$7M - That is how much this learning cost my organization at that time.
Context - Like all developing markets, India, Indonesia; being prime examples, creating mass market products is as much a pricing win as it is a product win. The real artistry lies in creating a sachet of Fair and Lovely for Rs. 5/-. Or, what was then the case, a sachet of Soy sauce for Rp. 500/- in Indonesia (that’s a little under 5 cents). Its these small pack sizes that help the lower-income customer buy these basic products on an everyday basis, as putting down, say 50 rupees for a larger pack of Fair and Lovely or $2 for a 500ml bottle of Soy sauce, is not something their disposable income can afford. It’s also what drives penetration growth (customer base growth) for brands, making it the one of the largest contributor to the revenues. The challenge, of course - How does one make a product for 5 cents, with raw material, pack material, labor, R&D, production, ammortized management expense, selling and marketing costs; while still making a decent profit.
The answer lies in scale and in-housing. Such small sizes allow for reaching customers in the many millions in developing markets. Hence by in-housing your production (i.e. making it at your own factory), controlling the supply chain and procurement - which means buying the raw material and packaging material in bulk, harmonizing logistics (i.e. ensuring these materials are moved at the same time or same vehicles as some of your other products) and using “Value” materials instead of premium ones (say, using a lower grade of sugar in your Soy sauce sachet vs. the larger pack), the per-unit-costs can be brought down to make a decent profit.
I am making it sound way, way easier than it actually is. This is quite a complex task for R&D, procurement, supply chain, marketing and the sales teams. The sales teams, too, have to leverage their existing relationships with channels to get them to stock this product, along with other products of ours and other competitive products too. For example, think of a kirana store in India or a wet market in Indonesia. Think of that tiny space they have. They can, at best, stock 2 brands of each product (whether it is a soy sauce or a fairness cream). The sachets you see hanging in their stores or even the chocolates in the cans are a choice that store owner makes, in choosing the 2-3 he can stock, based on either the money he earns per unit or the popularity of the product, which drives the numbers being sold. So the sales team also have a tough job in launching innovations - they need to convince such small store managers to add one more unit or replace something to ensure the “small pack” innovation you are making, gets shelf space and hence actually gets sold. Of course, this works differently for other channels - like Big Bazaar, Tesco or Lotte, which are modern trade, large format stores or e-commerce, where small packs are simply not feasible, due to logistics costs.
The Faux Pas
Outsourcing production and material sourcing for a category we knew little about - We were a cooking and dipping sauce company, with some extensions into canned foods and juices. We were (and are) a market leader in most of these categories, with significant market share. Given it was Indonesia, being large in these categories meant that a large part of our sales came from small sachets. However, our size meant we had production facilities, stable sugar supply and warehouses that allowed for us to make these 5 cent products with a healthy profit.
We were of course, in the food business and more sharply, in the taste enhancement business. Outside of sauces, the other category that was growing in this space was seasonings (Think Everest Butter Chicken Masala or Indofood Nasi Goreng) - a $300M+ category growing double digits. We had equity in taste enhancing cooking sauces, so extending to dry seasonings seemed a logical extension.
The first challenge - We had no production facilities in our factories to make seasonings, which sold at 15 cents a pack, primarily in wet markets. Simply put, the only way to make money was large volumes, while ensuring costs were controlled.
The first mistake - Working with a third-party supplier to make the products at their facility.
This literally meant renting their spare production capacity, relying on their ability to procure the raw materials at reasonable costs and of course, paying a commission for their service. The result - On the realistic business case, the product margins were down single digits, which meant we really, really needed the volumes to come in. And the final risk - a 3-year lock-in, where we had to commit volumes, and hence heavy financial penalties, if the volumes did not come.
The second mistake - Under-estimating the importance of scale, ours and the competition’s.
We thought our clout in sauces would be enough to convince wet market store owners to stock us when we launched. But we were the 5th player to enter the market, with the first and second larger having more than a 20% share each. What this meant - out of goodwill for our sales team, they would stock it the first time but unless, we were able to drive heavy awareness and interest in the product with really large marketing dollars, the product would just sit in their store. Our heavy production costs meant we couldn’t incentivize the store owners with commissions higher than the competitors to push the product for higher financial incentives.
While we invested heavy marketing dollars and drove some early sales, it was not enough to create the volumes we needed. And the thin margins meant we couldn’t keep investing heavy marketing and promotion dollars for a sustained period.
The result - The gap between what we earned and what we spent was upwards of $7M. I.e a $7M loss.
It was one me - My regional CMO recognized this challenge during the development process and asked us to re-consider entering the seasonings market, but left the choice to us. My CEO sensed the challenge too, 2 months before launch but thought that it would work, if we got the execution right and left me to make the call on whether the execution was tight. My commercial head and my sales partner called out the risk but backed the launch on the back of the size of the opportunity and the diligence my team had done. I remember clearly - we had a conversation on a go-no go a month before launch and i said, let’s go, as the CMO and product head. I had under-estimated the gravity of the challenge and hence, my call was wrong.
The technical learnings are there for you to read; which is to never rely on external/outsourced expertise for developing a product with thin margins. And to approach any category where you are not a leader with added caution, even if your product development and marketing muscle is superior.
But my biggest learning was a management one - Don’t just listen to that inner voice of confidence. Sometimes listen to the voice of reason from others with a more objective view.
We failed but learnt. And eventually, it was a big learning for a big failure.
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