This week’s podcast is about how consumer packaged goods (CPG) companies can go digital. It’s my 4 basic rules to get going.
You can listen to this podcast here, which has the slides and graphics mentioned. Also available at iTunes and Google Podcasts.
Here is the link to the China Tech Tour.
My 4 Rules for CPG Brands Going Digital
- Focus on DOB3. You need to digitize the core. This is easier in CPG as it’s mostly about marketing. The hard part is creating the connection with the consumer. AB InBev did this by creating its own app and delivery service. You can use services like Shopify and JD Logistics.
- Do DOB4 as early you can. You want to connect with other parties, such as complements and retailers. This is mostly about sharing data early on. Collaborations in product development, operations and R&D may come later.
- Commit to Ecosystem / Platform Participation as your SMILE marathon long-term. You have to become a master at engaging with the major ecommerce, social media and video platforms. Even Nike can’t do it all direct. This is usually about developing talent early on.
- Build moats and competitive advantages as you can. These will mostly be by consumer capture.
- Zé Delivery’s “Wow” Experiences vs. Ant’s Sustained Innovation Imperative (1 of 2) (Tech Strategy – Daily Article)
- Why I Really Like Amazon’s Strategy, Despite the Crap Consumer Experience (US-Asia Tech Strategy – Daily Article)
- Why Netflix and Amazon Prime Don’t Have Long-Term Power. (2 of 2) (US-Asia Tech Strategy – Daily Article)
From the Concept Library, concepts for this article are:
- DOB3: Digital Core for Management and Operations
- DOB4: Connectedness, Interoperability and Collaboration-Based Business Models.
- SMILE Marathon: Ecosystem / Platform Orchestration or Participation
From the Company Library, companies for this article are:
- AB InBev / Ze Delivery
Welcome, welcome everybody. My name is Jeff Towson and this is the Tech Strategy Podcast where we analyze and value the best digital businesses of the US, China and Asia. And the topic for today, four rules for CPG brands going digital. Now this is actually a pretty common question from CEOs, managers of CPG, consumer packaged goods companies. You know, this is a big list of product types. It could be, you know, L’Oreal, it could be beauty products, makeup products, it could be household goods, staples, ketchup, Coca-Cola, flour, cleaning products, fashion products, socks. I mean, there’s just a lot of different consumer packaged goods of various types depending how you sort of define them. And when these companies go digital, it’s a lot. It’s an interesting question because it’s not like a retailer and it’s not like a service company. There’s often not a lot of direct contact with the consumer at this point. Most of these companies just, you know, they deal with retailers and they place their stuff on the shelves and then they do brand marketing and coupons. But there isn’t a long history of direct engagement for most of them. So the digital question is a pretty common one and I’m basically going to give you my playbook for what… you should do if you’re running one of these companies and I’ll give you my four rules and that will be the topic for today. Now a couple announcements, pretty good ones I think today. The first one is that China is open, right? It’s opening as we speak. Pretty much everyone I know in China has got the flu. at this moment, but the borders are opening in a couple days. People are starting to travel. So the Asia tech tour, which was planned for March, we’re shifting that to China. And I’ve been emailing a decent number of people, you know, the last day who have sort of been, you know, on board for coming to Singapore and whatever, you know, apologizing. I am sorry about that. But you know, we’re going to Beijing, we’re going to Hangzhou, we’re going to Shanghai. That’s going to be in April. I mean, it’s There’s just a sea of tech companies, particularly in Beijing. And these are really the innovation leaders, equal to Silicon Valley. So that’s gonna be the plan. So if you’re interested in that, the China Tech Tour, five days intensive, Monday through Friday, April, we’re gonna visit some companies, do a lot of sort of advanced digital training, have some fun. This is kind of my stomping ground. This is… you know, where I’ve been living for the last 15 years, more or less. So this is, you know, Alibaba, Baidu, Ant, Alipay, DD, JD, you know, all of those companies are there. So we’re gonna try and visit quite a few of those. Now, we’ll specify what those are gonna be as we go forward. Anyways, if you’re interested in any of that, it’s gonna be awesome, very exciting. And you can send me an email at info at 1000group.com or just go to 1000group.com there and look for the tech tour. and you’ll see it. I can’t miss it and I’ll put the link in the show notes. So that’s kind of the big announcement. Awesome. China’s opening up and it’s going to be great. So that’s sort of announcement number one. Announcement number two. For those of you who are subscribers, we have been doing valuations now. We did Microsoft. There’s a team here in Bangkok, group here in Bangkok that meets, but we’re also doing that online as well. So if you’re interested in being part of that, and I know several of you have signed up in the last several days or sent me a note, we’re working on valuing Amazon right now, and we’ll just keep going through these companies. So that’ll be sort of handled in that chat group, and then with offline, we’ll do calls, and basically come up with numbers. If you’re interested in being part of that, send me a quick note over at info at towsongroup.com, or just go over to LinkedIn, I’m always there, easy to reach there. and let me know. So that’s the other thing that’s moving right now. And if you’re not a subscriber, feel free to go over to jefftausen.com. You can sign up there. Free 30 day trial, see what you think. Okay, so those are the announcements for today. And let’s see, my standard disclaimer, nothing in this podcast or in my writing website is investment advice. The numbers and information for me and any guess may be incorrect. The views and opinions may express may no longer be relevant or accurate. Overall, investing is risky. This is not investment advice. Do your own research. And with that, let’s get into the topic. Okay, now as always, we sort of start