Elio Leoni Sceti, Co-Founder The Craftory
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Welcome back to another episode of our 2024 Masterclass series - this series is the brainchild of Italians in VC and Made IT Podcast, and powered by BCG and Bizplace.
The theme of today’s Masterclass is “Is it Still Possible to Build a Global Consumer Brand?” and we are here with Elio Leoni Sceti.
Elio has over 30 years of experience in the consumer goods and media sectors. He is co-founder of The Craftory, the first investment house for mission-driven challenger brands in Consumer Goods.
Founded in early 2018 by Elio and Ernesto Schmitt, The Craftory is a $550M global investment house focused exclusively on investing in responsible Consumer Packaged Goods brands at growth stages. They have invested in brands such as Seed, Who Gives a Crap, All Plants and Edgard & Cooper.
Elio Leoni Sceti was formerly CEO of Iglo Birdseye until June 2015, when he oversaw its sale to Nomad Foods. Previously, Elio Leoni Sceti was CEO of EMI Music from 2008 to 2010 and he earlier held senior leadership roles, firstly at Procter & Gamble and then at Reckitt Benckiser, where he served as CMO, global head of Innovation and then head of the European operations.
In the title of this Masterclass we ask “Is it Still Possible to Build a Global Consumer Brand?” because it seems it’s getting harder and harder for consumer businesses to establish themselves if behind it there’s not a celebrity/influencer type person and few VCs seem to be interested in investing in this sector, so I am very curious to talk about it.
EPISODE TRANSCRIPTION
Inès Makula (00:01:34) - In today's saturated market, do you believe it's still possible to build a global consumer brand from scratch, especially as I just mentioned if you're not a celebrity or a big influencer?
Elio Leoni Sceti (00:02:47) - Absolutely. The answer is yes. building consumers is the most timeless of things has happened for, you know, centuries. if you think about Frederick Barbarossa, Red beard, you know, 12th century, it was a brand. Einstein with his crazy hair is a brand. you know, the same way that Red bull is a brand for the energy that it provides, etc., etc.. So brands really are a way for consumers to recognize something which is relevant to them. Distinctive, like the red beard could have been at that time. and that is meaningful. And so as long as there is a consumer, there is an idea, and that idea is relevant to that group of consumers, there is the opportunity for a brand to be created. So, can you do that 100% now, 1000 years ago and a thousand years from now? the thing that happened that, you know, you're saying fewer VCs are interested in consumers or, you know, there is this sort of, different ways of communicating with, with people, influencers and, and celebrities that just fads, right? so the consumer investor that were investing in consumers in the last five years where, you know, investors that had capital to deploy, they had done tech and other things for a long time they saw that there was an opportunity because of the TikTok influencer, celebrity, whatever, to get into the market. They got in, they paid wrong amounts, they got burned, and they got out. So, you know, basically what happened is that there is a screening. And what remains is experts, consumer investors like the crafter is and and few others that understand how to build a consumer brand and see the value. Actually probably even better now because you can have that value at some compressed multiples. So so the opportunity is definitely there.
Inès Makula (00:04:44) - Okay, that's really encouraging. And I think what everybody wants to, to hear, in this masterclass and what would you say are some of the key factors that contribute to the success of new global brands, like if you were to build a brand today?
Elio Leoni Sceti (00:05:00) - So the, the, the brands are, in a way a sets of values that represent, a desire or a need that consumer associate with a product. And that wrapper is called the brand. So how you build it is, first of all, by creating a brand that can have power, and power can be achieved if you have saliency relevancy and meaningfulness.
Elio Leoni Sceti (00:05:28) - And so you need to create a brand that is both from a brand representation. So from equity assets perspective as well as from a product perspective. So it has to be better at something in consumer goods. You got to be better at perceive performance convenience or value. It either cleans better. Or it's easier to use or at parity. Convenience is cheaper. You know, if you're not better, one of these three things, the product will not have that uniqueness that that is required in order to stick. So you need to have a brand representation that is memorable. You need to have a product that is superior and you need to have margin. And this is like the most important line in the PNL is margin, because without margins, you have no fuel for growth in marketing or sales, and without fuels for growth, there is no growth. And if there is no growth, there is no there is no brand. And so, you know, the margins is way more than just one. KPIs is the vital KPIs, which in consumer goods doesn't really improve with scale the same way that it does in tech and other, you know, sectors.
Elio Leoni Sceti (00:06:33) - So if you have a bad gross margin at start, you're dead. So, you know, it's as simple as that. And that's a, a simple truth that not many investors that are not consumer expert understand. So you see some of the brands that went public and you know, over moments of hype then collapsed. And the reason is that their, you know, gross margin was like single digits or something like that, which clearly doesn't allow for this to happen. So his brand is product is margin. And then the other two things that are obvious is of course the founding team and or the leadership, is the people that make success. So, you know, the founding team needs to have qualities of vision, resiliency and capacity to recruit the right people that can continue on the on the positive journey. that's absolutely fundamental. And then the other one in the final is that ideally, you want to be in a sector that has endemic and secular growth. So it's much easier to build a brand in petcare now or in, you know, women wellness or in, you know, better nutrition, you know, things that are, that are, you know, already going.
Elio Leoni Sceti (00:07:41) - And so you swim with the river. It's much easier to build a brand swimming with the river than against those would be my five, sort of point of reference.
