Growth IQ

by Tiffani Bova

  It wasn’t until 2016 that the Toxic Substances Control Act of 1976 was updated, providing better transparency into the chemicals used in producing everyday items and protecting vulnerable populations such as pregnant women and children.

  The global baby personal care market was valued at around $56 billion in 2017 and is expected to grow at an annual CAGR of approximately 7 percent from 2016 to 2024. It is experiencing significant growth in products that are “organic in nature and pose no threat to a baby’s well-being.”

  Demand for organic personal care products is expected to provide a huge opportunity to baby personal care product manufacturers. Even though these products are more expensive, parents still prefer the best and branded products for their child, thereby disregarding the cost of certain products.

  This growth, however, has gone disproportionately to (seemingly) small upstarts. In recent years, parents have been spurning Johnson & Johnson’s infant staples for products containing fewer chemicals. In the first half of 2016, J&J’s baby care sales fell below $200 million for the first time since 2007. Gerber (owned by Nestlé) has been losing market share to Earth’s Best, Plum Organics, and Ella’s Kitchen. Even baby diaper behemoths Procter & Gamble (Pampers) and Kimberly-Clark (Huggies and Luvs) are anticipating a dry spell.

  NOT FOR MY DAUGHTER

  First came the idea. In 2009, actress Jessica Alba gave birth to her first baby, a daughter. Like most new parents, the world felt toxic and perilous overnight. When her daughter developed hives after Alba used a store-bought clothes detergent, she decided to launch a consumer goods company committed to selling only nontoxic household products. Since then, The Honest Company has experienced amazing levels of growth. In 2012, its first year selling, it hit $10 million in revenue, and in 2016 it surpassed $300 million, and in 2017 it experienced a “flat year.”

  The Honest Company targeted the baby products market with a very specific buyer persona. It was both responding to and creating consumer desire. In particular, its message hit home with new parents who worried about the petrochemicals and synthetic fragrances in the baby goods they purchased. The context of the market was right for what The Honest Company was selling. Over the past two decades, “parenting” and “mothering” have become branded concepts, and now as then, consumers are willing to pay a premium for eco-friendly, trustworthy, high-quality organic products for themselves and their families.

  The Honest Company has used a number of growth paths in combination to achieve its $1 billion valuation. With its initial focus on diapers, infant formulas, and household cleaning products, The Honest Company was quick to maximize sales by offering more of its existing products to its existing customers via a subscription service (Customer Base Penetration).

  The company launched (Product Expansion) the recurring $79.99-per-month subscription model for its diapers and wipes to improve both the customer experience and revenue predictability, based on its keen understanding of its customer base and what would appeal to them—it didn’t want new parents to run out of diapers and need to make a midnight run to the store any longer.

  The Honest Company also broke with industry tradition by eschewing traditional marketing such as advertising and brick-and-mortar retail. Instead, it focused upon direct-to-consumer (D2C) online sales and an image of purity and goodwill, not least in making major donations to charities right from the start (Unconventional Strategies). Hence why its e-commerce roots continue to run so deep even today.

  WHAT GOT YOU HERE—MIGHT JUST GET YOU THERE

  A cofounder and a former CEO, Brian Lee was a successful online entrepreneur, having cofounded LegalZoom with Robert Shapiro and ShoeDazzle with Kim Kardashian. He was instrumental in driving the company toward an industry-leading position, with its online prowess even outmaneuvering the industry stalwarts. The Honest Company’s products were almost exclusively sold online, but as it pursued Customer Base Penetration and Market Acceleration, the off-line sales channel became not only more important to growth but a larger portion of overall sales.

  Of course, it didn’t hurt that Alba was a major movie star and one of the country’s best-known new mothers. That star power helped her gain publicity that very few CEOs in the industry could ever achieve—including giving testimony before Congress about consumer product testing for dangerous chemicals. Because of Alba, The Honest Company enjoyed unequaled coverage in show business magazines and other nontraditional channels for reaching other new mothers. However, a celebrity name alone doesn’t guarantee success or keep a company growing; if the products aren’t good, there is no demand. You need both in order to capitalize on the effect of being a “celebrity.”

  For most companies discussed in Growth IQ, the decision to pursue a new growth path is made because the current one is either maturing or fading, or the company is encountering effective new competition. But for The Honest Company, the decision was made for the opposite reason—its runaway success. In particular, the company had found the ideal mix of the right market context, coupled with the right products, brand promise, and a clearly defined target market to deliver growth.

  The interconnectedness of those individual attributes is extremely difficult to replicate, even by bigger brand names. If you think of a company trying new things to stimulate growth as moving at a “crawl-walk-run” pace, The Honest Company began by “crawling” in Customer Base Penetration. It focused on the company’s foundation in the right sequence. It started “walking” and hired the right management teams, and putting in place the appropriate supply chain, built strategic Partnerships, and, as it grew, it began (running) to explore Market Acceleration, which included off-line partnerships.

  Nick Vlahos, CEO of Honest, told Fortune in an interview that when he looked at the white space opportunities for the brand to pursue growth, Amazon was a clear target: a partnership with the e-commerce giant would make the brand more relevant online where more consumer spending is gravitating. The union, he explained, is part of an “omnichannel strategy that we are driving aggressively.”

  The Honest Company faced a dilemma. Should it continue to expand its business to its existing customers (that is, Customer Base Penetration) or pursue its planned growth (Market Acceleration) outside of its current North American market?

  There was also a third option—one that was presenting itself with ever more clarity as the months passed: to begin to extend its product family to recognize that its first cohort of customers—babies and their parents—was now growing older, with changing needs and interests beyond simply baby products, now looking toward the entire home (Product Expansion and Customer and Product Diversification).

  The diaper and wipes business proved it definitively. The Honest Company believed it could develop a single brand that carried its credibility across even more products in the nontoxic category.

  It would also pursue these initiatives largely in parallel, through a combination that included massive funding (which was why the pursuit of an initial public offering was even on the table), the development of (geographic, chronological, and application) adjacent markets, and the addition of a brick-and-mortar component to its largely (80–90 percent) online ecommerce business.

  In order to optimize sales, it chose to expand the places customers scould buy its products and pursued Partnerships with various retailers in order to pursue the Market Acceleration growth path. The Honest Company was already selling through Whole Foods, Costco, and Target. Its products were also being sold in Nordstrom.

  In mid-2017, it added CVS and Babies R Us. Then, in July 2017, it added the biggest player of all: Amazon—even though in 2015 at South by Southwest (SXSW), Alba publically stated she wasn’t interested in pursuing Amazon (especially in light of the fact that it owned Diapers.com and Soap.com). CNBC reported that “she wants to maintain the one-on-one relationship with the customer and does not want to give up control of the customer experience to Amazon.” This decision t
o rethink her previous position highlights the brand’s focus on Customer Experience. Going where their customers are and responding to the ever-changing market context are what separates high-performing companies from the rest.

  The Honest Company could have done it on its own, but as you will see later in the Partnership growth path (and as you just read in the Under Armour story), this is a cost-effective and less risky way to accelerate sales in additional markets than going at it alone. This decision to open up its sales channels to more than its own online e-commerce store has proved a good one. The Honest Company now has a more balanced business, with about 50 percent of its current revenue ($300 million) coming from its more than eighteen thousand brick-and-mortar locations and online partnerships, such as Amazon.

  The company that had, just two years before, sold primarily online to upper-middle-class parents was now marketing its products on two continents in mainstream stores, online and off-line, and pharmacies to families across the economic spectrum—and yet still managing to maintain its reputation for quality and exclusivity.

  The zigzagging between growth strategies has been the very embodiment of Growth IQ and made The Honest Company one of the fastest-growing lifestyle companies in history, even when competing against some of the largest brands in the world. Similar to Under Armour and Red Bull, there was an opportunity, a “Blue Ocean,” that was ripe for the taking—it was being ignored for the most part by other, much larger brands that were selling similar products, attacking the incumbents on the edges while improving its beachhead proved to be a good move.

  From its beginnings as an online purveyor of diapers and wipes, the company grew quickly into an all-purpose lifestyle brand. Today The Honest Company sells more than 135 products, including cosmetics, toothpaste, sunscreen, multivitamins, kitchen detergents, and nursery furniture.

  For more than fifty million millennials over the age of twenty-seven, parenthood is becoming far more normal. Pew Research said earlier this year that sixteen million millennial women are moms, and 60 percent of all millennials say being a parent is important to their identity.

  By looking at the combination and sequence of its decision making, we can better understand how the company grew as meteorically as it did, which is why understanding the market context can have such an incredible impact on decisions made.

  Without those particular customer characteristics being in place, The Honest Company could have had a great idea, poorly timed for market demand. But instead, there continue to be rumors of an imminent IPO, the “Unicorn” status, and bringing in veteran CEO, Nick Vlahos (a consumer package goods [CPG] powerhouse previously from Clorox), signaling that it has no intention of backing away from a sizable market opportunity—regardless of who it is competing against.

  Just as Under Armour put a modernized spin on T-shirts, The Honest Company, with new, artfully designed disposable diapers, keeps its beachhead product fresh, relevant, and fun—maybe even helping to capture entirely new customers along the way.

  THE HONEST COMPANY

  KEY TAKEAWAYS

  As with Customer Base Penetration, Market Acceleration requires you to have a deep understanding of the wants, needs, and purchase preferences of your target customer. This allows companies to meet customers where (online and off-line) and how (direct with a brand or via a third-party retailer) they want. Companies who choose to stick with what has worked in the past, without taking into consideration shifting buying patterns of its target customers, risk being left behind.

  Worth repeating: For most companies discussed in Growth IQ, the decision to pursue a new growth path is because the current one is either maturing or fading, or the company is encountering effective new competition. But for The Honest Company, the decision was made for the opposite reason—its runaway success.

  Just because your company does not have a “Blue Ocean” strategy doesn’t mean you can’t apply learnings from these companies. In the case of The Honest Company, Jessica Alba did not invent or instigate the “chemical free” movement. She took the shift in market context and applied it to an industry that had all but ignored this opportunity.

  Somewhat counterintuitively, the quickest path to getting big in a new market is to aim small. By creating a proposition that is good enough only for a particular type of buyer in a foothold market, companies can avoid the time and expense required to satisfy broad swathes of customers. The company then has a narrow target for its sales efforts. It also can attain scale within the niche, such as new and expecting mothers, that can serve as a powerful customer base, especially if those customers are vocal about their satisfaction with a brand or product.

  STORY

  3

  MATTEL

  TOYS WILL BE TOYS

  Our vision is to inspire the wonder of childhood as the global leader in learning and development through play. As we shift our business aggressively in a new strategic direction and transform how we operate, I believe we have the assets to achieve this vision and shape the future of the toy industry.

  —MARGO GEORGIADIS, CEO of Mattel

  AS IS THE CASE WITH The Honest Company, as long as there are more than 130 million newborns each year across the globe, the need for toys isn’t going away anytime soon. U.S. toy sales grew 5 percent in 2016, and 1 percent (United States and globally) in 2017, reaching $20.7 billion according to the NPD Group. From 2013 to 2016 the industry grew 16 percent larger across a number of key segments (games/puzzles, dolls, outdoor and sports, plush, and infant and toddler).

  Founded in 1945, Mattel produces some of the most well-known brands in the world—American Girl, Fisher-Price, Hot Wheels, Matchbox, Thomas & Friends—and is the world’s largest toy maker in terms of revenue ($5.45 billion in 2016).

  In recent years, Mattel faced a problem. It had enjoyed almost continuous success and growth for more than a half century—most of it driven by one of the most iconic products of all time: Barbie. Now the company was in a growth stall. In a world where 85 percent of three- to five-year-olds have access to a home tablet where they watch shows and play games, toy companies are finding it harder to compete with this convenient and easy fix for a child’s attention. This shift in market context contributed to the disappointing quarters and sinking margins Mattel was facing.

  Throughout the course of 2016, company stock fell by 23 percent, which further increased when the company announced weak Christmas sales and a cut in its dividend to help fund a comprehensive turnaround plan. One of its turnaround efforts to boost sales was to focus on emerging markets where growth is still going strong as wages and quality of life steadily improve. The global market for toys and games is projected to reach $166 billion by 2024, with Europe representing the largest market and Latin America the fastest-growing market with a CAGR of 9.6 percent. Just the kind of opportunity Mattel needed.

  However, in June 2017, at end of the quarter, investors anxiously awaited the results of that turnaround plan—and when it didn’t materialize (sales were up only 2 percent over the previous year, to $974 million, while costs were up even more, to produce a net loss), they punished the company with a further stock drop of 7 percent. Mattel’s stock was down 27 percent in 2017, trading at its lowest level since the summer of 2015.

  Clearly, Mattel had made a terrible mistake. It had pursued a growth path (Market Acceleration) without fully understanding the implications of not having the other required growth paths (Product Expansion, Customer and Product Diversification, and Partnerships) shored up.

  Remember, it is never just one thing. The combination of products and sales channels wasn’t right. It had yet to give its flagship brands like Barbie and Ken a makeover for new markets—both domestic and international—considering both age and gender, it didn’t have a comprehensive digital strategy, it was far too reliant on traditional (U.S.) retailers, and didn’t have any lucrative licensing d
eal (Partnership) like Hasbro does with Disney—most notably, Star Wars, Marvel Superheroes, Disney Princesses, Beauty and the Beast, Frozen, and Moana.

  Specifically, the toy maker’s strategy to return to growth is fivefold:

  Create connected 360-degree play experiences.

  Aggressively target emerging markets, especially China.

  Fuel the innovation pipeline.

  Improve internal operations.

  Reignite the culture.

  The context of the toy business had shifted and Mattel had not responded in a timely way. As part of its turnaround strategy, Mattel acted, as one might expect, by following the money. The international sales projections were a strong proponent for Mattel to double down on Market Acceleration outside the United States. Even though Mattel had been selling its products globally for decades, what market could it specifically focus on to provide the greatest returns? It decided on China.

  Targeting a large and relatively untapped market at first blush may seem like an easy decision to make when using Market Acceleration to reverse a growth stall. However, in the case of China’s fragmented yet lucrative toy market, the success for any brand interested in aggressively pursuing new or emerging markets hinges on its ability to navigate strict regulation and adapt to local consumer preferences.