with key concepts, learning lessons for today. And I’ve got three for you, pretty important ones. Number one, well, I shouldn’t say number one. The first one is DOB3, which is Digital Operating Basics 3, which I’ve talked about a lot. That’s a digital core for management and operations. And this is really when you deal with non-software, non-digitally native. companies, this is where everybody starts more or less. You’ve got a factory, you’ve got a retailer, you’ve got a CPG brand of some kind. First step is always to build out the digital core, which supports management and increasingly operations over time, because if you don’t have data, you can’t really do anything in digital. So, you know, most companies, this is where they start. Very important, we’ll talk about CPG brands, that’s a bit different. If it’s a factory, you kind of know what to do. You put in sensors, you put in cameras, you start to put it into the machines and all that. If you’re a retailer, you kind of know what to do. You look at your inventory, you do checkout, but most CPG brands don’t have any of that. You know, you’re sort of putting stuff on the shelf of somebody else’s store and then customers buy. You don’t really have any contact. So getting data and building your digital core, it ends up being a lot about dealing with e-commerce platforms, digital marketing, social media, that’s where you’re gonna get really most of the data you have. Now you can try and integrate in with retailers, that can work, but it’s a lot easier when you’re a factory. You kinda know what to do. But for CBG, digital operating basics three, digital core, you have to kinda be clever. So that’s the first concept for today. Second concept for today is digital operating basics four, which I haven’t really talked about, but it’s super important. This is, unfortunately has a terrible name. I need to think of a shorter name, which is connectedness, interoperability, and collaboration based to business models. Yeah, terrible name, right? And this is the idea of, look, once you’re digitized, your management, your operations, you’re improving your… customer offering over time, that’s DOB2, you start to connect with other parties. This could be in the supply chain. So we would call that like a production ecosystem, which is something I’ve talked about. And you can do that on the consumption side. So you might, you know, if you digitize a hot dog, the group you wanna connect with is the mustard people. Right now you can’t digitize either of those, I don’t think. But you know, because that’s all part of the same sort of consumer offering, complements, retailers, distribution channels, anything that faces the customer you want to sort of connect with and start to interoperate. So you can call that a collaboration-based business model. But usually the first type of connectedness is data sharing. That’s usually what comes first. You start to see. have some agreement, you start to share data, and your digital core gets stronger because you’re feeding in external data as opposed to only the data you have access to. So that’s DOB4. And then the last concept for today is within the SMILE marathons, S-M-I-L-E, the E, which I don’t talk about too much, is ecosystem orchestration or participation. And you can say ecosystem and platform. A platform is a simplistic type of ecosystem. But this is the idea, look, you are dealing with Alibaba, you’re dealing with Amazon, you’re dealing with Google, you’re dealing with Baidu, you’re dealing with one of these ecosystems or platforms. You are either going to be the orchestrator, which is rare, you know, it’s great if you are. Taobao is an orchestrator, Shopee is an orchestrator, or more likely, you’re going to be a participant, which means you’re going to have to learn to be very good. at working with Amazon as a merchant or a brand. And most everyone’s a participant. That’s an incredibly important skill set. Even the most powerful CPG companies in the world, Nike, L’Oreal, they are all outstanding at being a participant on someone else’s platform or ecosystem. WeChat, Facebook, YouTube, Amazon, Alibaba, all of that. That’s kind of when I talk about sort of a marathon, a digital marathon, an operating dimension you wanna be focused on for years and years and get great at, ecosystem participation is probably the most common one. Super important, most small CPG brands are not very good at this. Anyway, so those are the three ideas for today. And I will list those in the show notes. Okay, so let’s talk about CPG brands facing a digital world. which is difficult for them. If you are selling a razor, let’s say a Phillips razor or a vacuum, when you think about going digital, you basically think about making your product smart and connected. You put in some chips, you put in some IOT, things like that. Okay, most CPG brands can’t do that. There’s no way to make ketchup smart and connected. So you’re not gonna get a lot of data flowing in from the usage of the product. Now maybe they could. I suppose maybe they’re doing that and I don’t know about it. I suspect they’re not. In theory, that would be cool. You know, you can put sensors into, let’s say, refrigerators and they could track how much ketchup you’re using and what the level is and all of that. Okay, there’s ways to do it, but it’s not usually what you go to. For most CPG brands, let’s say makeup, ketchup, you know, basic household products, things like that. You know, historically, There’s not a lot of innovation happening in ketchup, mustard, Tabasco sauce. You know, most of what they’re doing, and there’s actually not a lot of production either, their manufacturing production facilities are usually like very small. Mostly what they’re doing is a lot of marketing and a lot of negotiating and dealing with various retailers, you know, give us good shelf space, give us a good placement. Oh no, the retailers are consolidating Walmart’s more powerful. They keep squeezing us. You know, it’s about getting shelf space. Maybe you do coupons, you do some things like that, but it was mostly about brand and distribution. What is Coca-Cola? They’re a branding and distribution company. The making cola part is really not that much going on. Actually, they don’t even make the cola, they just make the syrup, and then the bottlers do the rest. Which you could call that distribution, I guess. Okay, you know, that’s historically