Inès Makula (00:07:50) - Those are actually incredible. Incredible like tapes, especially the, the three you mentioned at the beginning. Like, you know, you have to have one of those three things, the, the either the convenience or superiority, and asking you a bit of a further question on margin, because obviously when you're starting out margins, you know, as you, you know, you're hoping your margins get better as volume of, of your products, you know, there's more volume. So if you start with a negative margin, like you shouldn't be starting or like what's your take on that? Like it should be profitable from day one, at least the product.
Elio Leoni Sceti (00:08:29) - You should in in consumer goods, you must think that you are not going to have, economies of scale that are more than maybe. 1,520% of your cost of goods. The. It's called fast moving consumer goods, because there are a lot of things that moves very fast off the shelf.
Elio Leoni Sceti (00:08:49) - So the unit price tends to be small. You know, we're talking about stuff that cost, you know, $10, $5, $15. We're not we're not thinking about 200. So if in that, you know, $10 pick a number. Your cost of goods is not engineered to allow for a positive gross margin, you will never get there. So you need to have at least a gross margin that once you know, be be benefiting from the economies of scale with 15, 20%, you know, benefit will be at the top of the category in which you can compete. It's not just having a good gross margin. You got a target to have it at the top of the category range in which you compete. Otherwise other people would be able to spend more money than you. And that's never a good place to be.
Inès Makula (00:09:33) - And how crucial do you think is having a mission driven brand in today's consumer landscape, and how do you think it can contribute to a global, a brand, global success? It seems like, you know, everyone's kind of going in that direction.
Inès Makula (00:09:47) - Is it necessary, these days to always have that part?
Elio Leoni Sceti (00:09:54) - So, you know, as you mentioned, I've been in consumer goods for 35 years, mostly with very large companies on top of the one you mentioned, Procter and Gamble, Reckitt Benckiser, Iglu Birdseye. I've been on the board of AB InBev. I'm on the board of Kraft Heinz and the board of Barry Callebaut chocolate beer, you know, many categories and, all of these categories for many, many years have been focusing on what I said before performance, convenience and value and frankly, the attention to the impact that we had. You know, in the outside stakeholders, you know, Mother Earth, planet, people, society, ESG has been relatively of secondary importance, not because there were any ill intent, but it's just was not part of the economic model, you know, for many, many years until probably maybe I want to say 20 years ago, 15 years ago. So I've been part of that system for many years. And then, at a point, you know, about ten years ago starting to go on the board of, of this larger companies.
Elio Leoni Sceti (00:10:55) - I saw this, mission driven, this ESG as an opportunity for this company to take a turn. And there was a lot of attention coming from the big guys. But you have to think about it, that there is a very large capital intensive, you know, expenditure installed in the manufacturing and the systems in the processes and etc.. So it's very difficult for a large incumbent to move away from where they've been for many years because you have to write off equipment, you have to change your system. It's a very complicated path. So there were these these new brands that were getting very keen and very activist in, you know, eliminating plastic, no sugar, no salt, no toxic, you know, these things. And, and I saw that they were really, developing a different level of loyalty and emotional engagement with consumers. And that really spoke to the fact that the consumers were willing to embrace this mission driven brands. And they were preferring there was a brand preference of those brands over the big guys.
Elio Leoni Sceti (00:11:58) - That's how the Kraft story was born. The Kraft was born by saying, let me invest and partner with these brands so that you can take them from 2030 million in sales to 100 to 100, to 100 to 100 million sales at that level. If they go to a strategic, they are big enough to make a difference and change the norm of reference for the category. We just exited Edgar and Cooper to General Mills. That's a very good example of this sort of theory. And at that time ESG was Uber important because before it was not important at all. And then over the course of the last few years, I would say up to Covid, it was really, you know, top of mind and fundamental for a brand to do that. The logic of the ripple effect is very clear. Everybody uses consumer goods many times a day. There is an average, I think global is about 30 units of consumption per person per day. So all of us have, you know, brushing your teeth, cleaning your hair, putting your creams, etc., etc. we have about 30 units of consumption per day in the States is double that.
Elio Leoni Sceti (00:13:06) - Somewhere else is half that, but on average. So if you change a little bit of one category and then you have billions of users that benefit from the little change, the ripple effect is is huge. So really worth, you know, to, to amplify and to grow those brands. Then what happened is that there's been a tremendous inflation. As we all know, over the last couple of years, there has been a post-Covid sort of post-traumatic syndrome. And, ESG became almost like, People. Did not prioritize it as they used to prioritize before, you know, price sensitivity, availability. Other things came before. And and therefore ESG, in a way, got a little bit relegated back into a different place. I think, it is probably a movement that is now settling. And I think in, in this movement back is, differentiating two type of brands, the brands that have brought that ESG mission back into the DNA of the company, of the product development, of the way you recruit, of the, you know, whatever social governance or environmental aspects.
Elio Leoni Sceti (00:14:21) - And those are the brands that will succeed. And it's very important. Those are the brands in which we invest, and those are the brands that consumer will recognize that they are, aware and behind what matters. But it is not an activist anymore. Like it was like, you know, save the world. No single plastic type of front messaging is we do things responsibly. We have a DNA of responsible consumption. We look at it whether it's diversity and inclusion, whether it is the use of plastic, what is the use of ingredient? We care about it and we have it in our internal DNA. Those brands have these at their core. And so the claim they make reinforces the brand, the product. Consumers see them as authentic and real, and it will definitely play a role. Those brands that have not brought it at the core, that continues to just put it on the facade, on the, you know, front, front label in a forced, inauthentic way. You recognize them because it's a is a brand that is about whatever haircare.
