On a cold February morning in 2011, the new CEO of Nokia, Stephen Elop’s issued a memo to all staff that warned Nokia was standing on a “burning platform”. The unequivocal message was that the company would die unless it was prepared to jump into the icy water off the rig. Nokia was subsequently acquired by Microsoft and the mantle for market leader rapidly passed to Apple.
The question we now need to answer is whether FMCG companies are facing their own burning platform moment. Although the leading FMCG brands are not in crisis, their performance is not exactly setting the world alight. The industry has experienced only GDP-level growth and nearly flat margins for almost a decade. Perhaps this is unsurprising for a category that is mature and dominated by a small number of very large players. But somehow it’s hard to shake the sense that we are starting to see a radical shake-up of the category in the same way that the 90’s saw happen for the automotive industry and the noughties saw for the technology industry. Will this be the decade that we see FMCG companies staring at their equivalent of the iPhone?
Our view is that we are indeed about to see a radical change in the category and that unless FMCG brands embrace the changes we may some of our most famous household names go the same way as Saab, Nokia and Blackberry. Because as we have seen in technology and automotive markets, the unthinkable can indeed happen. The FMCG market is set for further consolidation as activist investors look to gamble big time on M&A as a means to enhance value.
Technology disruption is transforming FMCG
So just what is going on? How did these might behemoths suddenly become so vulnerable? The answer, just as it was for Nokia, is technology disruption. Scratch the surface of any market category and you see the way in which technology is fundamentally changing the dynamics. Want to buy a new pair of jeans? Try the Digital Denim Doctor which uses an airport-style scanner to find you the perfect fit. Want to make sure you have white teeth? Oral-B Smart Series toothbrush connects your mobile phone to your toothbrush to ensure you optimise your brushing technique. Want a coffee? Nespresso’s capsule system offers promises freshly brewed coffee on a subscription basis.
What does this mean for consumer goods? Quite a lot it seems. Just look at the impact that Dollar Shave Club, a technology-driven subscription razor service with an irreverent and fun style, has had on the fortunes of Gillette, the market leader. According to Fortune magazine, P&G has seen Gillette’s market share in the US declined from 71% to 59% in the first half of 2017. P&G slashed prices in an attempt to protect market share, but sales volumes have still declined and market share has fallen.
Let’s be clear. Technology has transformed the modern company, leading Erik Brynjolfsson, director of the MIT Initiative on the Digital Economy to point out that “More and more important assets in the economy are composed of bits instead of atoms”. Indeed, there is a new breed of company that is light on physical assets but heavy on data assets — Airbnb, Facebook and Netflix are obvious examples. These have all changed the terms of competition in their respective industries. But this is not limited to these types of ‘digital’ companies; it is estimated that some 70% of the value of a modern company is now derived from intangible assets.
New business models
This is a problem for FMCG companies where the relationship with consumers is typically mediated through retailers. And indeed, at first sight, it can be hard to see the way in which decidedly physical products could be digitally transformed. But the reality is that technology is creating new business models that are reshaping the landscape. Dollar Shave Club is the pin up child but there is a whole host of other examples. For example, home delivery is transforming the way in which beverages are sold with services such as US company, Saucy hand delivering Jack Daniels to customers’ doorsteps by Frank Sinatra impersonators. On-demand laundry services such as Cleanly have been immensely popular, sidestepping the need for buying fabric care products. Cosmetics subscription boxes are proving hugely popular with brands such as Glossy Box and Birchbox posting rapid growth.
Of course, consumer goods companies are not standing idle. Dollar Shave Club was acquired by Unilever in 2016 for an impressive $1bn a marker of the potential for new business models. P&G are experimenting with new laundry care models such as Tide Spin, a home laundry pickup and delivery service in Chicago. Unilever’s Ben & Jerry’s ice cream brand recently announced that “the day has finally come” when the fans can directly order pints of ice cream for home delivery from store.benjerry.com.
In addition to technology creating new business models, we are seeing also see it creating new channels to market, as consumers increasingly shop online rather than in-store. This creates a fundamentally different set of challenges for FMCG brands as the buyer dynamics are very different. Consumers are more easily able to compare features and prices but also read reviews and gauge the popularity of products. This means that smaller brands are able to get to market and reach critical mass much more quickly. Indeed, the different dynamics mean that the best-selling brands on Amazon are frequently not the leading brands in bricks and mortar. This helps explain why small local competitors are collectively creating huge pressures for large packaged goods brands.
