Global retailers are meting the demands of the Instagram generation by identifying emerging brands with social media appeal and buying them up, says Comgest fund manager Alistair Wittet.
Big firms have also resorted to disrupting their own brands as millennials become less loyal and more restive while demanding social media ‘shareability’.
Wittet, who manages Comgest’s Pan Europe, Europe ex UK and Europe Smaller Companies strategies, says that in sectors like retail, cosmetics and fast-moving consumer goods, giant brands such as L’Oreal, Nestle and, on a smaller scale, Boohoo.com have learned how to win over a younger customer base. This is despite lower brand loyalty and, sometimes, conflicting signals and demands.
For example, the younger generation are eating less chocolate to be healthier – but still prize it as a treat.
“In chocolate, they’re trading up. You have a decline of the whole category, but solid growth in the premium chocolate category. So again – even where the broad category seems like it’s suffering, it requires a more subtle approach,” he says.
Wittet says younger consumers want to be more ethical and cut back on waste, but the buying behaviour of the ‘selfie generation’ doesn’t always match these ideals.
“They want to continually change their look – to never show the same image on social media twice – so there’s actually an increase in demand for fast fashion – for cheap, disposable clothing. That benefits those super-fast fashion players like Boohoo.com.”
He says the bigger brands are becoming alert to the fact that the current generation are much less loyal and much more willing to switch clothing brands.
“That has resulted in much higher customer acquisition costs for retailers. They increasingly need to advertise online where the cost of advertising is going up, and where the attention span of their consumers has been going down, all with less customer loyalty. That’s created quite a lot of disruption in the retail industry,” he says.
Low barriers to entry – high barriers to scale
At the same time, the barriers to entry have come down in terms of launching new brands, a trend facilitated by firms that specialise in enabling this kind of launch.
“The US firm Shopify enables you to launch a brand, essentially by yourself. They will look after the website and all of the marketing – the way you present the product. It’s very easy to find the supplier for the product, so it’s rather easy to launch a new brand. You can establish awareness of the brand and prove it quite quickly.”
Influencers then play a significant role. “If it gets picked up by the influencers, it can very quickly do the rounds, and you get significant brand awareness.”
However, there are significant barriers to consolidating that initial success.
“This comes back to the customer acquisition costs. Those first customers are quite easy to get, in that all it takes is somebody with a relatively decent following to promote your product and you immediately create a bit of buzz. Yet then to get to scale, given the lack of loyalty of the customer and the rising cost of that online advertising, it’s actually very difficult.”
This is where the global players come in.
L’Oreal sees worth of buying smaller brands
Wittet adds: “When you look at some of the big players, they’re actually not suffering as much as one might have thought. L’Oreal, for example, in the cosmetic space, have come up against lots of new entrants, but it’s delivering some of the best organic growth in a very long time.
“It is managing to buy up some of these small players and to scale them. A few years ago, there was a big debate as to whether L’Oreal would suffer. The answer has become quite clear in the last few years’ that that they haven’t.”
On a smaller scale, Boohoo.com is following a similar route.
The price is right at £15m or £20m
“Even though Boohoo is not a huge company, compared to a lot of the new entrants, it is pretty big. It’s already a billion-pound revenue business. They have stated they intend to continue buying up and consolidating all these small brands. When they reach £15 or £20 million of sales they then buy those companies up to scale them.”
Wittet notes that it doesn’t offer a clear solution for retail brands that run physical estates. They have been preoccupied with the transition to online and taking over a succession of smaller brands represents a very different business model.
At the same time, some retailers that were slow initially to react to the online challenge have now fully embraced the change. The classic example is Zara parent Inditex.
The Spanish firm was reluctant about online in the mid-noughties, but once they made the decision to shift at the start of this decade, they understood just what a structural challenge it represented.
“They radically adjusted their store estate. They closed a large number of their secondary stores, enlarged their primary stores and remodelled them, because they realised that stores now had a completely different function. They weren’t just the place where you went and bought clothes; they were becoming a kind of display form of advertising and more recently, somewhere where you can pick up and return clothes. In that sense, stores are functional, but in a very different way than they were in the past.”
Inditex also changed their approach to inventory given the rise of online but also customers’ different behaviour regarding returns.
KitKat – old favourite and social media star
Wittet’s final example is Nestle. He says that the Swiss giant is well aware that customer demands are getting tougher.
Their approach is to see their brands almost as “living creatures that need constant nurturing” but that now face constant disruption. Indeed, arguably Nestle has even disrupted its own brands itself rather than see others do so.
He says that Nestle takes this message to investors – that consumers want new products, with natural ingredients that are produced locally and that have authenticity. They also want products that connect to them in some way or another. They want to be able to share the products, so they have to be shareworthy. They need to be cool, allow self-expression and if possible do good.
That may seem like a quite extraordinary list of demands.
He says perhaps surprisingly the example brand often used is KitKat. It has embraced ethical sourcing of chocolate – something that hasn’t had the cleanest supply chain in the past. It was certified as fair trade back in 2013. It has adapted the mainstream product with variations such as green tea and most recently the KitKat Ruby meeting the demand for shareability.
KitKat has been growing at around 6 per cent a year in the las few years.
He adds: “It’s not easy. But if you can see that the companies are making the right adjustments to their model and thinking in the right way, then I think that’s a good sign that they’re taking these challenges seriously.”