The big investment lie right now is the safety of blue chip offshore consumer staple stocks, like Procter and Gamble and Johnson & Johnson. These companies have fashioned themselves into dividend payers in recent years. This doesn’t impress us; whether companies keep profits or shareholders get them, it’s a zero sum game. The key question should be how quickly they can make more of them.
The fast-moving consumer goods (FMCG) model goes like this: a company spends on developing an answer to an everyday need – like shaving or deodorants or shampoo. They come up with a neat solution, at which point the whole problem is handed to the marketing department, whose job it is to not just cover the materials cost, but also recoup the research that goes into product development and of course their own marketing department salaries.
The time-honoured way of doing this was television advertising, with a little sports promotion/magazine advertising/point-of-sale to go with it. Job done.
This worked until the internet came along. One of the great changes brought by on-line is the move away from distributive to communicative architecture, meaning that information doesn’t just travel from the television station to the consumer, it is now addressable and therefore two-way – and interactive.
And interactivity translates very quickly into virality – so a piece of content or an advertising message can very quickly reach tens of millions of people. And the thing about virality is that it cuts the marketing budget. Hugely.
Enter Mike Dubin of Dollar Shave Club (DSC). He proved that it is possible to build a really big consumer staple business (razors) through mail-order on-line. He did this by taking a long hard look at the $30 cost of four premium cartridges, and correctly perceiving that around $20 of that price was television commercials – in sports programming, for example, or Formula 1 or all the other blokey places we see shaving commercials. So DSC could undercut Gillette by 60%!
This model – a generic but quality product marketed through low cost channels on the internet – is an arrow to the heart of the big consumer brands everywhere – whether in laundry detergent (Ariel), dental (Oral-B), Listerine or what have you. Did I mention that Dubin just sold that business for US$1b, five years after it started?
It was Unilever that bought it, and yes, P&G and its shareholders are worried.
In this globalized world it is relatively easy to find a vendor somewhere with excess capacity who will supply generic goods at low prices for a brand to white label. Specialised third party logistics providers will move products and technology minimises the need for warehousing. Cloud software will create a detailed customer and sales list.
Dubin’s sale fired the gun in a race to create the next US$1b fast-moving consumer goods story, and there are now a new, committed bunch of runners – just have a look at feminine hygiene products here or PooPourri (the ad for which is a laugh, for sure. See below.)
There are second-order effects too. The whole of the TV (and radio, and print) business model is built on advertisers needing to reach a given number of consumers but not having the tools to do so accurately, and so having to waste a lot of money marketing laundry detergents to children. Remember, media companies distribute audiences to advertisers, not programs to viewers. The programming part is just incidental. Facebook works the same way.
Consumer goods companies were happy to pay media companies big dollars to hit large audiences, knowing this to be inefficient, but unable to do anything about it because Facebook hadn’t yet been invented. Except now it has.
Facebook’s very detailed information on its users allows marketers to simultaneously target and bring total advertising costs down while its massive audience allows it to provide big reach for big products. Want to reach just the two million in 100m people who are teenage boys about to commence shaving – no problem. TV can’t do this with the same accuracy, and so cost.
But haven’t companies always had to deal with changing business models. There was change 50 years ago too – why is this change different?
The answer is that the pace of change has increased so dramatically in the past few decades. We have had petrol engine cars for 100 years now, but electric vehicles are coming and it is possible that in 30 years that there will be very few petrol engine cars left on the roads.
For hundreds of years, energy consumed used to be a function of resources extracted – now it is a matter of using existing energy sources to harness ‘fresh’ power – witness the growth of the solar and wind industries. Communicative networks inject information into the physical world so that people can know who is reading their message, and how often, and for how long, and when, and where. So Uber cars just turn up, while taxis are still working on it.
We have seen the damage that disruption has done to businesses in the world where information is the commodity – whether tv networks or newspapers. Now it is moving into the physical world. And that is where the real disruption starts.
Alex Pollak is chief investment officer of Loftus Peak, a fund manager that specialises in building listed global portfolios for self-managed super funds.