Association for Financial Professionals : Why Should Finance Be Buzzing About Artisanal Trends? 01/10/2018

Recently my wife wanted to upgrade our home-brewed coffee by buying a pour-over set. For the uninitiated, this is a Luddite-like retreat back to a prior era when people would grind their own coffee beans, put them in a filtered cup, pour hot water over the grounds, and allow them to drip into the waiting mug below. I thought this was replaced by the fancy coffee machine on our counter that did the same thing in an automated process while allowing us to bustle about the kitchen in the morning, preparing lunches and slowly opening our eyes. However, the $100 we spent online that night proved I was wrong.

The next day, I read a story in The Wall Street Journal, 'Fancy Coffee Shops Say It's Over for the 'Pour Over.'' The challenge is this: 'The purposefully slow, personal nature of the ritual is an icon of the artisanal movement. Now, uttering words like 'efficiency' and 'consistency,' some coffee shops are embracing the perks of machines... A large-batch coffee machine can make more than 100 cups per hour, while one barista can only churn out about nine pour-overs during that time.'

You may think this is a tempest in a teapot (pun intended), but this encapsulates a central contradiction for businesses and finance: How do we embrace customized, local, artisanal consumer desires with the need for efficiency and ruthless price competition? The same newspaper edition featured an adjoining article that addressed how Unilever is wrestling with this very dilemma. 'The world's biggest brands are facing a broad-based revolt among shoppers, threatening a business model that has served them, and investors, for decades,' the article read. 'Shoppers have gravitated in droves toward smaller, niche or locally made products.'

Unilever is adopting multiple strategies to respond. In some cases, it is pursuing a guerilla marketing and e-commerce strategy. In other cases, it is being a 'fast follower' and copying the ideas of competitors. Simultaneously they also purchased some rivals.

Unilever made structural changes to de-centralize executive decisions, allowing more localized control over product innovation and marketing spend. The result: product launches for local markets increased 50 percent in 2017; macro products saw fewer global launches, but each one had a larger scope. 'We have to match [the small competitors] in terms of insight, speed and the ability, frankly, not to be 110 percent sure all the time that what you've got is going to work,' said Unilever Chief Financial Officer Graeme Pitkethly.

The fact that the CFO is leading the reorganization effort to address the local competition is incredibly telling-finance often sits at the gates of capital allocation and therefore can enable this change. Large companies compare potential returns on investment to those of current products. After factoring in risk, the ROI for new efforts may look uncertain or disappointing. This is especially true when the incumbent is a category-leading product. Large companies (especially consumer packaged goods) historically would justify new launches with reams of marketing surveys and research because they needed to justify diverting capital away from success products.

Start-ups don't face those procedural hurdles or calculated hurdle rates. For example, Halo Top ice cream was invented by Justin Woolverton, a hypoglycemic lawyer who was looking for a way to indulge. There was no alternative investment option. Today it holds a 5 percent market share, about 1.5 percent is estimated to have come from Unilever brands.

This presents a contradiction for management and finance. Companies need to be both more global and more local to get economies of scale and low prices, and responsive to their markets. That requires the evaluators to have different criteria and risk appetite to approve initiatives in various markets. It also requires allowing for more uncertainty, experimentation and, yes, failure in their decision-making processes, and know when to trade efficiency of mass scale for the effectiveness of small market trends. Finance has sometimes been the voice of 'no' when the ROI was too low; now it must consider the impact of failing to test and roll-out new products.

On this last point, it is also critical to know when you are pursuing a strategy of cost efficiency or customization with higher margins. Global or local, efficient or uniquely experiential. Finance needs to align its approach to the customer and product strategy.

Sometimes your customer just wants a cup of coffee in the morning.

Bryan Lapidus, FP&A, is a contributing consultant and author to the Association for Financial Professionals. Reach him at [e-mail].

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