The success or failure of consumer goods companies will ultimately rest on the extent to which they are able to rise to the challenge of the digital economy. Of course, it is not that easy. The new business models are typically direct to consumer and as such, there is resistance from retailers who have frequently retaliated to efforts to by-pass them with punitive sanctions on stocking and pricing. So existing market structures will not necessarily help an agile response from the large players.
The changing consumer mindset
But there is a more fundamental challenge that consumer goods companies need to understand. The technology disruption we are seeing means that not only are consumers spending their money in different ways but the nature of the way consumer makes decisions has completely changed. The stable, predictable consumer landscape that has enabled a hugely efficient and structured approach to marketing has gone forever.
Consumer expectations are now increasingly liquid, with expectations of engagement with a brand performance not only being set within the category but from their experience of Amazon or Uber. There is an ever growing desire for services rather than products, not least because experiences can offer greater satisfaction and happiness than things. We expect greater personalisation so that the things we buy are right for us, as individuals, rather than being satisfied with one size fits all. The list goes on (and we have many such cases) but the message is simple. Consumer decision making is becoming more dynamic, more complex and intricately woven with the changing digital environment.
As we spelled out, the valuation of brands is now more related to bits than atoms. So developing a digital relationship with consumers is surely table-stakes. There are plenty of business models being explored that do exactly that. Which horses to back is the first decision. But it is also all about how that relationship is designed, optimised and leveraged that makes the difference. How do you generate stickiness? How do you ensure that they spend money on your digital assets? That they have a positive experience? That you can personalise in a way that is engaging and not creepy? FMCG companies have not really needed to understand how to develop relationships, as their relationship with consumers has always been mediated by retailers. But now that is simply not good enough.
FMCG companies need to understand that the tents of consumer behaviour have changed, as digital creates new requirements. Emotion has a bigger role to play as digital means that brands can respond more quickly to fleeting moments, captured by data. Understanding trust in an online environment is critical, as this is the new ‘oil’ of the digital economy which is understood when one hands overpriced clothes to an online laundry service. Implicit measurement becomes core as disruptive changes mean that consumers are less able to draw on their past experience to decide their preferences. Buying online means that consumers are more objective than ever in their decision making, trashing the traditional tents of packaged goods marketing. These, and many other implications of technology disruption, we call the mind economy.
Consumer insight is the new building block
So what we see is a clear linkage between a fundamentally changing consumer decision landscape and the market valuation of consumer goods brands. Now, more than ever, brands need to understand the nature of consumer decision making if they are to increase shareholder value. But the environment is fast moving requiring a radically different approach to the one that has historically been in play.
Because in a stable environment, research data has been able to adapt to the demands of the organisation to satisfy its demands for data to support business decision making. Very frequently it was used to justify decisions that experienced brand managers are able to make, using their extensive, tacit understanding of the market. Less frequently was the opportunity to use research to highlight new opportunities – this was the role of the business executive who had built up an intimate knowledge of their category. Of course, new insights and understanding are provided – but these were incremental and generally supporting the intuitive knowledge held, rather than offering something transformative.
Both agencies and brands need to understand that this game is over. Value now comes from spotting the new ways consumers are operating in the mind economy. Given that brand valuation is so linked to data assets and that consumer-brand relationships are increasingly mediated by technology (which generates the data), then understanding how consumers make decisions has a direct impact on the bottom line in a way that we have never seen before. And make no mistake, there is no ‘new normal mode’ of consumer behaviour. This is a fast changing, agile environment creating rapid fluctuation in consumer activity. Sure we still need tracking studies but not as we know them. Nimble, agile and adaptable is the new mantra.
This is an issue that has not quite sunk in for many. But it is, in fact, a huge opportunity for consumer insights as we can now see a point at which the discipline can directly relate the valuation of intangible assets directly through to insights gleaned from the research process. At last, we have a means to establish clear ROI for an activity which has become increasingly downtrodden and insecure of its own authority. But this requires market research professionals to make the case for the mind economy – to demonstrate how research activities are essential to grow company valuations. And it is only through good quality, timely data, collected with care and attention that a strong business case can be made to resist the huge barriers that inevitably exist to change. Agile does not mean sloppy otherwise the battle will be lost. They are not mutually exclusive qualities.
Consumer goods companies are indeed standing on a burning platform. And so is market research. Their fortunes are entwined – but of course, it takes both parties to share the vision and make change happen.