Why Consumer Startups Can Be The Next Big Thing
There is now a common preconception in France that Entrepreneurship has to be about tech. “Fin Tech”, “Ad Tech”, “Biotech” and even “Food Tech”: it seems almost impossible for new companies to be called “startups” and to capture attention unless they tick the tech box. And thus very difficult for them to secure funding from Venture Capital funds.
Last year, we decided to go against the flow and to create, within Otium Capital, Otium Consumer VC team aiming at backing the most promising Consumer Startups in Europe.
For the traditional Venture Capital world, it may seem crazy to invest in such projects. Dealing with branding, inventories, production and store openings … the challenges are indeed numerous for these industries.
Yet, we believe the opportunities are totally worth the risk. We’ll explain why.
There is a mismatch between what the markets are currently offering and what customers are actually looking for.
Consumer markets are huge but only a few actors take the lion’s share with gradually less legitimacy. Food is a 120 billion euro market in France with some categories achieving robust double-digit growth over the past five years (the Organic Food market has been growing by nearly 50% over the past years for instance). Beauty & Personal care market is smaller but still represents a 13 billion euro national market and is our second exports sector (after aeronautics). Fashion and Accessories, Beverages, Home and Garden and Leisure are also all multi-billion euro markets.
Until now, only a few actors have controlled these markets. L’Oréal has 25% of market share in the beauty & personal care while all other companies have less than 5%. Nestlé owns more than 25% of the baby food market. And Unilever owns more than 15% of the home care market.
Yet, people are more and more questioning the leadership of these companies. We have discovered that some of them flooded the market with products using toxic ingredients (UFC Que Choisir pointed out once again this year more than 400 cosmetic products containing allergens or hormone disruptors), others were not compliant to safety regulation (remember the horsemeat fraud scandal that affected France and several European countries in 2013), manufactured abroad with poor working conditions, or made us pay a premium for having celebrities on an advertising campaign. In the US, big corporations are even seen as one of the least trusted institutions (according to a recent Gallup Study) and keep losing market shares (the 25 top food & beverage companies would have lost 18 billion in market share since 2009).
There is an emergency for new types of consumption that go beyond trends and are actually reshaping the market in depth. They are particularly triggered by the new generation of consumers, the so-called “millennials”, who will be soon the largest consumer target and have expectations towards brands and consumptions that have radically changed.
People want transparency and truth. They want to know what is inside the products they use, where they are made, why they are good for them. In the food industry, the best illustrations to date of this trend have been the rise of organic products and local distribution: organic food market has reached €7bn in France in 2016, a jump of 20% from last year, which means a value creation of more than €1bn in one year, meanwhile 71% of the French consumers are now more favorable to local food distribution than traditional retail distribution. The beauty market faces exactly the same revolution with demand for organic beauty said to double in the next 8 years.
They want a personified relationship with the brand based on authenticity. Despite what seems to be a growing anonymization of society behind the screens, people actually want to rebuild a sense of community and engagement with brands. They love to know the companies’ stories: who are the founders behind, what kind of people work there, how the products are made and designed … They enjoy interacting daily with them, following their news on Instagram, being included in their product development process. Likewise, they like being known as an individual customer, having some privilege because they are loyal, being known by their first name.
Finally, they seek experiences and to be accurate, they want companies to think “customer experience first”. From the first visit on a website (or in store) to the delivery (and sometimes, the return process), they want to have the smoothest journey possible and to live something that they will remember. Oh My Cream! illustrates perfectly this trend: from the second you enter a store, you are immerged in a soft environment, being taken care of by a professional and friendly beauty advisor that takes time to speak to you and understand your needs and doesn’t try to sell you something at any cost. You may buy something in the end but even if you don’t, you will have had a great time, you will remember it and that might probably make you come back.
Today, historic players seem to have neither the legitimacy nor the agility to address these growing needs and we believe this is an amazing opportunity for new ones to step up.
At the same time, distribution and communication tools have radically changed, enabling new brands and concepts not only to emerge but to outperform old ones.
E-commerce is probably the most striking example of this distribution revolution through marketplaces (or multi-brands websites) or own channels. The first ones offer young brands an incredible visibility, a quick access to the market, credentials and legitimacy that usually face time to have (when your creams are sold on ohmycream.com, it says something about you). The second ones enable brands to connect to their customers and offer them a full experience (we told you: it is the golden word): the website UX, the content, the easy payment process, the way products are wrapped and sent to your door, the samples or little gifts you get with your purchase … all of these features are what build your brand and engage your customers.
