For many CEOs, taking volatility out of the business is a key goal.
One brand perfectly encapsulates the forces that are disrupting the consumer goods industry in the 21st century: the Dollar Shave Club. Seven years ago, two men – Michael Dubin and Mark Levine – met at a party and griped about the cost of razor blades. Out of that conversation – with US$45,000 of their own money and some incubator capital from Science Inc – sprang a start-up that attracted a lot of venture capital, and changed the dynamic of the men’s shaving market with its pioneering subscription model. Last year it was acquired by Unilever for US$1.5bn.
As Liz Claydon, Head of Consumer Markets at KPMG in the UK, says: “Dollar Shave Club was a wake-up call for many big brands. Smaller start-ups have a potential route to market that just didn’t exist in the past. For every 20 successful start-ups, there are probably 350,000 that we don’t see, but those kinds of success stories – and those levels of returns – will attract the attention of private equity investors.”
The funding for the right disruptive idea certainly exists – and it could come from private equity investors, venture capitalists or tech giants. Tomorrow Ventures, the VC firm founded by Eric Schmidt, Executive Chairman of Alphabet, has backed California meal delivery business Lyfe Kitchen and online grocer Relayfoods in Virginia. Food tech start-ups have proved particularly popular, attracting a record US$5.7bn in investment in 2015, according to research by CB Insights.
The Dollar Shave Club story may be spectacular but it is far from unique. Birchbox has popularized the subscription model in the US cosmetics market. British start-up Graze has grown significantly in the snacks market (its products are now sold through 43,000 Walgreens stores in the US). Delivery Hero, the food delivery service backed by Rocket Internet, is considering a public listing that may value the company at US$4.5bn, only six years after it was launched. Founded in 2010, Coupang is now South Korea’s largest online retailer, generating revenues of around US$1.7bn in 2016, although it made a loss, primarily because of its massive investments in logistics and distribution.
As Peter Freedman, managing director of the Consumer Goods Forum, says: “For the past four or five years, start-ups have provided most, if not all, of the growth. If you look at the history of the consumer goods industry, there has been an unusual amount of start-up activity – especially in food – and it’s hard to see that changing.” That view is certainly reflected in the KPMG 2017 Top of Mind Survey: 42 percent of executives expected new competition to disrupt the industry.
Although big brands remain hugely resilient, some are finding it hard to generate growth. Nielsen data for the US consumer market in 2016 estimates that sales for the 20 largest consumer packaged goods companies were flat, yet sales for smaller brands grew by 2.4 percent. This scenario does not surprise Emmanuel Faber, CEO of Danone, who says: “There is an element of natural regulation as to how many smaller brands can get bigger, but having said that, take any food category, and the smaller brands are growing three or four times as fast as the top 100 brands.”
More on disruption on page 62 of the 2017 Top of Mind Survey >> (PDF 1.33 MB)
We spoke with consumer and retail executives to find out how they are responding to the opportunities and challenges of disruption. Read their interviews here: