19 June 2018 by Lise Ferrier
Ernesto Schmitt is an investor, entrepreneur, challenger advocate and scale-up sovereign. A four-time founder, he has been at the forefront of wave after wave of disruption from early on in his career; founding what grew to be Europe’s largest online music business in 2001 and the UK’s first chain of dedicated movie stories in 2002. After several years between Tesco, Dixons and EMI Music, he went back to his disruptive roots, co-founding the Marketing Technology company Beamly in 2011 – the same year, it’s worth adding, which Beamly posted 820% growth. Ernesto has a prolific habit of entering a business, driving exponential and previously unimagined growth: he was employed as CEO of Drivetribe, the digital media venture co-founded by Jeremy Clarkson, Richard Hammond and James May: after a $16M Series A capital raise, Ernesto scaled it to 50,000 content creators across 24,000 channels and 100m views per month from zero in 12 weeks.
Ernesto’s latest venture is ‘The Craftory,’ an investment vehicle aimed at backing the world’s boldest challenger brands in the consumer goods space. The Craftory is self-consciously not a fund – rather, it is an ‘investment company,’ which Ernesto describes as ‘anti-corporate’ and ‘anti-VC.’ Whatever you may wish to call it, the Craftory has $300 million in its back pocket, and is set to make waves across the FMCG market.
In a mini-series for La Fosse, Ernesto spoke to us about craft beers, challenger brand equity, and why ‘wash whiter’ advertising could be on the way out.
The second wave of disruption is about brands
We associate the word ‘disruption’ with tech. This is because the first wave of disruption focused on platforms: from social, to retail, to transactional.
Now the platform wars are over, and we’re left with not perfect competition but the exact opposite – a set of global monopolies in the form of the GAFA group.
However, the second wave of disruption is about brands: and those which are fighting to better the world, not dominate it.
Ariel washes whiter, Ariel washes whiter, Ariel washes…
For several years, consumer goods brands were a fairly sheltered, comfortable oligopoly. Several big FMCG brands were able to trade on a scale advantage in manufacturing, supply chain and distribution, and in doing so comfortably dominated the market.
Their brand equity was built around consistent advertising through traditional channels, such as TV and radio. Over decades you are told that Ariel washes whiter, so in the end you just believe that Ariel washes whiter. What choice did you have?
However, this modus vivendi has come to a rather sudden – at least from the incumbent’s perspective – stop. A new generation of digitally-connected consumers have entered the market and started spending, and they have a few different habits from their forbears.
This new generation on the block is (broadly) characterised by a few distinctive features:
- They have different values. These consumers care much more about a perceived sense of authenticity and are motivated by a cause and sense of purpose. They are often consciously anti-corporate.
- They’re accustomed to a rapid rate of change. These consumers have grown up with the rapid rise and fall of tech platforms as the status quo. They had no issue waving goodbye to Myspace or AskJeeves.com when they lost relevance: ultimately, they are far more receptive to change at pace than the previous generation.
- They don’t consume the media which traditional brand equity is built on. They don’t watch television, haven’t picked up a magazine in years and don’t know what movies look like if they’re not on Netflix. This means that traditional brand equity doesn’t speak to them.
- They are willing to pay more for products which are responsibly sourced. These consumers look for products free of pesticides and harmful ingredients, ethically sourced, or with a mission to look after a community or the world in general. Furthermore, they are willing to pay more for products that are good for them and good for society – a Nielson report suggested that 73% of millennials will pay above the odds for sustainable produce.
Enter the challenger
This has given rise to an opportunity for new entrants to come in and challenge the status quo with regards to consumer goods. In category after category, challengers are eating large incumbents breakfast, lunch and dinner.
Craft beer was an early indicator of change – it now accounts for 23.4% of the overall beer market in the US, from virtually nothing 15 years ago. More recently, Fever-Tree tonic have taken over from Schweppes in a category which Schweppes have dominated for 150 years.
Though recent coverage of the Craftory may have it as a ‘Hipster’ investment firm, the brands in which they are interested differentiate themselves from ‘cool brands.’ The value in a cool brand comes through exclusivity – they therefore by definition struggle to scale. By contrast, Challenger Brands are characterised by a profound sense of mission.
How to: eat an incumbent for dinner
- The Craftory is codifying the model for challenger success in order to be able to apply it cross-industry. They’ve established that the most successful challenger brands have five factors in common.1. They are driven by a righteous cause. Their drive comes from fundamentally improving the category in which they operate in, or the planet, or society as a whole (think Glossier cosmetics, which claim to be making a ‘a people-powered beauty ecosystem.’) The value for the consumer comes from signing up to be a part of this mission.
- They are obsessive about their provenance. Whether it’s linking themselves to a particular location or sourcing sustainable ingredients (Fever-Tree sourcing the highest quality quinine from the Rwanda-Congo border), challenger brands reject the traditional corporate ‘lowest common denominator,’ entirely cost-led product formulations.
- They are fan-worthy. These are strongly executed brands based around stories which people can retell and repeat to one another: such as Tony’s Chocolonely, a ‘100% slave-free ‘ company started by an investigative journalist after spending time looking into child trafficking in West Africa. It is these stories which form challenger brand equity, replacing ‘clothes wash whiter’ advertising.
- They are intensely focused. These brands value simplicity over highly complex or cluttered brand ranges: skincare brand ‘The Ordinary‘ boasts to be ‘pioneering, not in the familiar technologies it uses, but in its honesty and integrity.’
- They are digitally-activated. The medium by which they communicate to their consumers is digital, and they often sell through subscription models or similar, completely eschewing traditional bricks-and-mortar retailers – think how Dollar-Shave Club‘s ‘no-nonsense’ brand image derives in large part from its subscription model.May some of these brands prove to be a flash in the pan? Perhaps – though if the pan has a billion dollar valuation, you may wonder if they’re complaining.Ernesto Schmitt | LinkedIn