FMCG CEOs: How to bridge the strategy to execution gap to build at pace and at scale new businesses. Today.

‘The best way to predict the future is to create it’ – Peter Drucker

This article was born out of frustration. Frustration to see many FMCG C-level executives failing to execute sound strategies, frustration to see leaders being put in a position in which they could never succeed, frustration to struggle as a Firm to go beyond strategy to fully deliver on our purpose to co-create the future of the FMCG industry.

Over the last 2 years, out of all this frustration has progressively emerged a vision. A vision to create an organization that can generate consumer insights, turn them into creative and compelling value propositions, manufacture them and sell them, the overall in a matter of weeks and in the most cost-effective possible way. We have been trying over the last 2 years to execute this vision with our clients. The below article summarizes our key learnings.

Before getting into those learnings, let’s briefly pause and explore why it has become so vital to have the capabilities to build new businesses at pace and at scale. We see at least 5 reasons why it has become an imperative:

1) Launching new products is generally a poor ROI exercise where huge improvements can be made

The immense majority of our resources (human, financial, shelf space, consumer and customer mental availabilities) go in launching new (incremental) products and less than 10% of them end up being a success. There is a tremendous opportunity to optimize inputs (resources) and outputs (innovation success rate). It is even probably the single largest immediate opportunity most FMCGs have

2) Currently, there is still a Growth Gap to bridge

If most FMCG companies have refocused their resources on growth. The top listed FMCG companies still display a growth gap vs. their respective global markets

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Those are only averages but a number of organizations display a much larger performance gap versus peers (e.g. Kraft-Heinz, Campbell’s, Coty, Revlon, Avon, Molson Coors, Edgewell, Clorox, Ontex and most of Consumer Health players) for many different reasons that we will elaborate in another article next week dedicated on H1 2019 results.

Factoring all forces, many FMCG companies (depending country/ category/ segment/ channel footprint) have up to 50% of their profit at stake by 2023-25

3) Looking forward at the key future-back risks and opportunities across FMCG verticals, the value at stake is huge

Other things being equal, this is mostly driven on one hand by the channel shift lowering barriers to entry and diluting market share and on the other hand by the accelerating transfer of profit from FMCGs through retailers to hyper-scale players/ consumers. Factoring all forces, many FMCG companies (depending country/ category/ segment/ channel footprint) have up to 50% of their profit at stake by 2023-25. Current performance of Avon, Revlon, Gillette, Edgewell and Ontex to name few are already in various extent great illustrations of those changes. So, having this perspective in mind, the need to create (or acquire – see next point) new businesses (with often new business models) to hedge this exposure (and take advantage also of new opportunities) is unprecedented in the history of our industry

The need to create (or acquire – see next point) new businesses (with often new business models) to hedge this exposure (and take advantage also of new opportunities) is unprecedented in the history of our industry

4) M&A cannot always be the answer

We have been witnessing over the last years record M&A transactions in our industry but for the first time in 5 years, it seems the level of M&A in our industry is slowing down owing mostly to record high valuation and to an expected downturn

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If M&As have been increasingly leveraged over the last 4 years, they cannot always be the answer. Here is why:

i) The assets we need to future-proof our competitive positions do not always exist,

ii) When they do, often their valuation is not commensurate to the FMCG acquirer value creation case either because of hyper-abundant capital driving assets price inflation and/ or because another party has a higher value  creation case (increasingly the case for hyper-scale players – think companies like Rappi or Jumia where some FMCG companies hold a stake but where it is highly unlikely they could entirely acquire them one day)

5) Incremental adjustments in organization design and ways of working have yielded so far poor results

over the last few years, we saw an increasing number of those so-called Acceleration or Start-Up Units, often located at the edge of the organization, invited to use Agile methodology, those teams were tasked to build new businesses. The belief that we can transform at pace and at scale our businesses through putting a group of intrapreneurs at the edge of the organization and ask them to follow Agile methodology, be ‘entrepreneurial’ and expect breakthrough results is at best naïve and even dangerous.