what’s going on. What’s been happening? Retailers getting much more consolidated. especially in the United States. That’s a big problem because if you’re negotiating, they keep getting stronger and stronger. They’re going private label. So suddenly you’re selling to Walmart, they’re negotiating the bejesus out of you and they’ve just launched a private label version of your product and it’s got better placement in the store than you. Oh, and by the way, they’re selling at a loss because they’re Walmart and they can afford to. They don’t have to make a big margin on the one product they sell. They got a million products, right? Bad news. So that’s a problem. E-commerce is getting more and more powerful. Things are being bought online. Okay, that’s another problem for them. You know, it’s a, for a lot of brands, you know, if you’re famous like Nike or Coca-Cola, Walmart actually treats you pretty good because they need you and they know they need you. But for the vast majority of CPG brands, that is not the relationship. You are kind of doing what they tell you. and you got no choice. Okay, so then digital comes along. And in terms of operating behavior, my standard little six levels are that operating performance is about getting smarter, faster, and better every year. You become more data-driven, your cycle times are faster, your response times are faster, your tactics are faster, and you’re getting better. You’re using data to improve the product all the time, which is what digital services are very good at. It’s hard to do that if you’re making ketchup. It’s hard to do faster, it’s hard to get better, it’s hard to get smarter. Well, you can try and get smarter. That’s probably the one lever you can pull. So you get better at marketing. You get better at targeting. You go from one directional interruption based marketing, which is, you know, here’s an advertisement you didn’t want to see about ketchup, to two way communication, where you’ve got their email. Maybe you’re on an app of some kind, you’re on a platform, and you’ve got two-way communication where you can start to send offers and they can respond. You know, so you go from one direction to two-directional marketing, that’s very important. You can do things like social media, depending what product you are. If you’re doing ketchup, no. If you’re doing makeup, yes. There’s a lot of cool content about makeup. So you can start to get your marketing better, smarter, more data-driven. direct relationships with your customers, your consumers for the first time. Could be B2B, could be B2C. That you can do. And then you integrate more with the retailers, but you’re basically gonna do it on their terms for the most part. Okay, that’s one thing you can do. Smarter, faster, better. You can start to innovate faster on your products. Nestle is quite good at this. They roll out all these different types of coffees all the time. Instant coffee, which is very popular in China. Instant coffee’s huge. Like when you go into 7-Eleven. Well, you can roll out holiday coffees, and not only can you roll them out, but you can sort of micro target. You can go for people working in factories. You can go for college students studying for their exams. And you don’t have to do this mass market thing where we’ve got to appeal to everybody for the long term. You can do micro targeted products that maybe you only do for a couple months, and then you do another one. So you can do that sort of rapid product development, innovation, micro-targeting, and maybe some of them will last, but maybe you’re just rolling out 20 to 30 different types of coffee every single year, and most of them you do once, and then some of them you stay. So you can do that. And you can start to deal with your compliments. You know, if you’re selling beer, I’ll talk about beer a lot, you can start to think, well, what do people have when they buy beer while they have events? They have family gatherings. They have parties for the World Cup. What else do they buy? Well, they buy a lot of steaks because people have barbecues and things. Okay, so you can start to partner with the steak people. You can start to connect with them and sell things as a bundle, gather data together, things like that. That’s DOB4, collaboration-based business model. So those are kind of the big levers you can pull. In some cases, you can actually digitize your product like. the shavers and the vacuums. Pretty rare. Makeup’s getting kind of interesting actually. You can start to pair your product with a service. Like makeup is doing this where they’re making makeup that is tied to mirrors that do AI. And they do recommendations for what kind of makeup you should do for your skin color and what you’re gonna look like. And then they custom make the makeup for you. So there’s a lot going on there. depending what CPG category you’re talking about. Okay, so you’re a CEO or a senior manager at one of these companies, you’re just getting started, right? You’re not a huge company, you’re not Nike, you’re not L’Oreal, maybe you’re a very good Brazilian makeup brand. And you haven’t done much of this. I mean, you’ve sort of dabbled, you’ve tried some initiatives, you weren’t really sure what to do. That’s when they call a guy like me, hopefully. And generally my advice is, okay, look, you’re just getting started. The key things you have to have long term. You have to have a direct relationship with your customers. That is just like rule number one. You don’t want to have an intermediary between you and them. You may deal with an intermediary as well. That might be one channel, but you need to have a direct channel with your customers because this whole game long term. He’s about using data to constantly innovate and improve the customer experience. If you don’t have a direct relationship with your customer, that becomes very difficult. You’re not gonna get as much data, and you can’t get sort of direct two-way feedback to constantly innovate on the customer experience. So you gotta have a direct relationship with your customers. That has to be one of your channels. and you’ve got to be gathering data immediately. It’ll come from that channel, it’ll come from other channels, it might come from complements, it might come from platform business models. You might buy the data from other sources, but you start gathering data. You know, that’s the digital core. That’s