Elio Leoni Sceti (00:15:22) - And they put on the front something which is ESG but unrelated to haircare. I know you were like, what's the point? And so those brands, I think, will, you know, progressively be identified, recognized, and they will suffer from this, dichotomy.
Inès Makula (00:15:39) - And you mentioned a little bit price sensitivity. It seems obviously like we're going through like inflation, a crisis. So obviously it's something that's really important at the moment. Like the consumer is price sensitive. So do you have any advice on building brand loyalty in an era of price sensitivity?
Elio Leoni Sceti (00:15:56) - Yeah, it was just tough. The advice. The advice is to think about loyalty and and price sensitivity as, you know, you cannot reconcile them because if a, if a consumer buys a brand because of its price, it will buy another brand the moment that it's cheaper than brand A. So loyalty and price don't match. If you go after price they don't go together. You know if you if you if you try to achieve a low price, you need to know that your loyalty will be poor, full stop.
Elio Leoni Sceti (00:16:30) - The way to build loyalty is to actually build a premium, and to invest this premium in engaging with consumer at both an emotional and a transactional level. And what I mean by that is that brand, brand creation over a long time, over long term is the result of. Two level of of engagement is the emotional is like, I feel beautiful because my hair are shiny and smooth. The functional is my hair are shiny and smooth. But if you don't engage the consumers about this level, the brand over time will will fade. So in order to engage, you need to have mass communication, long term emotional messaging, and physical and mental availability, which you find by finding those brands wherever you go to shop. So you need to be physically on the shelf, you need to be online, you need to speak the language. And then short term transactional performance marketing, Instagram, you know, made all of that stuff to talk, of course, and everything else. And and that short term transaction is more about the functional bit, but mostly reminding consumers that already bought you already know you to do it again.
Elio Leoni Sceti (00:17:46) - So the transactional short term tends to repeat and the long term emotional tends to recruit. And the combination of these two is the one that create loyalty over time. Price will not get you there.
Inès Makula (00:17:59) - Oh, that's pretty interesting. Thank you. And, I remember when I used to work in the. Well, when I used to work in a, in a corporate consumer goods company, which was slaughter companies, our CEO would always say, you know, we don't make money by selling one foundation. We make money by selling to the same woman that, you know, repeats foundations. given you've worked on so many different brands and now, you know, you serve on the board of a lot of brands, you invest in brands. What would you say are like the most effective retention strategies, that are working these days?
Elio Leoni Sceti (00:18:33) - so first of all, I would not call it retention. I would call it repeats. not not to be, you know, pedantic, but because those terms of conversion, retention, you know, etc. they are tech digital DTC terms, which is one little sliver of what brand creation is.
Elio Leoni Sceti (00:18:52) - So you want people to repeat the purchase and, and, and that repetition is first and foremost a testament to your product delivery. So the always has been and always will be. The most important tool to get repeat is to get a product that perform. If you have to spend a dollar, get it on the right formula, get it on the right, you know, delivery user experience that allows for that. Consumers to want to come back. The second dollar needs to be in the long term communication that I referred to before, and only the third dollar into the transactional communication of the influencers and, and celebrities. So a lot of the brands I see have the unfortunate concept that the first dollars goes to the celebrity or the influencers. And then when that celebrity influencers are sort of, you know, passé or change their mind or whatever is the case, then you have wasted one, two, three years, you've created nothing, your brand goes away and you're done with it. So it's product first long term after short term third.
Inès Makula (00:20:02) - And as you said, we see it like the Kardashians, which are obviously like the biggest influencers in the world. They've launched so many brands that haven't been able to stick around. so it's really interesting because obviously they didn't maybe focus on the product. They focused on their their brand image. so it is so important, as you mentioned, to have the most amazing product. And that's why brands like Apple keep on, you know, never do a discount. And people kind of still buy the iPhone over buying the Samsung phone. and the last decade we so in the 20 tens, let's say we've seen the rise of the DTC brands that are that were selling exclusively online. and, you know, they grew, they grew, they grew. But now, if you were to launch a brand, would do you think launching exclusively online still works with the rising costs of shipping and online advertising and, you know, influencers before you brands can? I remember, you know, when I was working for brands, you could you could just gift something through the influencer.
Inès Makula (00:21:00) - Now the influencer wants the gift, but also the, you know, you have to pay for, for for them. The prices have gone up. So. Is it still possible to build just an online brand, or should or should founders basically focus immediately on on an omnichannel retail strategy?
Elio Leoni Sceti (00:21:17) - so no, you cannot build a new brand, only DTC. those those times are gone because of the reasons that you said and also because of the reasons that has always been there, which is you can build a brand up to a niche on DTC, but you'll never go beyond that niche because by definition, is a niche, right? It can be 5%, 15%, 25%, but it's never going to be 100%. So those times are gone. Cost is increased, you know, CAG, meta changes, etc., etc.. So the way that a branch should think about it is a sequential, sort of series of steps to build that brand. And so it's fine to start with it to see that allows you to learn, but it needs to be functional to the next step.