The belief that we can transform at pace and at scale our businesses through putting a group of intrapreneurs at the edge of the organization and ask them to follow Agile methodology, be ‘entrepreneurial’ and expect breakthrough results is at best naïve and even dangerous

From what we can see, the immense majority failed. Many reasons explain those failure: poor strategy with strategic initiatives with limited right-to-win/ low size of the prize, inadequate governance & KPIs, resources not commensurate to the value at stake, inadequate talent and limited execution capabilities.

We have a more pressing need than ever to build at pace and at scale new businesses

So, it is clear that we have a more pressing need than ever to build at pace and at scale new businesses. So how to address this unprecedented challenge?

Before getting in the details, please note that there is no one size fits all solution and organization/ execution must always follow strategy. Despite those disclaimers, we see few overarching themes emerging:

1)   The future belongs to Exponential Organizations – ExO – (and to Linear/ Legacy Organizations that will succeed to leverage their own assets to build, acquire, assemble those ExO)

This is our belief that has been reinforced by our experience over the last few years. Only few perfect illustrations of what is an ExO in the FMCG are public today. The best example is surely The Hut Group – article below:

This is the future of the FMCG industry: THE HUT GROUP or the rise of the Exponential Organization

2)   Dual end-to-end value chain will emerge as ultimate competitive advantage 

Any FMCG company should have at least 2 value chains. One to manage the legacy business and one to invent the New

By value chain we mean, an organization that has the entire autonomy and resources to generate consumer insights, turn them into consumer value propositions, get them manufactured and commercialize them. Any FMCG company should have at least 2 value chains. One to manage the legacy business and one to invent the New. This New Value Chain should have very limited dependency on the legacy business in terms of processes or resources. If anything, resource from the Legacy Value Chain should be used only on a pull-basis by this New Value Chain and it should not be in any case dependent on the Legacy Value Chain to operate. The frontiers between the two Value Chains should be porous to ensure that they can learn from each other and leverage/ share their respective assets/ expertise on a pull-basis.

The frontiers between the two Value Chains should be porous to ensure that they can learn from each other and leverage/ share their respective assets/ expertise on a pull-basis

Again, there is no one size fits all and organization must follow strategy. The degree of independence/ integration of the two value chains can vary greatly and are a result of a fine balance between economic synergies/ di-synergies, value at stake/ sense of urgency and cultural/ execution readiness.

3)   The resources allocated to the New Value Chain must be commensurate to the future-back risks and opportunities, ie. to the value at stake

This is fundamental. Meaning that organization design must follow a rigorous strategy work encompassing both a detailed present-forward and future-back assessment of the company’s strategic framework. Without that, it is guaranteed failure.

Without that, it is guaranteed failure.

4)   Consumer insights are the new lifeblood

Let’s not repeat all our thoughts on the Why and the How-To of consumer centricity (cf. article published last year)

FMCG CEOs: This is the mother of all our problems and nothing else – how to become the most consumer centric FMCG organization in the world

But few important points worth reinforcing:

i) We must irrigate the entire organization with cost-effective and fast consumer insights

ii) Access to consumer insights should not be anymore the monopoly of the Consumer Insights function but should be accessed and shaped by the entire organization

iii) Success is when a common language around the consumer (or an actionable segmentation) emerge across the entire organization and implications are embedded naturally in all decisions across the value chain

iv) The ability to generate fast, cost-effective and scalable consumer insights will become an ultimate competitive advantage

If in the past, consumer insights were slow, static and expensive (think the extensive U&A report compiled by a legacy research company with 200 pages costing ~€300k); technology has dramatically changed that.

If in the past, consumer insights were slow, static and expensive (think the extensive U&A report compiled by a legacy research company with 200 pages costing ~€300k); technology has dramatically changed that. It has never been so easy to generate CI within a week for a fraction of what it used to cost. This is one of the very few ways to re-give to consumers a seat to the table in all internal discussions and along the new product development process.