the engine underneath all of this. So that’s kind of where you start. And that’s usually what most companies do. CPG, retailer, that’s usually the step one for all of this going digital. is direct relationship with your customers if you can and start building your digital core, which means gathering data. And then usually the first expression of that is the management starts getting a lot smarter. You know, you got a lot more data, you’re seeing things clearly. The second step is usually your operations start to get more efficient because they’re more data-driven. So the management gets smarter, the operations get more efficient. That’s usually the first two sort of wins once you start to get the data and things like that. All right, with that, let me switch over and give you an example now of AB Imbev and Zed Delivery, which I’ve written about, those of you who are subscribers, I’ve sent you two articles on this, one a month or two ago and one in the last week, because I spent a really, I’ve been talking with them a decent amount over the last six months, and I met with their CEO of Zed Delivery, met with AB Imbev in São Paulo, they’re a Brazilian company by background. they are really focused on digital. I mean, this is a major part of their strategy all the way to the top. So a lot of interesting stuff and one of the initiatives they’ve done, they’re doing several, is Zed Delivery, which is basically a B2C delivery service for beer. It’s a beverage delivery service. It’s an app. It’s a pretty cool app. It’s not, I mean, it’s early days. You know, it’s pretty standard at this point. You know, it’s a basic e-commerce app. You get it on your phone. It’s called Zed Delivery. There’s a picture of a guy with a beard who is Zed. And the standard question is, well, who is this guy Zed? Which I asked the CEO of Rodolfo. And he said, not sure. I think they made him up. It’s not a real person apparently. But anyway, so Rodolfo Chung, CEO. Zed Delivery, he was ABM Bev, this was one of their sort of incubated ideas. It took off sort of like a rocket ship. They launched it a little bit before COVID hit and basically, and they only did it in Brazil. That was sort of where they started. And you know, basically you can go on to the app and you can order beers, spirits, wine. anything within sort of the alcoholic beverages category, plus some other types of beverages, but mostly this is ABMBev, right? So that’s what they’re good at. And you can order it on your app and they have about 500 SKUs for beer, wine, and spirits. And you get delivery in 15 to 25 minutes, closer to 15 minutes for the vast majority of their orders. And that’s their value proposition. Huge selection of beverages. alcoholic mostly, you get it really fast and it shows up really cold. And they have these like hyper cold freezer units in their distribution centers where they keep this really cold so by the time it gets to you it’s really nice actually. So that’s a really nice idea. You know a nice beverage, a nice sort of app makes a lot of sense. What are they pitching? It’s a good product, it’s very convenient, it’s fast and you get a relatively good price because this is AB Imbev and no one… They’re the largest beer company in the world. So they can price it pretty good. It’s not dirt cheap, but no one’s going to get under them on price. So that’s their idea, very clever idea. 2019, they get about 1.5 million orders. In 2019, this is pre-COVID. But it’s growing pretty fast. Turns out in Brazil, this is a really good idea. Product market fit. Absolutely, it starts to scale. COVID hits, 2021, they hit 62 million orders, up from 1.5 million in 2019, right? This thing’s a rocket ship. Now, COVID optionally helped, obviously, but I did ask about this. I said, okay, now that that’s over, and it’s pretty much over in Brazil for the last six months, what’s going on with the orders? And they basically said they’re stable. They’re not dropping. They’re not going up like the rocket ship like they were during the pandemic, but it’s not like it’s falling back down. So I mean, this is, you know, there’s a Harvard business case being written about this company and a lot of CPG companies are paying attention to what they’ve done because this is the dream scenario for like every CPG company. We have a good product, but we want a direct link with our customers launching our own app that does real time delivery. is a fantastic idea if you can pull it off. And they’ve pulled it off at this point and they’re now rolling this out across Latin America. And it’s gonna turn in, I think, to a big case study. Now I spent the day with them, Rodolfo’s a really cool guy, and going around Sao Paulo and looking at their distribution centers, they have multiple levels of distribution where basically guys on motorcycles pull up. They have these warehouses full of every beverage you can think. The orders come in, the guys pick up, and they zip out and deliver very quick. It’s a really nice service for the subscribers. If you look at the emails I sent for this, you can see quite a few pictures. It’s pretty cool in their warehouses and their delivery people. And then they have sort of their… It’s an interesting mix because if you go to the nicer parts of São Paulo… You know, these are very nice neighborhoods. Itaim Bibi, the west side near the river. It looks one way, but if you go into sort of the middle and lower class neighborhoods, which there are a lot of them in Brazil, like Jacabara, it feels very different. I mean, and this is where they have different types of distribution. So they’ve got this model that works very well, everything from sort of the urban downtown CBD areas. to the more lower class neighborhoods, which are really everywhere in Brazil. I mean, most cities, you’re talking about 300 cities plus in Brazil. You know, most of them are not wealthy. You have villages and, you know, on the river and on the Amazon. So there’s a spectrum. That’s gonna be very interesting because we see a similar picture in Southeast Asia. We see a similar picture in a lot of parts of the world, India, where we get this spectrum of development. Well, this model works well in all of those. So that’s pretty cool. Okay, so, okay, this is the early stage of this company. What are they good at? They’ve got product market fit, they’re growing really fast, it’s a nice simple service that they’re gonna build on. They’ve