On-line, Gillette enjoyed 20% market share only as of H1 2015. Gillette launched also their online subscription based web-shop but they cannot be as audacious as their competitors price wise as they are under pressure from retailers that do not want to see this big category moving away from them and as they do not want to under-cut their off-line business. As a combined results of market deflation and volume loss, the threat for Gillette is huge. It is no more no less than 20% to 50% of its US profit that could be wiped out by 2020 if its online market share remains at 20% and if deflation kicks in. In the meantime, other start-ups launch similar business across the globe and are taking on Gillette. In 2015, Dollar Shave Club decided to launch also skin care and hair care products on its website.
It is no more no less than 20% to 50% of US Gillette profit that could be wiped out by 2020 if its online market share remains at 20% on-line and if deflation kicks in
To nuance the above, it is important to mention that:
– Dollar Shave Club received several private equity infusions since its inception (the latest in 2015 for 75m$). They used mostly this cash to run TV ads. Lately, they outspent Gillette (64m$ vs 43m$) in TV ads spend in the US. This is the irony of the digital disruption age
– They are not turning yet a profit
Lately, Dollar Shave Club outspent Gillette (64m$ vs 43m$) in TV ads spend in the US. This is the irony of the digital disruption age
For the readers that are not familiar with Gillette. It is a 8bn$ revenue business owned by P&G that displays a top operating margin of 25% (average P&G: 15% – source: Financial report 2015), that has been ranked by Forbes the 18th most valuable brand in the world in 2015. Gillette has access to the best technology and to the best talents around the globe. It enjoys the huge scale of one of the largest FMCG in the globe: P&G. Despite all of that, it is getting disrupted. So if it can happen to Gillette, it can happen to any other FMCG also.
If it can happen to Gillette, it can happen to any other FMCG also
3. What are the 5 lessons we can learn from this case study?
i. Barriers to entry are falling and will keep falling as digital penetration will increase and as ‘last mile transportation’/warehousing cost will decrease (think drone delivery and robot operated warehouses)
ii. Your assets are not anymore unique and absoluete competitive advantages(brands/manufacturing/retailer relationship)
iii. Online business disruptor can threat up to 50% of your profit in the next 3-5 years depending your categories
iv. Your valuable relationships with retailers might have become a burden for change
v. Your size is not anymore an advantage but could even be a handicap – the winning FMCG will need to be fast, entrepreneurial and reactive with a challenger mindset
Your valuable relationships with retailers might have become a burden for change
4. What are the 5 actions that you FMCG leaders should take?
i. Assess the vulnerability of your categories in regard of the 1st and the 2nd wave of disruption
ii. Ensure you get ready to benefit from those 2 revolutions (win with e-tailers, launch your own web-shop, invest in R&D to invent your future ecosystem with your hardware, software and digital platform/network)
iii. Build a challenger business unit separated and autonomous from your core business to disrupt your existing business and to identify new opportunities. As CEO, ensure that all key decisions come up to you directly for decision to avoid political decisions. It will require courage but it will be critical. Businesses that invest early and are pioneer will be in a position to transition smoother than those lagging behind that will have to take strong calls to stay in the race. It can even offer opportunities to enter into new businesses (e.g. ORANGE, the French telecommunication company just acquired a major online bank – they disrupted their landline business with mobile phone – now they understood that banks have become just technology company managing risks and that they have the skills to win on this market). There will be no FMCG CEO anymore, they will be only Tech CEO as a result of blurring frontiers between industries
Build a challenger business unit separated and autonomous from your core business to disrupt your existing business and to identify new opportunities
iv. Keep talking value to your consumers to increase the perceived value (e.g. we have the best blades, they are the best for your skin…) of your products and do not wait to have a new entrant that disrupts you to engage them – it needs to be credible
v. Strengthen directly the links with your consumers (apps, web-shop, in-house programmatic buying to collect consumer data..) and your key suppliers (e.g. farmers for food categories…). Those relationships will be one of the only barriers to entry that will keep you ahead of the competition.
Again, I believe we have never lived in so exciting times in the history of FMCG. That is in those times I think that we will recognize the true leaders and innovators.
To conclude, let’s all keep in mind William Gibson’s quote:
“The future is already here – it’s just not evenly distributed’
Looking forward reading your comments and starting discussions.
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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 lie mainly in growth and profit turnaround, corporate strategy, direct-to-consumer and business model innovation. His passion is to help FMCG leaders 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.