‘The only source of knowledge is experience’ Albert Einstein
Over the last 18 months, I had the opportunity to interact with more than a fifteen FMCG companies on the Direct-to-Consumer topic across categories. If a majority of FMCG companies have now understood that not acting is not an option, most are still struggling to articulate a sound strategy to leverage this exponential opportunity.
I will not discuss in this article ‘Why’ it is important to get started with DTC as it was tackled in the below article I wrote 3 months ago.
This article focuses on the ‘How To’ and more specifically details the 15 most common mistakes FMCG companies do in their DTC journey.
Here there are:
A great number of FMCG companies engage into DTC in a reactive manner as a result of a competitive response. They have not mapped the vulnerabilities of their portfolio and the opportunities on adjacent segment (space in the P&L between retail shelf price and cost of goods, associated last mile delivery cost, non perishable goods, regulatory requirements…). At such they do not have clear priorities. Most importantly, they do not factor the evolution of last-mile-delivery costs in a dynamic manner in their strategy.
They do not have clear priorities. Most importantly, they do not factor the evolution of last-mile-delivery costs in a dynamic manner in their strategy
The above matrix summarizes the various options available. Coty showed with Younique that it was possible to leverage the exponential potential of DTC on existing and adjacent categories without damaging retailer relationships. Same thing with Unilever and Dollar Shave Club. There are a variety of options to investigate. If any DTC strategy involves protecting currently ripe segments, there is also an ‘upside scenario’ either through leapfrogging to new adjacent categories or to leverage DTC to address non-consumption barriers in specific geographies. Best-in-class organizations understand their upside scenario and address them along with their defensive scenarios,
Best-in-class organizations understand their upside scenario and address them along with their defensive scenarios
FMCG companies that see DTC purely as an incremental channel and fail to build a valuable holistic consumer eco-system with high switching cost will be wiped out:
Best-in-class organizations have a clear consumer centric eco-system strategy.
Understanding the consumer eco-system logic is one thing, focusing this eco-system to solve the most critical problems for the consumers is something different. One marketing director was telling me recently how his team launched an App and a connected object that ended up having very little traction with consumers. He admitted himself that he never personally used it. Technology must serve consumers, not be an end in itself. Over-premiumization and over-shooting consumer needs with gimmicky apps and connected objects is a clear risk.
Best-in-class organizations map their DTC risks and opportunities and pour all their resources to address those, they do not waste their resources on gimmicky/non consumer critical features.
Understanding the consumer eco-system logic is one thing, focusing this eco-system to solve the most critical problems for the consumers is something different. Best-in-class organizations do not waste their resources on gimmicky/non consumer critical features
Many were surprised by the announcement of RB to enter the infant milk category with the Mead-Johnson acquisition or by the Unilever’s acquisition of Dollar Shave Club to get into blades & razors, Looking at those deals through a category lens, they might seem surprising. Looking at them through a consumer eco-system lens, they make perfectly sense. As we are progressively transitioning from a ‘Retailer Centric Era’ to a ‘Hyper Consumer Centric Era’, the category lens is becoming increasingly obsolete (cf. article below). Many FMCG leaders believe that their biggest threat is DTC start-ups, I would tend to disagree. Their biggest threat is the large FMCG leap-froggers that have the resources to scale-up those start-ups and that will assemble competing consumer eco-systems.
Many FMCG leaders believe that their biggest threat is DTC start-ups, I would tend to disagree. Their biggest threat is the large FMCG leap-froggers that have the resources to scale-up those start-ups and that will assemble competing consumer eco-systems.
Best-in-class organizations take a broad view on DTC and connect the dots between emerging exponential technologies and derive their key ‘Survival Questions’ and ‘Billion Questions’ (big hits on the current business model). From there, they build few strategic scenarios that they work against. A great example where working on multiple strategic scenarios make sense is the baby diaper category (cf. article below)
Best-in-class organizations take a broad view on DTC and connect the dots between emerging exponential technologies
Having a few set of strategic scenarios is good but if those scenarios are worked by the same team working on the day-to-day business or even by the same team that works on the other scenarios, then the outcome can be jeopardized. Best-in-class FMCG organizations do not hesitate to set-up up to 5-6 Black Ops teams at the same time to test their hypotheses and hedge their bets (cf. below article).
Best-in-class FMCG organizations do not hesitate to set-up up to 5-6 Black Ops teams at the same time to test their hypotheses and hedge their bets
DTC opens a new array of opportunities through eliminating the reach-richness trade-off. It is not anymore required for SKUs to hit a minimum rate of sales (ROS) per point of sales (POS) threshold to be listed. On the contrary, companies that sell very targeted SKUs that are not available on mass channels can be really successful. Bevel is a good example. It sells exclusively through DTC Male Grooming SKUs that help to prevent razor bumps and reduce skin irritation, mostly to the African-American consumer group. Their average transaction value is >$40 whereas the Dollar Shave Club and Harry’s average transaction value lag at respectively around $7-10 and $15-20. Hyper segmentation at scale can be a way to escape price competition through differentiation and capture maybe a smaller piece of a market but a profitable one. Especially at a time where most DTC start-ups on blades & razors have yet to record a profit.