Elio Leoni Sceti (00:22:01) - So by by launching on DTC you can move faster. You can read the behavior of your consumers. You can adapt your product. You can change your communication. You can test ten different messages and just, you know, select the best. Now you have fantastic AI tools that actually allows you to even them to do it for you so that you can do it even faster and even better. And so this is all fantastic. But then you need to be ready. And in the preparation of launch, you need to already have gone to Sephora. If you are a beauty brands or to whatever grocery if you're, you know, you know, a grocery, you know, type of brands and ensure that the packaging is designed to fit on that shelves, that the visibility of your logo will, you know, match and and contrast with the, you know, key color coding and and messaging of that category. That's the buyer of that store will tell you that, you know, in this category, if you do not do A, B and C, you have no chance.
Elio Leoni Sceti (00:22:57) - So you need to start thinking about it so that when the time come you move to Amazon, you move to.com. Amazon is a great second step because it allows you to actually get the ranking if you are in the ranking, whatever it is in your category in Amazon, then you go to the grocers and, and you know, present that as a case. and then eventually, you know, you are there until you reach. 6,070% of 60, or 70% of the physical availability that the category has for your average mass consumers. I'm not talking about your heavy users or your light use. I'm just talking take the the bell curve in the middle. You have to be in 60 or 70% of where that consumer shop in order to have a chance to sustain a brand over time and build it. So B2C only will not get you there.
Inès Makula (00:23:47) - But thank you for that. And, we, you know, you talked a little bit. We talked a little bit about some metrics, you know, like, margins, obviously some sorry, more than metrics, financial actually indicators.
Inès Makula (00:24:00) - Are there any other really important financial key financial indicators that you focus on to ensure a healthy PNL that a brand has to focus on from the get go, that are crucial to succeed and to grow a brand, you know, to 10 million, $100 million in sales.
Elio Leoni Sceti (00:24:17) - Yes. So, sort of in, in order, not in order important, but, at the top, if you can command the premium price, premium pricing, it's a good indicator. It's not a bad indicator. It's difficult to maintain, but it's a good indicator because you need to have a story that supports that premium pricing. if you don't have the story and you have a premium pricing, you're dead in the water. If you have a story and you have a premium pricing and they support each other, then that might be a very a very good indicator. The second is the promotional level, you know, trade spend. and it's very easy to grow when you give your product for free or halfway for free, 80% of your volume in buy one, get one free.
Elio Leoni Sceti (00:25:00) - Not a good indicator. So your promotional support needs to be moderate. It needs to be appropriate, but it needs to be timed. So it cannot be every weekend in the year. Because then, you know, clearly you create a basically your pricing doesn't mean anything anymore. Right? So appropriate promotional spend to avoid, you know, flooding with with promotion and buy one, get one free kind of thing. Then you got of course, the gross margin, which I commented to before, which is, you know, the most important one. And then, the other sort of two that I normally look at, it is what marketing percentage can you spend as you grow. So the first year or two is is disproportionate your small. You have to spend a minimum. So a minimum or spend in a small brand sometimes is like whatever it can be 100% of sales. So you know that percentage doesn't mean anything. But if you project three years into the journey and your panel doesn't work with a minimum amount of marketing, call it 15%, you know, something like that, 20%, then the panel is not built sufficiently well, because you will need the kind of spend over the course of the coming years in order to support and grow your brands.
Elio Leoni Sceti (00:26:12) - And then the last one is fixed cost or SG&A, basically the cost of paying the rent, paying the people, you know, running the electricity bill. and I would say more recently this has gone a little bit out of whack. you know, there are there are small companies that set themselves up as big companies. And of course, that is a big burden on the, on the potential for growth, because profitability has always been for a few years has been forgotten, but now it's back into being the number one value. When you exit, you know, there is no exit for a brand if it's not profitable and the value will be a multiple of that profit will not be a multiple of your sales when you earlies multiple sales when you exit is a multiple of profit. So if that fixed cost is inflated, it's it's a problem.
Inès Makula (00:27:02) - And what's the multiple out of curiosity now, for an exit of a of a consumer brand on profit like an average.
Elio Leoni Sceti (00:27:11) - Yeah. It changes dramatically by category.
Elio Leoni Sceti (00:27:13) - Of course, I would say that the more profitable categories will probably. Can look at somewhere around the sort of 10 to 12, you know, the less profitable category, you know, if, if they are of the right size, can you know of the right volume if you want can be a little bit more in terms of multiples, but they need to have a higher size to to start with. So if you can have a high profitable category, maybe you can exit it when you're ready. 70, 50, 70, 80 million run rates. less profitable, larger volume categories probably would take you to 150 million before you are like, you know, good. Excellent.
Inès Makula (00:27:51) - And, I mentioned it a little bit in the, in the intro, but not a lot. You know, consumer goods consumer is not the hot topic or the hot, trend or sector of the moment for VCs, which are focused on a lot of, you know, B2B than there was web three then, now it's all about AI.
Inès Makula (00:28:10) - what would you suggest? or how can an early stage consumer brand be more attractive for investors?