Offline distribution has evolved too. Some strategic wholesalers like Monoprix or Sephora have early understood that if they want to be appealing to the new generation, they need to make room on their shelves for new young brands: for example, Monoprix was the first one to distribute the food brand Michel et Augustin and is now betting on Merci Handy to boost its personal care category. There is no doubt that the other ones will soon follow this path. Retail may seem struggling these days but we have the conviction that the omnichannel strategy is key to get out of this deadlock. People love to browse online and buy from their mobile, but they also love to live great experiences in real life. This is what offline retail should be all about: real experiences with real people. And since every pure-player opens a store at some point, from Amazon in New-York to Made.com or Birchbox in Paris, we are probably not the only one with this conviction.
Communication channels are the other game changers. Through social media, brands can interact daily and directly with their customers. A generation of “Instapreneurs” is born with brands building their success on their community: Merci Handy has more than 120k “kittens” who follow them on Instagram and tell them every day why they love their products and what they want next. Having this kind of relationship with your customers even gives you the ability to involve them in the creation process to optimal development. Influencers have also radically change the way brands communicate. While bloggers and vloggers are becoming at the same time the new journalists and your new best friends, brands don’t have to pay an expensive advertising campaign on TV or a full page in the latest magazine, with a major celebrity endorsement, to get known by customers and appealing to them.
This digital transformation of the distribution and the communication tools is actually enhancing the opportunities for new brands. It gives them not only a fastest go-to-market but also a legitimacy that traditional players cannot have. Because they are born digital (and most of the times their founders are as well), they understand intrinsically how these tools work, what their customers expect and what they can do to reach them. To compare, Le Petit Marseillais, who may be one of the most famous personal care brands in France, has less than 10k followers on Instagram: they may one day achieve what Merci Handy has, but it will take time to catch up.
There are exciting perspectives for new players even if the road is long and challenging to become the next market leader and not be just a flash in the pan.
So, we said that there is a mismatch between what consumer goods markets were currently offering and what customers are actually expecting, while thanks to digitalization, there is an unprecedented opportunity for new brands to fill this gap. There already are some great examples of companies, mostly in the United States, who noticed this window of opportunity and have recorded an incredible growth over the last few years: the Dollar Shave Club made a total revenue of $152m in 2015 after just 4 years of operations selling razors; Warby Parker reached a $100m turnover after five years disrupting the eyewear market; Casper, the mattress company, made a $100m revenue in less than two years; without mentioning Greek yogurt Chobani company that hits one billion revenues in less than five years.
These success stories have worried the historical players who understood they would not be able to compete with new comers and deliver the same type of services. Instead of spending millions in in-house innovation, they developed a very specific tactic: acquisition. Only in the beauty sector, 59 deals were made in 2016, including Atelier Cologne (L’Oréal) and Dollar Shave Club (Unilever) and this trend is not supposed to slow down. Given the high growth rates, valuations are rocketing: $550m for Casper, $1bn for DSC or $1.2bn for Warby Parker.
Of course, things are not that easy and not every brand will become the next Chobani. Sustainability has become the main challenge for new players, in terms of economics and in terms of brand positioning. We have seen a lot of brands that managed to emerge thanks to very accessible prices and massive marketing expenses but that neglected to work on their margins and their acquisition funnel and will never turn profitable. We have also seen brands that managed to grow very fast in a few months and thought there were “too hype to fail” but eventually did not last because they did not know how to stay innovative in the long term. In a more and more competitive environment, where consumers are solicited all day long on their feeds and wholesalers always looking for the new hit products, the tough part is not to sell in anymore but to sell out, not to be known but to be kept top of mind, not to push products but to pull consumers.
But who said leading a revolution was an easy one? Because we strongly believe that the world is changing as well as the way people are consuming, we are happy to work every day with promising entrepreneurs who are dealing with these uneasy questions. More than money, we want to bring them the structure that will help them keep their agility and focus on creativity, we want to help them build solid foundations to scale right and fast, we want to make them stay for years and become the next leaders of their categories.
So yes, these companies are not “tech” but if we look at the market dynamics, the incredible opportunity to outperform the current players on many levels and the success stories of these last few years, these consumer startups have definitely a chance to become the next big thing. We take this bet @ Otium Consumer! -
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