got some pretty good barriers to entry because it’s hard to replicate their distribution footprint as a startup. Like if you’re a regular app company and you wanna just have five guys in a garage, it’s hard to replicate this because you need all the distribution across a very big country. So that’s a good barrier, but a well-run supermarket could probably replicate this because they have the distribution, they have the footprint. So they’ve got some good strategy questions with this company. OK, so what’s the takeaway? What are the lessons if you’re a CPG company going digital? Lesson number one, you’ve got to go direct to the customer. You have to. Now, the best way to do that is what they did is to turn this into a service, a delivery service. Put an app on a phone. Suddenly you have a direct connection with people’s phones. You’re getting two-way communication. You can pester them every 10 minutes to turn on notifications, which I hate, but that’s what they do. That’s a tremendous linkage with your customer. Now. The rule there is you have to go direct. It’s hard to get data, it’s hard to do any of this digital game if you don’t have a direct connection. Now most companies aren’t gonna be able to start a distribution delivery service. Okay, this is ABMBF, right? They’re a giant. But there’s a lot of ways to do this through companies like JD Logistics. JD, which is the number two, well, maybe number three e-commerce player of China. They launched something three years ago. which was basically retail as a service. They’ve renamed it now, and now it’s sort of morphed into JD Logistics. But what they offered was they would go to FMCG companies like Pepsi, Coke, and they would say, we will handle all your distribution and delivery, and anyone can get Coke’s, not only will we do immediate delivery to all of your customers, we will also manage where the inventory is kept in various neighborhoods. We’ll keep it in convenience stores. We’ll keep it on our own warehouses. So they did a sort of end to end fulfillment service that smaller brands could sign up for. And basically start to have a direct connection, well at least an immediate connection with their customers’ smartphones, as opposed to waiting for them to come into a retailer. Now you have a partner, JD, is obviously sort of an intermediary there, but it’s really more of a service. So this is sort of like the Shopify model. where look, you can’t build the app yourself, but you can deal with a company like Shopify or JD Logistics and start to have something close to a direct connection with two-way communication with your customers as a CPG brand. And FMCG tends to be a good category for it because that’s something that people order frequently. It’s harder to do this if people only buy your product every month. But if it’s an FMCG, beer, soda, things like that, or if it’s urgent, aspirin, I needed it 2 a.m. You can start to use these sort of support services to build the direct connection. So that’s sort of rule number, you know, lesson number one from Zed Delivery, which is go DTC, direct to consumer, direct to customer. It can be B2B as well, and AB Imbev does have another service that’s not to consumers, but it’s to restaurants and bars, who also buy a lot of beer. Okay, another lesson from Zed Delivery is digital operating basics number two is you never stop improving your experience and customer service, even if you’re a product. So what Zed Delivery is doing right now is they’re shifting from a product company to an experience company where we’re not just selling beer, here’s our big selection, they’re saying we sell experiences for occasion. If you have an occasion, event, a World Cup party, a birthday, Sunday with your family, which is a big deal in Brazil. Like Rodolfo had mentioned, like they see as big of a spike in sales on Saturday night, which is like parties with your friends, as they do on Sunday, which is lunch with your family. Like they see similar spikes on both of the events. So they’re shifting more to an occasions and events companies, as opposed to just, we have a lot of spirits. Experiences, occasions, you have a lot more dimensions to build out the customer experience. And they’ve started to add things like barbecue. So you can buy beer or it’s bundled with steaks. So you can have those on Sunday with your family. That’s a good focus. I think the more you can shift to an experience or a service, the more dimensions you can build upon over time. It’s hard to build out just a straight company. You can innovate. You can have lots of different products, but it’s better to be in the services business. OK, number three from them is they’ve started to bring in other brands under their wing. So they’re dealing with state companies, chips, things like that that would be complements. but they’re starting to connect with them. So that’s kind of DOB4. We’ve got to start using our digital connections to bring in more than just our product. Who are our complements? If we’re selling hot dogs on demand delivery, we want to partner with the mustard people. Same idea. So those are kind of the lessons I think that like, and I did a podcast and a bunch of articles about a month ago about the consumption ecosystem. That is a specific business model where you partner with your complements. and you digitally integrate with them. That’s kind of what they’re moving towards. Okay, that’s kind of one example. Let me talk a little bit about Nike, and then I’ll sort of summarize this with my four rules for basically going digital as a CPG brand. Now, Nike in China is, I mean, there’s certain companies that I keep an eye on who are just outstanding at digital. Nike’s one of them. L’Oreal is also fantastic at digital. But Nike in China, they’ve kind of pulled back now and they’re sort of political related, but tremendous strategy. They’re very, very successful. Now they’re obviously a retailer, but they’re primarily a product company. The stores are basically lots of shoes. Now what they did in China is, they’re far down the pathway, right? They’ve been digitized for a long time. They’re omni-channel. You know, they’re selling on platforms, they have their own stores, things like that. So they’ve done sort of the standard e-commerce playbook of, you know, digitize your retail outlet, go omni-channel, stuff like that. And they really started like back in 2012, they got on Tmall. 