Elio Leoni Sceti (00:28:19) - Honestly by doing everything that that I said before, I don't think that the consumer is what he was hot and it's not hot. I think that the investor were wrong. I think consumer is was, as has always been, very sexy to me. So, you know, consumer goods to me will not change is, is every day, every consumers everywhere in the world, you know, from a category perspective, you cannot think of a better one or a more secular one that will always be relevant. The investors were wrong. And so with the right investors, just do the things that I said before, get the right products at the right price, with the right margin, get a good story to support and hopefully, you know, maintain your premium and do not over promote. If you have a USP on performance, convenience or value and a good funding team, you're very hot to me.
Inès Makula (00:29:04) - Perfect.
Inès Makula (00:29:05) - That's encouraging. and what kind of metrics are important for a consumer at a seed stage versus maybe a series A? you know, when when you're looking at those businesses, I know you really focus on growth, but probably people come to you as well, maybe for advice. early stage as well. Yeah.
Elio Leoni Sceti (00:29:24) - I would say that the only thing that really changed is the repeat. When you are a series A, you want to have real evidence of repeat. If I step back in order to, to make an assessment for investment, you need to approve points that will help you to suspend your disbelief and make the jump and pay the check. Those proof points normally are around the first at that series A is do consumer like this product enough to come back at a higher level than competition? And is the story credible? And so that's kind of really the first proof points that is super important. And the other one I said before it depends on the category. Do you have the right, you know, level of advocacy or whatever that is.
Inès Makula (00:30:09) - What's a good percentage actually of return? Would you say.
Elio Leoni Sceti (00:30:13) - That dramatic that that depends on on too many things. I cannot answer you because some people measure it like at least one purchase over the next 12 months. We measure it, you know, in terms of month by month and returning at one time, two times, three times, four time. So you get into all kinds of things and it changes by category. But the important thing to keep in mind is every category has some norms, and you got to be at the top of those norms because that's the number one measure. And then the other ones, you know, this one, you cannot have it at seat because you know, you do not have enough data points to prove whether you are at the top of the norm or not. The other things remain the same. You know, the gross margins, the founding team, the brand power, sure, at the beginning. But empower will be potential. And at CAC, the brand power will already be visible.
Elio Leoni Sceti (00:31:00) - But the way you measure it is, is the same. The way you look at in brand execution and consumer relevancy is the same. So I would say the one things that change is repeat. the rest is any stage for pretty much the same.
Inès Makula (00:31:15) - and would you say the bar is much higher for consumer or DTC brands in general compared to other businesses?
Elio Leoni Sceti (00:31:25) - I think so. I think so, because it's more difficult to find and to retain a USB. you know, in tech, look at what happened with AI, right? You know, this thing happens, it kind of changes our life in three months. We're all, like, behaving differently. It is visible. It is immediate. It was not there before. In consumers. Everything is already there. I mean, there is not a consumer product that has not been invented. You know, you name it, it exists somewhere in the world, everywhere in the world. So what you have to come up with is something that does it better.
Elio Leoni Sceti (00:32:01) - But it's very difficult to be transformational. A consumer goods that is transformational. The last time it was invented, it was many, many years ago. So you need to defend a delta that is smaller, and there is a lot of easy copy and competition because IP in consumer goods, it's almost like, you know, non-existent. there are so many ways of going around any formulation tweaks that, you know, nobody really spends time or money on, on IP very much. So the bar is high because the product difference is very is very difficult to maintain, and the bar is high because the unit price is very, very low. So the cost of switching is very, very low. If you switch to a brand that you don't like, you spend $5, who cares? You go back to the previous one. It's not like a car, you know, you get the car that you don't like. You spend 30,000, you know, pounds or whatever. It's it's more annoying. So. So it is tough because of, of the nature of of of what we do.
Elio Leoni Sceti (00:33:03) - Yeah.
Inès Makula (00:33:04) - And marketing is also like a really you know, sometimes it's what differentiates a lot of products. I mean, there's talking about beauty, maybe because I've been in the beauty world for so long. you know, there are thousands of brands. Most of them are going to produce in the same labs. So really the difference is the packaging, the communication, the marketing. Like, is that something that for you, it's like, do you fear that when the differentiation is only about maybe communication, packaging and branding or, or is this how, you know, the consumer world works and it works in every category, right. You have private labels that produce for pet brands. You you know it for food for, for, for most things. So like how important it is to produce your own products and really kind of differentiate your own products to maybe focusing on, you know, the marketing and the communication.
Elio Leoni Sceti (00:33:56) - Yeah. So, you know, part of the answer is that the crafty we have not done beauty, you know, brands until now.
Elio Leoni Sceti (00:34:06) - the reason for is that they are the borderline between sort of fashion and like you, like you express it's only dependent or mostly dependent on the on the story. we found, you know, I worked across many, many categories. I defined them in a, in a little bit of a simplistic way, but the categories that are very functional. So it's staying here, staying on, paying here, being gone. Those categories are easier because you have a visible provable difference that if your product makes then you associated with your brand, you invest in marketing behind your brand there is a 1 to 1 consumers always remember one primary things. People that try to put seven messages on the front label. It's useless. I mean, consumers just get one. So if you're one thing that is on the front label is associated with the pain here. Pain gone, think about Nurofen or ten years, then go and think about varnish or things like that. Those brands are very powerful because they can maintain an associate that benefits to the brand.