Hyper segmentation at scale can be a way to escape price competition through differentiation and capture maybe a smaller piece of a market but a profitable one
This is Why You Definitely Need a Shave Brush
Unless you got a house in Calabasas with a 1000 ft2 bathroom, there’s a good chance you fall in line with the rest of society and have minimal countertop space by the sink. From soaps and salves to your most-used skin care products, there’s little room for nonessentials.
Beyond, personalized on-demand business models have started to emerge, mostly on beauty and skin care categories so far. Companies like IOMA in France (backed by Unilever Ventures), Curology, IDDNA, Skinshift and many others propose personalized skin care products online.
There is a variety of DTC execution possible:
There is a diversity of models. Each execution has its pros and cons and need to be assessed carefully. Best-in-class companies understand those pros and cons and build DTC business models accordingly.
There is a diversity of models. Each execution has its pros and cons and need to be assessed carefully
There is naturally no one-size-fits all answer as it is a case by case assessment. Many if not most FMCG companies consider the US as their preferred play-ground when it comes to launch their DTC initiative. Developing markets and especially China and in a lesser extent India should be also reviewed with attention. It will for sure require a radically new business model but that may well be where sits the largest size of the prize. China for example is already #1 in terms of e-commerce revenue ahead of the US and is expected to be almost double the US by 2021. DTC, especially DTC P2P, could be an extremely powerful way to drive household penetration, address non-consumption barriers and achieve record sales (cf. the article below)
Developing markets and especially China and in a lesser extent India should be also reviewed with attention. It will for sure require a radically new business model but that may well be where sits the largest size of the prize
This is one of the most often seen mistake: FMCG companies that do not give any reasons to the shoppers to visit their DTC platform. Reasons are multiple:
That is exactly how a DTC initiative launched with much hype and CEO support could end up being killed after a year or two as it remained small and unprofitable.
That is exactly how a DTC initiative launched with much hype and CEO support could end up being killed after a year or two as it remained small and unprofitable
The key make or break of DTC profitability lies in the average absolute margin per transaction which is a combination of gross margin % and average transaction value. This average absolute margin per transaction needs to be high enough to absorb logistics costs and last-mile-delivery costs in particular. That is why it is so important to have a clear revenue model from the start. FMCG companies tend often to under-estimate logistics costs and over-estimate their future average transaction value.
FMCG companies tend often to under-estimate logistics costs and over-estimate their future average transaction value
This is rare but it can happen. Conceptually the DTC strategy is brilliant except that this new business model is too remote from the core business and at such presents no synergies, and requires a lot of effort to execute it with a low probability of success. The business focuses for example on a super premium consumer group that has nothing to do with the current consumer base. Categories sold are two or three adjacencies away from the core business…etc… There is no one-size-fits-all answer here, it all comes down to a qualitative strategic assessment.
Well, it all comes down to execution. Generally, most FMCG companies struggle in the execution as they fail to articulate a comprehensive: Execute/build from within, Acquire and Partner strategy.
There is a variety of options. As a rule, the more disruptive is the strategy and the most conservative is the culture, the more at the edge the team should sit.
Unilever Acquires Minority Stake in True Botanicals
By Rachel Brown March 30, 2017 05:25 NEW YORK, United States – Unilever Ventures, the venture-capital and private-equity arm of consumer packaged goods conglomerate Unilever PLC, has secured a minority stake in prestige natural skincare brand True Botanicals as part of a more than $3 million round of seed funding that includes several investors.
I covered this point at length in a previous article (see below) on talent management. We might under-estimate how entrepreneurial can become our current employees. Today, they just play with the rules they have been given. If we give them different rules, we could well be surprised to see how many succeed to adapt. We cannot expect naturally that 100% will adapt and it is exactly why we need a new breed of talents to lead this change but as FMCG leaders, we need to do a better job at empowering our employees to become more autonomous and entrepreneurial.
We might under-estimate how entrepreneurial can become our current employees. As FMCG leaders, we need to do a better job at empowering our employees to become more autonomous and entrepreneurial
Best innovations take place when you give ambitious people stretch goals and you starve them with very low budget and low resources. It could seem counter-intuitive but I still see a couple of initiatives failing because the team still works and thinks like a department of the organization. They can have as much resources as they want. They have a decision monthly cycle. They have various level of approval. Not many bets are taken and tested. They are just spoiled and are not forced to behave like ‘hungry and foolish’ entrepreneurs.
They are just spoiled and are not forced to behave like ‘hungry and foolish’ entrepreneurs
Some might find in the above article reasons to delay their initiative, I will argue that I could have added another 16 other mistakes, The reality is as long as we do not get started, we will not know. On an increasing number of categories, time has become the essence to implement a DTC strategy. As we say at RB: done is better than perfect and as Albert Einstein once wrote:
‘The only source of knowledge is experience’
Frederic
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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. 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. His focus areas are mainly direct-to-consumer, consumer eco-systems and business model innovation; growth and profit turnaround and corporate strategy 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.