2014, they had their own website in China. 2017, they had a sneakers app. 2018, they set up a WeChat store. 2019 they did a Nike app. So I mean they’ve been you know on the frontier of e-commerce in China for a long long time. But really what they’re doing is trying to go direct to consumer as much as possible. And what does that mean? It means they have their own stores, right? Their own physical stores which are great. They’ve digitized them and you’ll see announcements for, oh, this is our smart store. I’m not terribly impressed with shoe stores that go digital. There’s just not a lot you can do. You know, makeup and beauty and fashion, there’s a tremendous amount you can do when you digitize, but ultimately in a shoe store, you’re looking at a shelf with a bunch of shoes on it and you try them on. They can tell you the history of the shoe and they can custom fit the shoe and custom. print the soul for you and okay, that’s all cool. It doesn’t totally knock me over. I would say the same thing about Starbucks, like when they digitize Starbucks, it’s okay. It’s a nice upgrade, but it’s not a game changer typically. Okay, so but they’re trying to go direct to consumer. So they have their own physical stores and then they have their own app, the Nike app. And those are their two main channels where they’re directly engaging with customers. Please come into our store, please download our app. Direct relationship, direct data, direct sales. And they’ve been pushing that pretty hard. And then the indirect channels would be, we have a store on Tmall, we have a big WeChat presence, we have a store on WeChat, we have chat rooms and communication on WeChat. And when you look at their numbers, their DTC revenue is up to about 40%. Well, 2019, it was about 40% of their sales. Now 2014, it was about 20%. So, you know, the lesson, the sort of takeaway here is you want to go direct as much as possible, your own app, your own stores, your own website. Even a company of Nike’s abilities is only 40% of sales, which means you are always going to be dealing with the digital giants, the Facebooks, the Googles, the Amazons, the Alibaba’s, the Shoppe’s, the Lazada. You’re not going to avoid them. So now you want both, but that is just, and if you’re a small company, if you’re a 10 person makeup company, in Singapore, you’re going to be over, I mean, that’s going to be in your entire business for the most part, right? But you want to push the DTC lever as hard as you can. Okay, so what does that mean? Well, that’s the other point I sort of brought up, which is what is your smile marathon? SMILE, right? The E stands for ecosystem and platform orchestration or participation. The marathon is the operating activity that is gonna make the biggest difference in terms of your competitive strength over the long term. So ByteDance has been running a digital marathon in machine learning since the day it was founded. That’s why it’s so far ahead of everyone else. It was slow, they pulled ahead slowly, slowly, and now they’re so far ahead of somewhere like Facebook. If you look at short videos on ByteDance, you get such a better feed of your interest than compared to say Facebook Reels or YouTube Shorts. And it’s because they’ve been running this digital marathon in machine learning for short videos forever. They’ve just pulled ahead. It’s like Elon Musk landing his rockets. He’s been running that sort of innovation and technology marathon for a decade. And people can’t, he’s just too far ahead. Well, this is the same. If you’re a CPG brand, the digital marathon you’re gonna be running for the most part is ecosystem participation, platform participation. You are gonna become a master of how to engage with Tmall. You’re gonna become a master with how to engage with WeChat and it changes all the time because these companies are always evolving. When WeChat says we’re gonna start focusing on short video, which Alan Jung basically said a year and a half ago, two years ago, the future of WePath. WeChat basically depends on short video and live streaming. Basically, he viewed TikTok as a mortal threat. You’re gonna be evolving with whatever they need and you’re gonna have a massive team focused on this. You’re gonna be data-driven and you’re gonna be very fast on your feet. So when WeChat rolls out new features, you’re on top of those immediately. If you’re dealing with WhatsApp in Brazil, if you’re dealing with Mercado Libre in Brazil, if you’re dealing with Lazada in Thailand, You know, that’s the team within the management that needs to be incredibly good at what you do. We are the ecosystem participation experts. We know digital marketing, we know all the omni-channel, we know the e-commerce channel. That’s really the game. And that’s pretty much what Nike has done within China. One, they went direct, which was important. But two, they are all over Tmall and WeChat and WeChat mini stores, mini programs. I mean, they are just masters at these systems. Now China, it’s a bit easier because there’s only a couple you have to know. I mean, you have to know for social media, it’s WeChat and Weibo. That’s it. Okay, for short video, it’s TikTok and Quaishou and then e-commerce, it’s more of a spectrum. Yes, it’s Tmall, but you’ve also got. you know, Red and Billy Billy and all these quirky companies. But it’s a much simpler ecosystem than a lot of countries. Somewhere like Southeast Asia and Brazil, Latin America, you know, you’re looking at Facebook and you’re looking at WhatsApp. And the problem there is these are pretty stagnant companies in terms of their feature set and what they do to build, you know, services that merchants and brands can use. They’re really slow. which is frustrating. A company like Shopee is much faster. So anyways, that’s kind of the third point for today. And I think that’s been kind of enough theory. I’ll summarize my four rules, but this idea that yes, you need to go direct, which is the Zed delivery model and the Nike model, but you also need to become a master at platform participation. You just have to. That’s sort of the smile marathon that’s going to make the biggest difference long term. Companies that did well in that in the short term are like Perfect Diary in China. You could argue that that was a large part of TikTok success early on. You could argue that Shiyin. was incredibly good at being a participant in Facebook, YouTube, and that’s