Elio Leoni Sceti (00:35:09) - When you get into beauty or you get into, you know, fashion or. It is much more difficult to do it because it's almost like an expression is, is, is, is way more creative in a way and less functional. And so sure, you know, a foundation will make you feel like it's working for you or not. But you know, what you say is foundation is a foundation. You know, it's like, what is the fundamental difference in terms of how, how the brain perform? So, yeah, it's more difficult, I would say, on the, on the beauty and on the type of brands that are bordering outside of the functional benefit visibility.
Inès Makula (00:35:50) - And are there is there a category right now that you think is like really hard that you're excited about that maybe, you know, there's you think still there's an opportunity in that space. for any anyone who might be still at early, early days in their brand adventure.
(00:36:09) - yeah, I think so.
Elio Leoni Sceti (00:36:10) - Pat has been, a very interesting category for a long time, and I think it's still very interesting, all of this sort of demographic, the socio economic everything is working in favor of pet.
Elio Leoni Sceti (00:36:23) - I wouldn't worry too much if a category saturated or not, because in consumer goods, pretty much every category is saturated, 90% penetration, you know, except 1 or 2 things. So. So pet is very interesting. better nutrition and health. It's it's, very good. I mean, you can put in there some bits and supplements you can put in there some, you know, type of, you know, food and, and, and healthy programs, of sort and you can put health as in consumer health, not, not wrecks, not not medicines, you know, health. so, so better nutrition and health. the, the other one is aging population. you know, it is what it is. It's going to be more and more people that are aging, even if it's aging more forcefully or more gracefully or whatever, but it is still aging. And so there are some biological elements of the human being that requires a different type of product. And I would say wellness for women or women, wellness and health, massively underrepresented for years and years.
Elio Leoni Sceti (00:37:27) - I mean, it's funny because of course, you know, it's actually not funny. It is not funny, but it is not credible that so many years, consumer goods have been for everybody and 50% being women. but if you take a look at all of the product testing and all of these sort of developments and the performance metrics etc., were actually on, on men. So the women were the responsible for purchase, but the product were developed for men and some of the, you know, women problem, menopause or, you know, fertility or all kinds of stuff that is super important, to be served by, by consumer products, that is, you know, good, reliable, etc., etc.. have not yet been, I think, done for not even 25% of what it should be. So I think, I think women, wellness and health is a big one.
Inès Makula (00:38:17) - That's very interesting to get your, your point of view on, you know, on those key kind of categories. And in terms of, you know, you mentioned some of obviously the most important factors, and metrics, but is there anything else that like.
Inès Makula (00:38:33) - Gets you excited or gets you basically, you know, when you make an investment with the crafty, like, is there anything else that you look at in terms of, you know, for an investment, maybe like a founder trait or anything else that you want to add.
Elio Leoni Sceti (00:38:48) - To the founding team? The founding team. And I underline team because. One man band or one woman band. Don't. Don't go. Don't go for ever. so you need to have a founder or founders that have created a team or that are willing to create a team, and they've shown the interest very early. I mean, we invested in some companies super early and already like Fantastic Team because the founders realized that that's where the money has to go in order to create, you know, a brand that is relevant and future. And in the founders we look at cause many things for greatness. Right. you know, there are a few that I think are always important to look at. The one is the capacity to have a vision that is almost founders can be missionaries or can be mercenaries.
Elio Leoni Sceti (00:39:37) - The mercenaries are like, I want to do these things where I can exit three years from now and be rich. We run like, you know, to the woods when we see something like that. The missionaries want to do stuff because I think is relevant, is relevant for the company, for themselves, for the relevant it doesn't have to be just generous for the world, but is a relevant mission that they feel the burning desire to accomplish. And those missionary, founders, have the capacity to have a vision and setting the compass in the right direction where, you know, they think that they can make a difference. So that visibility of the vision is is super important. Number one, I would say the next one is, Resilience, grit. Call it, you know, whatever you want. But the capacity to not to not stop at the obstacle, to make the obstacle be the way to, you know, make them stronger, to look for the opportunities to learn and to and to develop themselves.
Elio Leoni Sceti (00:40:40) - that is an important, you know, traits that that we look at. I mentioned the point about recruiting a team that is better than you at the individual areas in which you know, you, you are not responsible of. And I really mean better. There is all of this sort of many theories, but this concept that a people recruit a plus and B people recruit, see people and and that's the way, you know, we've seen it over and over repeating it's an absolute truth. and and then, you know, because it's this category, we look in the founders, the desire to make consumers, specifically the desire to make consumers at the center of the innovation development, to look forward in a way, to please consumers. You know, if you put consumers at the center of your product development of your system, of your organization, of your innovation pipeline, you see the way they speak. There are people that you know, you cannot get the word consumers, you know, if you if you if you pray for it.
Elio Leoni Sceti (00:41:42) - And, that's numerically a, it's a, it's an indication that maybe they're in the wrong category. Yeah.
Inès Makula (00:41:48) - I'm going to pick a question from the audience because it's quite relevant to what we just talked about. it is asking what are some of the red flags that would make you hesitant, actually, to invest in a consumer brand? So we talked about what you, you know, want to you or you're looking for. But is there anything that makes you rotten.
(00:42:05) - Yeah.
(00:42:07) - Well,
Elio Leoni Sceti (00:42:08) - I have to be honest, the, the sort of the D to C only with the, desire to prove the wall wrong, that it can stay D to C only it's a big flag and some, some are still believing that that's the way to go. So that that normally is is one the other one is the margins. you know, we are sort of literally philosophical about it. I mean, low margins, you know, it's like can get, you know, can get any clothes. and and the other one is, you know, founders that are, I want to say, not good listener.
