FMCG CEOs: 7 reasons why Coty acquired Younique or Why the race to become an Exponential Organization is on
Frederic Fernandez
Solving the most complex strategic problems of the world largest FMCG companies. Strategy | Organic Growth | Digital Route-To-Market - Ecommerce, DTC, EB2B | M&A
Bart Becht (Coty Chairman - Calvin Klein, Hugo Boss perfumes, Opi nail varnish, Wella professional haircare... - previous RB CEO) is surely not a bean counter and even less a rice grain counter, but he understands the Indian rice chessboard legend, the power of compounding and he would surely agree with Albert Einstein quote: 'The most powerful force in the universe is compounding power'.
What we are now witnessing is no more no less than the transition from a linear to an exponential paradigm in the FMCG industry. So far only few of the great movers & shakers of the industry have understood it and are leading the change (Bart Becht, Paul Polman).
In our digital disruption age, there will be increasingly only two options: Becoming an Exponential Organization (1) or Shrinking-to-glory. The race to become an Exponential Organization is on and the clock is ticking.
In our digital disruption age, there will be increasingly only two options: Becoming an Exponential Organization or Shrinking-to-glory. The race to become an Exponential Organization is on and the clock is ticking
After Unilever and Dollar Shave Club in August 2016, Coty delivered the first punch in this New Year and on January 10th announced the acquisition of 60% of the leading online peer-to-peer beauty platform Younique for $600mn. This post explores the reasons behind this acquisition and the implications for the whole FMCG industry.
After Unilever and Dollar Shave Club in August 2016, Coty delivered the first punch in this New Year
1. Younique a truly Exponential (profitable?) Organization
Younique is by design the quintessential Exponential Organization (see chart below).
Younique's entire 4P strategy and business model have been designed to leverage the power of exponential
Younique's entire 4P strategy and business model have been designed to leverage the power of exponentiality (online sales, peer-to-peer platform, social selling, online virtual sales party, social media marketing, staff on demand with its 200,000 independent entrepreneurial presenters, carefully sourced SKUs from premium contract manufacturers). Created end 2012, in 4 periods it reached a staggering $400mn yearly sales mark, and this without venture capital infusion. Better then than Dollar Shave Club which was founded also in 2012 but reached $200mn sales in 2016 and consumed almost $75mn of VC funding over the same period.
Created end 2012, in 4 periods it reached a staggering $400mn yearly sales mark [...] Better then than Dollar Shave Club which was founded also in 2012 but reached $200mn sales in 2016 and consumed almost $75mn of VC funding over the same period
Profit wise, although no numbers have been communicated, based on available information (business model, commission structure, premium price point, absence of heavy marketing investment, higher COGS driven by the use of contract manufacturers, absence of VC investment), it would not be surprising to see Younique already enjoying a healthy structural EBIT % in the +/- 10% region. This is only an "educated guess".
2. A credible value creation case
Plenty of revenue upsides through driving further penetration, adding products to the portfolio [...] and rolling out Younique to new geographies
In a context where Coty has been facing challenges to organically grow revenue over the last quarters, Younique seems to be the perfect value creation case with:
- An exponential business model adding to Coty's existing/adjacent categories
- Plenty of revenue upsides through driving further penetration, adding products to the portfolio (today mainly skin care and make-up, but tomorrow also perfumes, nail varnish...) and rolling out Younique to new geographies (sold in only 10 countries so far)
- An opportunity to apply Coty's brand buidling skills to the Younique brand
3. A way to escape the hyper competitive retail environment
In an ever competitive retail environment (increasing retailer pressure on margin, increasing competition among FMCG players,), investing in a Direct-To-Consumer peer-to-peer platform is an effective way to escape the hyper competitive retail environment and add a critical building block to help deliver incremental revenue/profit on a like-for-like basis for 2017.
4. No retailer legacy dilemma
With this acquisition, Coty gets exposure to a highly dynamic P2P DTC channel with no retail risk exposure
One of the reasons traditionally holding back FMCG companies from entering Direct-to-Consumer, is the fear of short-cutting retail partners who could retaliate and which still account for a majority of their sales (either in store or online). With this acquisition, Coty gets exposure to a highly dynamic P2P DTC channel with no retail risk exposure. Coty is certain to help Younique to expand its SKU count and the number of categories proposed, and as such, it would be surprising to see Coty canibalising its own sales by selling its own brands through Younique, at least over the short-term.
5. One of the best way to learn to become an Exponential Organization
One of the best way to learn to become an Exponential Organization is still to acquire and nurture one. It follows the basic leadership circle:
- - You do it and I am observing / you teach me / I am doing it alone and you watch me / I am doing it alone / I am teaching someone else to do it
I have stopped counting the number of FMCG executives asking:
- 'The requested multiples for DTC companies are high, can we start our own Exponential Organization from scratch?'
My answer is invariably:
Can we start our own Exponential Organization? Yes you can but do you have available the scarsest and most critical resources to do it (time and the right skills/talent)?
- Yes you can but do you have available the scarsest and most critical resources to do it (time and the right skills/talent)? Maybe yes, maybe no
Would you consider hedging your bets in regard of what is at stake?
- Would you consider hedging your bets in regard of what is at stake and maybe start one/few internally and acquire one and then monitor?
- Besides, what does 'high multiples' mean? Have you applied a linear mindset while assessing those opportunities or have you integrated all the market exponential dynamics?