5)   Creativity must (re?)-become a differentiation driver

It is obvious that creativity is completely under-leveraged in our industry, just walk down any supermarket aisles or watch most TV commercials

This is something that very few people talk about in the industry and in the earning calls: Creativity. It is hard to define, almost impossible to measure. Yet, it is obvious that it is completely under-leveraged in our industry, just walk down any supermarket aisles or watch most TV commercials. One of the key reasons is that the marketing agency model is broken. Not only the model is not cost effective but the percentage of the agency fees that really go to remunerate creative talent is very small. A new breed of agencies connecting at scale outstanding creative talents that made their ‘personal IPOs’ are emerging. Not only they are much cheaper and faster than traditional agencies with often a superior outcome but they create more value to creative talents (more money redistributed, more flexibility and free-time). I strongly believe that significant growth lies in fully unleashing creativity within our industry and in enabling it with precise/ actionable consumer insights.

I strongly believe that significant growth lies in fully unleashing creativity within our industry and in enabling it with precise/ actionable consumer insights

6)   The supply chain of the future: fast, scalable, seamless and delivering a holistic ROI

Most of the new products launches fail (or their final version ends up being drastically different) and contract manufacturing ends up then being a major CAPEX/ OPEX saver

It is increasingly clear for all supply leaders in our industry that the future lies in using more contract manufacturers. Reasons are obvious: manage effectively small quantity runs of production, cut time-to-market, save on CAPEX, learn before investing, manufacture radically different type of products (e.g. think consumer electronic device)

Another very strategic reason is that contract manufacturers can free-up capacity for scarce internal resources and give them the opportunity to focus on the most strategic manufacturing projects of the future (e.g. 3D printing for diapers, blockchain and traceability for infant milk, hyper-personalization at scale on beauty…).

Too often contract manufacturers are under-leveraged as the running COGS are judged too high. This could be a mistake as:

i)              Most of the new product launches fail (or their final version ends up being drastically different) and contract manufacturing ends up then being a major CAPEX/ OPEX saver

ii)            Benefits related to speed-to-market and learning fast from consumers are sometimes grossly under-estimated

iii)          There are often no aligned views on what should be the key strategic priorities of the Supply Chain organization (to win now and to win tomorrow) preventing an effective resource allocation

Supply chain leaders must articulate a holistic strategy on how to win today while helping the entire organization renewing its competitive advantage to win tomorrow. Looking at the pace of changes on some FMCG verticals, resources must be dramatically shifted to those few areas that could entirely redefine the nature of competitive advantages

Supply chain leaders must articulate a holistic strategy on how to win today while helping the entire organization renewing its competitive advantage to win tomorrow. Looking at the pace of changes on some FMCG verticals, resources must be dramatically shifted to those few areas that could entirely redefine the nature of competitive advantages (e.g. 3D printing for diapers, blockchain and traceability for infant milk, hyper-personalization at scale on beauty…).

4) Trading effectively on indirect e-commerce platforms is becoming a competitive advantage but it should not consume our scarcest resources

It is increasingly clear that those platforms drastically lower barriers-to-entry (especially in developed markets), impact the size of the profit pool in the entire value chain and accelerate the redistribution of the remaining profit among the key actors (FMCGs/ private labels/ legacy retailers/ hyper-scale player), mostly at the benefit of the latter

There is no discussion that we should follow consumers and ensure we win on Amazon, Alibaba, JD, FlipKart, Mercado Libre, Look Fantastic… where most of the growth (and for some categories/ countries, all of the growth) is. But we should keep a balance between winning today while renewing competitive advantages to win tomorrow.

It is increasingly clear that those platforms drastically lower barriers-to-entry (especially in developed markets), impact the size of the profit pool in the entire value chain and accelerate the redistribution of the remaining profit among the key actors (FMCGs/ private labels/ legacy retailers/ hyper-scale player), mostly at the benefit of the latter.

Too often, C-leaders do not understand clearly their future-back risks/ opportunities (and corresponding value at stake) and allocate all their internal resources to win on indirect e-commerce platforms. It is a double waste:

i) First, because we still see many FMCG companies struggling with getting everywhere the basics of e-commerce right (mostly: right talent, tailored 3P strategy, right organization, right KPIs/ tracking) and wasting tremendous resources doing it alone whereas they could leverage external specialized agencies to help them which is often more cost-effective (lower cost per FTE, pay-for-performance scheme), faster and yield better results. Especially in smaller countries where the absolute size of e-commerce is limited (despite accounting already for a significant share of the growth) and where it is hard to justify full FTEs

ii) Second, they are not only wasting precious resources (FTEs, budget) that could be replaced at least partially by more effective external resources and then redeployed in addressing their key future-back risks and opportunities, but they are wasting what is surely their most precious resource, time. The time they need to transform and address their future-back risks and opportunities

Finally, specialized agencies can be extremely valuable in helping selling new products very fast across different platforms and countries to get commercial validation and gather consumer feedbacks.

5) An exponentially scalable technology back-end and consumer centric technology interfaces

We stopped counting the number of FMCG companies that have been held back by their IT function, imposing legacy solutions that turned out to be expensive, slow, not scalable and sometimes even not functioning

The last pain point is surely related to technology. We stopped counting the number of FMCG companies that have been held back by their IT function, imposing legacy solutions that turned out to be expensive, slow, not scalable and sometimes even not functioning.

In our world of SaaS hosted in the cloud, most of IT solutions can be addressed by ‘shelf/ ready-to-be-used’ solutions that are scalable and cost-effective. Beyond, often IT departments do not have internally the technology expertise to enable digital first businesses (to name few: DTC website analytics, CAC-CLTV cohort analysis, Big Data regression analysis to derive consumer segmentation…).

The IT function should not have the monopoly of technology but they should enable the entire organization to use the best of the technology through leveraging adequate partnerships. A technology with consumer-centric interfaces that is fast and cost-effective to implement, and exponentially scalable.

Bringing it all together, we see an imperative to assemble dual value chains and leverage fast, scalable and cost-effective consumer insights, creativity, supply chains, sales platform and technology to transform our FMCG businesses at pace and at scale

Bringing it all together, we see an imperative to assemble dual value chains and leverage fast, scalable and cost-effective consumer insights, creativity, supply chains, sales platform and technology to transform our FMCG businesses at pace and at scale.

The stake could not be greater. Our industry is worth an impressive ~$3.5 Tr in sell-in and and ~$500bn in profit. And a significant chunk of this profit is at stake by 2023-25 (dedicated article to follow).

At our level, that is exactly why we decided to assemble Exponential FMCG Partners: A unique one-stop-shop opened ecosystem of world-class professional service Firms that have in common the same purpose: co-creating at pace and at scale the future of the FMCG industry, today.

Exponential FMCG Partners

We have never lived in so exciting times in the entire history of the FMCG industry. It is up to all of us to co-create this future.

As Peter Drucker once wrote: “The best way to predict your future is to create it.” 

Frederic

To continue this conversation, we will organize an Exclusive FMCG Senior Executive round-table on January 17th 2020 in our Zurich office from 11 am to 4 pm (lunch will be served), The theme will be: ‘This is the future of the FMCG industry – key predictions for 2020-25 and key strategies per FMCG verticals’. It will be our unique conference in 2020. As usual, the attendance is strictly limited to 12 Senior FMCG leaders (P&L responsibility > $1bn or Group Head of Strategy). Please contact lea@fredericfernandezassociates.com to RSVP

To follow Frederic, please click Here, To contact him, email 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 and Partner of Frederic Fernandez & Associates a global bespoke Strategy Consulting Firm exclusively focused on the FMCG industry. Its purpose is to co-create the future of the FMCG industry, one client at a time. The Firm helps the CEOs and the Boards of the world’s largest FMCG companies on selected areas: Growth and Profit turnaround, Exponential Growth strategy (New Retail, Omnichannel, DTC, Ecommerce, Business Model Innovation), Disruption Hedging/Leapfrog and M&A strategy. The Firm’s head office is located in Zurich, Switzerland. The Firm’s team intervenes all across the globe. To know more about the Firm, please visit its website: www.fredericfernandezassociates.com