Elio Leoni Sceti (00:42:46) - They're not curious, you know, the sort of the know it all the, you know, this is working because I believe it. And, and then, you know, maybe they can find money from whatever SoftBank or others. But, you know, clearly not from people that have things to add.
Inès Makula (00:43:02) - And, we talk about a lot on the, on the podcast about internationalization, because Italy is a weird country where, where we're around 60 million people. So it's not a small country, but it's not a huge country either. So a lot of the times we, you know, obviously we see brands that are focusing on Italy for, for a very long time, brands, company startups, not just in the consumer space. What as a, you know, you mainly invest in brands that are international brands. what would you what is your advice for somebody starting a brand in Italy? Like how fast should it be thinking about internationalization, even in their communication? Should they be going Italy first and then creating a community after? Should they be going immediately for an international brand that speaks to, you know, at least Europe? It's a bit trickier with the with the language because I think from the UK you launch a brand immediately, you can go to the US, when you launch in Italy or France or Spain, obviously you're with the Languaging, you're a little bit limited.
Inès Makula (00:43:59) - And I remember when I launched the brand with my sister, it's something that we really thought about, so much like, do you compete with everybody in, you know, in but you're not from there in the English language. You focus on your home market. I'm really curious to hear your thoughts.
(00:44:15) - so.
Elio Leoni Sceti (00:44:15) - In answering this, I'm gonna so say something and kind of, you know, put a little bit of a plug for a, a reality that is doing very well in Italy, in which, you know, we, we have invested in, which is called cientifica and cientifica is an incubator is, you know, in advanced manufacturing material quantum. And I the reason why I'm saying this is I believe that honestly, the Italian genius, is a thing. you know, I'm, I'm very happy to engage with, you know, made it and Italians, NVC, etc., because I lived in seven countries 35 years away. And, of course, you know, bright people are everywhere, but there is this extra sort of a little bit of creativity that very often I've seen in Italian people.
Elio Leoni Sceti (00:44:59) - And I like to see the young people, technology transfer, Science Lab, University to have a bit of a way to express it. So I think the studying in Italy is a good thing, because it's a way to let some of this creativity flourish and and go abroad. But there are limitations. And and you said, some of them, what what I suggest, I suggest that the internationalization has to be designed in the processes at the very beginning. So you need to think about your cost of goods, your team, your, your, you know, systems to be capable of doing it. So at the very, very early stage, design it as if you know you want to go abroad international, but then put it in a in a drawers and do not open the drawers until you have an absolute certain proof from a consumer's in Italy that you have found the way to communicate the product is right, the insight is relevant, etc. so you do all of your tick tick tick tick tick. You go for a period of time that is sufficient to get a visible repeat, and then you see how to apply that into the international, you know, rollout.
Elio Leoni Sceti (00:46:13) - so.
Inès Makula (00:46:13) - Like your social media, your newsletter, everything that's still in Italian, you're, you're targeting the Italian market.
Elio Leoni Sceti (00:46:18) - You target the Italian market, you make it a success in the Italian market. You get the repeat that you want, but then you have already designed the system to get this international, but literally just from a get ready perspective. But don't do it. Probably I would say for the first minimum two years, it, it takes time to, to polish because it's a very fragile startup. It's a very fragile thing. If you hit a wall and, and it sucks out all of your liquidity, you're done. And so internationalization is very costly for every sales that you do in another market. It cost you three times what it cost you in your market. So unless you have the shoulder ready and the consumer insight clear so that you can roll it in a seamless, easy way and don't spend that three times more money to prove yourself somewhere else. because it's very it's very, very risky.
Elio Leoni Sceti (00:47:09) - What market to go to? I would say not as a first next market. The US. The US is sort of unfortunately, the tomb of so many attempted internationalization because you really you really need to be sort of very, very, you know, big and ready to cut lights go out. Here we go. to do it. So, you know, probably some of the neighboring, you know, maybe, maybe Germany, you know, maybe UK. but yeah, that's that's the way I would approach it.
Inès Makula (00:47:45) - Thank you. That's very useful. And I'm just going to open, the Q&A. So we have a question from Alessandro. Grandpa. hi, Elio. Can you share your view on consumer electronics market scenario as well? If you,
Elio Leoni Sceti (00:48:02) - Yeah, to be honest, it's kind of not a market that I look at it, enough to have an opinion. So I would just say my own personal opinion, which is not the relevant.
Inès Makula (00:48:14) - We have a question from John John Hobart or John Abbott.
Inès Makula (00:48:17) - Dear Elio, could you share your view on the oral care sector? Do you think it's investable for The crofter?
Elio Leoni Sceti (00:48:23) - yes it is. oral care is clearly part of the very daily routine type of companies. We love, we love, we love categories that have, you know, a package, a cap, and possibly two purchases a week. That's kind of our, you know, golden, golden, space. So, yes, oral care is one of them. it has not been really disrupted for a long time. I mean, so it is actually quite exciting. if somebody could, you know, what is really sort of hot in that space now is all of the functional benefits. I've seen products that are working on sort of proper cure of the cavities and stuff like that. And so as you brushing daily, you are treating, you know, some of the problems that you have in your mouth. so functional oral care is very interesting.