- While comparing the cost of doing vs. the cost of acquiring, have you integrated the high mortality rate of a business in its first few years?
'High multiples', really? Have you integrated all market exponential dynamics while assessing acquisition opportunities? Have you integrated the high mortality rate of a business in its first years to determine attractiveness to acquire vs. build-up?
It is naturally not about repeating the mistakes of the Internet bubble of the late 2000s, it is about assessing a business model's strength and its scalability having all parameters in mind. Bart Becht and Paul Polman understood this and they are everything except unexperienced, desperate or even impulsive buyers.
Bart Becht and Paul Polman understood this and they are everything except unexperienced, desperate or even impulsive buyers
6. Learning the art of nurturing direct long-term consumer relationship
Younique knows how to engage and sell to millenials. They understood that some of the best marketing is made through personal recommendations (and not necessarily with large TV campaigns although the two are not mutually exclusive as Dollar Shave Club demonstrated) and through peer-to-peer platform powered by social media. Direct consumer relationships are more than ever becoming the ultimate barrier to entry and Coty's teams have surely plenty to learn from Younique.
Direct consumer relationships are more than ever becoming the ultimate barrier to entry and Coty's teams have surely plenty to learn from Younique
7. None to little integration efforts
Last, at a time when Coty is focused on integrating the P&G Beauty business (to the point that Bart Becht described it 'as a distraction contributing to the stand-alone decline in revenue and profit' in the Coty last quarterly financial release - last 3 month ending 31/09/2016), this acquisition appears to require minimal integration effort over the short and mid-term while being immediately accretive to Coty in 2017.
A week ago, I shared in an article 'FMCG CEOs: 10 thoughts for the FMCG industry in 2017' that the #1, #2, and #3 priority for FMCG will be Growth and that business model innovation will be the key. I did not expect to get this prediction validated only few days after.
The Coty-Younique move is the first one of the year and many more will follow.
In our digital disruption age, there will be increasingly only two options: Becoming an Exponential Organization or Shrinking-to-glory. The race to become an Exponential Organization is on and the clock is now ticking
I leave you with a quote from Jeff Bezos: ‘Companies that are making bets all along, even big bets, but not bet-the-company bets, will prevail’
If you are interested in hearing more on the above, you can reach out at frederic@fredericfernandezassociates.com or attend one of my upcoming Senior Executive FMCG Conferences (each limited strictly to 20 attendees and reserved to senior FMCG executives on a pure first come/first serve basis - the attendance is free) - upcoming topics/dates for Q1 2017 include:
Q1 2017 Topic: FMCG CEOs: Managing (finally) for growth or how to stop 'shrinking to glory'
- Zurich, Friday, March 17th from 8 to 10 am at Hotel Grand Hyatt
- Geneva, Friday 24th from 8 to 10 am at Hotel Des Bergues Four Seasons
I deliver also speeches on request on the future of the FMCG industry.
Frederic
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(1) - 'Exponential Organizations' - Salim Ismail - Singular University 2014 - the application of the Exponential Organization theory to the FMCG industry is developed in the below article - it includes also a video of a speech (in English) I delivered on the topic (corresponding PDF available on demand):
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 are mainly in growth and profit turnaround, corporate strategy, direct-to-consumer and business model innovation 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 senior FMCG leaders across Europe, Middle East and Africa (EMEA). He is based in Zurich, Switzerland. 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.
Previous articles published include:
'FMCG CEOs: 10 thoughts for the FMCG industry in 2017'
FMCG CEOs: 6 Reasons why your company's competitive advantages are becoming increasingly obsolete
7 Reasons Why Unilever Acquired Dollar Shave Club
Why the FMCG industry is becoming 'uberized' and how to move from disrupted to disrupter in 5 moves
FMCG CEOs: Stop insanity and turn your company into a serial business model disruptor
Why Consumer & Retail companies should listen again to the ABBA hit 'I want it all, I want it now'
What do Bayern Munich football club, McVities biscuit and Sainsbury premium tea have in common?
Co-Founder & CEO Glim, Future of Compensation
5 å¹´Frederic Fernandez, I was researching the recently announced breakup of Younique and Coty and ran into this post. It would be interesting to see what lessons could be learned from this. https://www.coty.com/in-the-news/press-release/coty-and-younique-part-and-focus-development-their-respective-strengths
Global Senior Manager - Pricing & Merchandising
8 å¹´Time will tell... it was not a cheap acquisition (2x annual sales) and Coty does not have the expertise in direct selling. The direct selling channel is also getting more crowded with newcomers. Two different worlds, I expect significant challenges during the integration. I am not sure it will deliver a good ROI...
I develop Executive Leaders of Leaders through Coaching, Mentoring and Leadership Development
8 å¹´As a former FMCG'er I have followed with interest the developments in the marketplace and there have been a number of moves now looking at changing the game. I would also highlight Nespresso and the Art of Shaving as ventures of the FMCG businesses into Retail as another example of changing the game. Like you, I believe the acquisitions of Dollar Shave Club by Unilever and Younique by Coty signal the next step in changing the game and I believe as the industry restructures this will be an exciting place to be.
The Business Bouncer ??????| Developing Capability & Possibility for Business Owners, Commercial Managers & Graduates. ?????? ??
8 å¹´Johnny Wiggins
Student at Henry Ford Community College
8 å¹´I just want to know what this is going to do to us as presenters?