how they got really rolling in the United States, is the founder of Shein. I mean, his background is in digital marketing and influencer marketing. And then e-commerce, cross-border e-commerce. So that was really his skill set to begin with. Okay, I think that’s enough of that. Let me just sort of summarize and give you the so what for today’s podcast. for CPG brands going digital. Here’s my four rules. This is pretty much what I tell CEOs, like, hey, you’re a really cool makeup brand, you’ve got a great team, you’ve been around for 30 years, customers love you, you don’t quite know what to do with digital yet, you’ve been trying things, but it’s not totally clear, your team doesn’t really understand the stuff beyond a certain point, the marketing person seems to know it, maybe the CTO knows it, but you’re not totally sure what to do. You’re kind of sure, but you don’t have the confidence you have in your core business. Like makeup, you’re totally sure. The digital side, you’re kind of sure. This is sort of my standard advice for that type of situation is number one, you got to focus on DOB3. You got to focus on building your digital core. You don’t have to build the whole architecture in one shot. You don’t have to bring in and move on to the cloud and then be multi-cloud and then no, you don’t have to build it all at once. But you’ve got to put that first, and you’ve got to come up with, let’s say, three to five use cases that we’re going to build the digital architecture and the data architecture to improve these three to four use cases such that within six months we see the numbers move. We’ve got to have some early wins. And then, you know, against those use cases, you add a couple more, and then your overall architecture will evolve over time. Generally, yeah, focus on your digital, particularly your data architecture. Go fast, move after a couple quick wins, and that’s your best first step. And usually for CBG companies, the use cases are gonna be in marketing. That’s usually where you’re gonna go. You’re gonna focus on management reporting, and you’re gonna focus on marketing. That’s where you’re gonna start putting your data in the right formats. You know, that’s your data lake and your data warehouse and then you start running analytics and you start with data analytics, you’re backwards looking. If you get good at it, then maybe you shift over to predictive analytics and you start doing ML and things like that. That’s rule number one, focus on DOB3. Rule number two, start to do DOB4 early. Now DOB4 is that… poorly named one, which is connectedness, interoperability, and collaboration-based business models. This is where you reach out to other CPG companies like yourself that have complimentary products and you talk. And you say, okay, we’re doing the eyeliner, but you’re doing the lipstick. Let’s talk about data sharing. you’re probably looking at some sort of data sharing arrangement with others that are close to your same customers and that feeds into your digital core, which is DOB3. That’s usually the best place to start. You can start with your compliments. You could start with retailers. You can start with companies like Shopify, anything that directly connects you with the customer. You start to link in with them. And Later on, you’ll start to integrate operations. In the early days, you just wanna start sharing data. Those data rivers are gonna flow into your digital core. That’s what you want. So that’s rule number two. Do DOB4 as early as you can. Rule number three. The smile marathon of platform orchestration. is probably the key strategy for the company long term. So start moving that direction now, even if you’re taking small steps. And that usually means talent, people. Do you have the people that are gonna be your core team such that in a year and a half, because that’s how this plays out, year and a half, two years. The other ones play out in six months, this one plays out in two years. Such that in two years, everyone sort of recognizes that your company, is like has the team that everyone admires, that that team is so good at everything happening with these platforms. They’re on top of every nuance, they’re playing every angle, they’re fast on their feet, that’s what you want. So recognize that your long-term strategic imperative, the marathon you’re gonna run, is probably ecosystem participation. And last rule, that was rule number three. Rule number four, start to think about moats. The first three things I gave you were all operating activities. You wanna start building a moat. Cause this game is hard and you gotta play. There’s no way around it, but the more you can have a competitive advantage, the better. Now for most CPG companies, the moats you’re gonna be building are about customer capture. They’re demand side competitive advantages. So you start to think about customer lock-in. switching costs. You start to think about loyalty programs. You start to think about points. Starbucks in China is unbelievable at this. They have something, I forget the number off the top of my head, they have something like 80 million Starbucks loyalty members in their system. They’ve been gathering these people for like 15 years. And then once you get everyone on your loyalty program, then you shift them over to your app. All right. So you’re going to build some sort of Lock-in is the best one. The problem with lock-in on the B2C side is customers don’t like it. When you try and create switching costs for your customer, a consumer, it’s generally not in their best interest. They don’t like it. Like I have a storage shed in the United States. I put some boxes there. You know, they, when I went to meet the storage shed, you know, they always give you a cheap deal for the first six months. We have a special offer for you. Because they want you to move your stuff into the storage shed because they know once you do, people don’t like to move. So they can raise the rates later. It’s a switching cost. Storage sheds are very good at that. But generally, consumers don’t like it. Switching costs tend to be more accepted ERP systems software SAS things like that on the consumer side It sort of runs counter Contrary to convenience and consumers like convenience switching costs are an inconvenience. They’re a pain point So you got to kind of be clever there Psychological hacks are better forms of customer capture consumer