Inès Makula (00:49:15) - And then we have a question from Stefano DiNapoli.
Inès Makula (00:49:17) - How do you partner with companies in your portfolio? What level of involvement and what areas?
Elio Leoni Sceti (00:49:23) - So our model is basically our team. it's about half a deal team and then have craft partners and craft partners, meaning that they are experts in some of the areas like digital marketing, like, you know, supply efficiencies, innovation strategy, the stuff that that, you know, they've done a CMO of this year or that, you know, myself or CEO, a company. So we have that operating experience. So the way we partner is that we take, positions that tend to be between 30 and 60% of the company, meaningful minority to majority. and then clearly both governance and representation in line with, with that position. But the board interaction is only one of the way we do that. The main value is delivered by the craft partner interacting with our portfolio companies when they need it, on topics that are, you know, important to solve. And so we never do the job ourself is always like, you know, experts that come to the companies and sit with them and share.
Elio Leoni Sceti (00:50:26) - We're very clear. We're very strong on playbooks, on on on protocols, on routines, on ways to approach things. You know, there's many years of experience that help us to be. Effective and efficient in our interaction with our portfolio companies. And, you know, those that have told us what what they think normally is, is positive. So it looks like it's working.
Inès Makula (00:50:52) - So if there's any other question, please ask. But I do actually have another question for you in the meantime because the crafter is actually you were saying it's not a proper VC fund, right? You're you're different than a VCs fund. So maybe you can you mention in what ways you're different, maybe you're more long term, just anything that sets you apart from just a regular VC.
Elio Leoni Sceti (00:51:10) - Yeah. Let's say that the main difference is that we are permanent capital. when when we did this six years ago, it was quite unusual now that a couple of others sort of have a green sleeves. you know, out of out of the bigger fund.
Elio Leoni Sceti (00:51:22) - We did it like that because, brands have a life on their on their own, of their own, and they require a certain amount of years and time in order to prove themselves. So if if a VC owns a brand and or private equity owns a brand and impose their fund cycle into it, you might find yourself that at the fourth year of life of your brand, or the fifth year of a lot of your brand, you go through a sale process. It might kind of take the sales out of the, you know, the wind, out of the sales. It might take momentum out, it might confuse people and so on. So we wanted to not impose our financial cycle over the brand cycle. And so we are long term, as long as is required to get the brand to the point at which it can be. IPO sold part of a strategic that you know will will benefit from it. without having the time constraints. So that's I would say is the main difference on top of the one about being operators as well as, you know, deal team.
Inès Makula (00:52:22) - And you invest in, in growth mainly brands. So usually when they're about is it 10 to 20 million in sales. Like what's the what's the minimum sort.
Elio Leoni Sceti (00:52:31) - Of you look at ten like small is more like sort of 20 plus is what we like. But you know we look also if it is ten, but 20 plus is what we like. Maybe up to 40, 20 to 40 million in sales is probably good. range, you know, run rate to, to enter for us.
Inès Makula (00:52:48) - And would you ever look at smaller brands or like maybe even as an angel investor separate from the craft series, that's something that you, you know, you're interested in or your your focus is mainly growth.
Elio Leoni Sceti (00:52:59) - The focus is there. Yeah.
Inès Makula (00:53:01) - Okay. We have actually another question from Alberto Masa. How would you personally approach expansion in the US? Would you partner with up with a local player? So I know you did mention that the US can be a graveyard for a lot of brands.
(00:53:15) - But
Elio Leoni Sceti (00:53:17) - Of course it's also the most exciting and the largest and, you know, huge opportunity.
Elio Leoni Sceti (00:53:21) - So you want to think about the US and if you want to have a unicorn, if you want to have a big chunk, big chunk of, you know, cash type of exit, you you got to be in the US. So it's a good question. it depends. It depends again there on, you know, the category very much, but also the model, the, the, the that you have. But I would not partner with another commercial partner. I would certainly partner with the whole sort of supply chain. You need to have a local supply chain. You need to have local experts. And I would partner with a distributor distributors as in Salesforce, not as in marketing and sales. if you want to succeed in the US, you need to own and you need to be incredibly methodical about, building your brand as different than others. And because there are a million others in every category, it's it's a tough job. So you need to have an own, you know, a US team that is your US team, in one of the big markets where you're going to roll out and, and place your, you know, ideally you want to place your headquarter there a couple of times.
Elio Leoni Sceti (00:54:31) - you know, we asked companies that we invested in, if you want to go to the US, you move your headquarters from whatever country you have to the US, and then you leave in your country behind. In this case, if it is an Italian, you know, you leave behind your Italian team, but you as the founder or whatever, you move to the US, you set up your team there, and from there you manage your distributor, your third party manufacturers, you know, your logistics providers. it's a it's a big, big challenge. And it's got to be taken by the best placed people in a company which, normally speaking, is the CEO and the founding team.
Inès Makula (00:55:04) - Elio, thank you so much for, you know, taking the time to to talk to all of us. It's been such an insightful masterclass. As somebody who also works in consumer, I've learned so much from, everything you shared. So I really want to thank you on behalf of everybody listening and really hope that everybody has found this valuable.
Inès Makula (00:55:22) - So thank you so much for having been on the Masterclass series.
Elio Leoni Sceti (00:55:26) - My pleasure. Bye bye.