capture habit formation If you can do dopamine hits, that’s good. Chemical addiction, like alcohol is better. To a point, then it becomes evil. But those are sort of my four modes. So I’ll put those in the show notes, but number one, focus on DOB3. You’ve gotta build your digital core. Number two, focus on connectedness as early as you can. Number three, accept that you are running a long-term marathon in platform participation. Start doing it now, which usually means recruiting and training. And you can call me for that, my guys do that. Well, we do the training part, not the recruiting. And then number four, recognize that you’re gonna have to build a moat and start thinking about that. That’s digital strategy, you can call me for that too. Number three and number four are a lot of what I do. Anyways, okay, I think that’s it for content for today. Hopefully that was helpful. A lot of fun stuff in this category. It’s really a fun space and there’s a lot of subtleties to CPG companies that we don’t see. Like there’s not a lot of subtlety to payment. It’s a utility. It’s fine. When people buy makeup or ketchup or house detergent, there’s a lot of interesting stuff that happens in terms of consumer behavior. So there’s a lot of cool data stuff that comes out of that. It’s a pretty fun space to be in. Okay, and I think that is it for the concept for the content for today. The key concepts, digital core, DOB3, connected business model, DOB4, and then ecosystem orchestration or participation. Those are the three concepts for today. I’ll list them in the show notes. As for me, I am having one of my best weeks ever. You ever have one of those weeks where everything just goes right? Like, you know, you have weeks every now and then where everything goes wrong. Like you get hit like three times in a certain week and you’re like what’s going on? Like this is one of those weeks where everything went right, which has put me in a great mood. As I kind of mentioned last week, I bought a new condo here in Bangkok and I went down to the land office and got all that done and basically took ownership a couple days before Christmas and it’s… It’s literally the greatest place I’ve ever lived. Like it’s, I don’t even leave, I just stay in my apartment all day long. It’s awesome. I like views and it’s too big, I don’t. I’m living here by myself right now, so it’s too big, there’s too many rooms. But often people come stay with me and families coming, so that’ll change. But right now it’s a little bit like there’s three bathrooms, and so I don’t know what to do with three bathrooms, so I rotate. I don’t know why, because I feel like I should. Then there’s all these great places for sitting and writing. So I’m having an absolute blast. Great week, just great week. Great for Christmas, right? That worked out nicely. And then the China thing is just, I’m so excited to be back on the ground. You know, I was on the ground of China for 11, 12 years. And then, you know, I sort of came, moved to Thailand right before COVID hit. So I haven’t really been on the ground there. I’m so eager to get back. Like it’s, I’ve already been talking with some companies that I’m gonna go visit. some of the sort of big name tech companies we were already sort of talking. I’m going to go do that. I’m going to tour around a little bit. I’m thinking of doing this for the China Tech Tour in April. Like it’ll be five days where, you know, we’ll be pretty focused. It’ll be like, you know, training session, visit this company, guest speaker, you know. But then, okay, that’s important because you want to learn as much as possible. But then you also want to have a lot of fun. So then it’ll be like, let’s go have hot pot. Like most people outside of China don’t know hot pot. Hot pot is spectacularly good. Like it’s such good food. Everyone’s like, that’s the thing I always get when I arrive in China. First thing I do, I go get hot pot. So we’ll do stuff like that. We’ll go get some Hunan food. Everyone likes Sichuan food, Sichuan’s high, because it’s spicy. No, no, no, no. Hunan is right next to Sichuan province. So they’re both famous for spicy food. Hunan Thai, I’m sorry to anyone who from Sichuan, Hunan Thai is better. So we’ll go get some Hunan Thai. So we’ll have a lot of fun. And then I was thinking I’ll probably do a trip or two before or after the tour, which if people wanna go, they’re welcome to, maybe we’ll get a group that’ll just be for fun. No, not part of the tour, we’ll just go. I’m thinking about going to Kunming. That’s where I learned Chinese, which is down in the southwest. It’s near Lijiang and Shangri-La. It’s a beautiful part of the country. It actually kind of looks a bit like Thailand. They have elephants in Xishuangbanan. You’re right up sort of next to the border. So it’s a lot more jungle. But for those of you who haven’t been to Yangshuo, absolutely beautiful place. Xiamen, fantastic. I mean, there’s so many fun places to go. So I’m thinking I’m going to turn it into a bit of a vacation. So anyways. If you’re interested in any of that, let me know. But I’m getting really excited to go. Yeah, it’s such a great place to… And then of course the tech companies are just fantastic. It always like charges me up when I get to meet with these companies. Anyways, that’s been my week. It’s been a pretty spectacular week. So anyways, I’m heading down to Kuala Lumpur in a couple days. I’m not sure if I’m going to make it into Singapore or not. I’m definitely going to be in Kuala Lumpur and Malacca at least for two weeks. So if you’re in the neighborhood, you wanna have a cup of coffee, send me a note. But I’ll be bouncing around. I’m gonna, I have to finish a new book, so I’m just gonna grind it out. You know, I’m gonna bury myself in a cafe for seven days and just get it done. So that’ll be my week. Anyways, off to a good year. Okay, that’s it for me. I hope everyone’s doing well. Happy New Year, off to another year. And I will talk to you next week. Bye bye.
I write, speak and consult about how to win (and not lose) in digital strategy and transformation.
I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.
My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.
This content (articles, podcasts, website info) is not investment, legal or tax advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. This is not investment advice. Investing is risky. Do your own research.