Are CPG brands ready for e-commerce?
Among consumer packaged goods (CPG) industry professionals, there are few topics as perplexing as direct to consumer sales. Even so, many are dipping their toes into e-commerce waters as the industry continues to face slow growth, more competition, and pricing pressure.
Urgency is leading many to hastily consider direct sales channels — despite how it might affect retail partners. Clouding the picture are new entrants offering a fast-path to e-commerce like Amazon. Growth-starved brands have little choice but to "follow the money" in the new omni-channel landscape.
Unintended Consequences
Amazon has the potential to disrupt the retail industry while keeping CPG makers fenced out of a close relationship with consumers. It’s the very issue many brands are trying to overcome with digital marketing. CPG executives need answers fast — a framework for how direct sales fit within their existing model.
Research from Deloitte presented in a webinar recently sheds light on these critical questions.
- CPG e-commerce is growing, but represents a small percentage of sales. Amazon’s moves suggest uptake will accelerate, making it a mistake to assume a steady state, small opportunity. Deloitte’s research validates this, with surveyed consumers expecting to make a larger share of purchases online in the future.
- Deloitte identifies a segment of shoppers — nearly half — as "indifferent" in that they neither like nor dislike shopping in a brick and mortar store. You can imagine currying favor with this segment with the convenience of online channels paired with timely and low-cost delivery.
- There is overlap between direct and retail channels, but an incremental opportunity does exist — the key is to figure out where, while maintaining mutually beneficial relationships with long-time retail partners.
Deloitte makes several recommendations around targeting and personalization:
- Target indifferent consumers with convenience items and capture impulse purchases.
- Establish new or niche brands while accelerating sales volume for established brands.
- Attack the new product introduction challenge through targeted trial via social media.
The findings include suggestions for working with retail partners to implement direct sales alongside both retail brick/mortar and online operations.
- Convince online retailers to stock many items, while saving physical shelf space for popular SKUs. Resolve to decide which variants should be sold online only.
- Plan assortment on physical shelves around SKUs with the highest productivity, with a rotating inventory of new or niche products.
- Pursue direct sales of profitable, low volume SKUs such as "niche flavors and fragrances unable to gain shelf space in traditional brick and mortar outlets."
- Fast-Rising E-Commerce Could Jolt Package-Goods Giants – Advertising Age (tiered sub.)
- Target sends sharp message to P&G over Amazon deal – RetailWire
- P&G invests 30% of media spend in digital – Marketing Week
- Digital Commerce in the Supermarket Aisle – Deloitte
- How Adaptive is Your Product Innovation and Launch Process? – Teradata
Discussion Questions
Do CPG vendors have the right visibility into channel activity to form and then implement a confident e-commerce strategy? Are the risks lessening around disturbing brick & mortar relationships? How does Amazon’s push into CPG alter channel relationships?
The key phrase here is “follow the money.” In light of the expectations of the digitally empowered shopper, brands need to be constantly testing and experimenting with how to successfully create a direct, personal and relevant dialog and relationship with their consumer.
This is the primary objective in order to establish and maintain the “customer for life.” Retailers have been extracting cash from their CPG partners for years and this has created adversarial tension between them. The commercial and social benefits of creating a meaningful dialog directly with the shopper/consumer far outweigh the risks of “disturbing” the existing business relationship. A measured and careful approach needs to be taken in order for CPG brands not to burn the bridge too soon.
Brands need to be wherever consumers are buying. Direct online sales are one channel towards building an omni-channel presence. Deloitte’s recommendations are solid.
While brands dip their toes in the direct sales waters, they should expect brick and mortar retailers to push back. For years, brick and mortar retailers have owned consumers and dictated, or tried to dictate, terms to brands. The Internet is beginning to challenge that dominance.
Brands need to experiment with direct sales to gain insights and experience. It’s not going to be a smooth, easy task, but it’s one that needs to be done.
Not clear if the question is asking if CPG vendors are pursuing a B2B eCommerce strategy focusing on selling into the channel or B2C bypassing the channel and going direct to consumers. I am inclined to say yes to B2B and no to B2C for the majority. The more entities that are in between a company and the end consumer, the harder it will be to initiate that direct to consumer relationship. I just lived through this at Microsoft from 2010 – 12 so am basing my opinion on that.
If a company does decide to pursue a B2C strategy when it’s been primarily selling into the channel, they do have to be careful about creating the perception that they are undermining their longstanding customers. Trying to find win-win situations is ideal, but there is inherent conflict here usually. That being said, companies need to develop their direct to consumer or B2C muscles if only as a defensive measure given how Amazon and others are reshaping retail.
I’m not sure most retailers have enough market visibility to “implement a confident e-commerce strategy,” much less CPGs.
In most product categories, the debate about channel conflicts when manufacturers go direct are pretty much over. Even well executed manufacturers direct e-commerce efforts are usually not competitive with their best channel partners, and manufacturers who become e-commerce savvy are much better at supporting their channel partners. So retailers tend not to be too concerned about competition from their suppliers direct e-commerce efforts.
A manufacturers e-commerce site is usually the worst place to buy a product; worst pricing (MAP compliance, minimal promotion), and least convenient assortment (only offering one brand). Usually, the manufacturer’s website only wins on brand assortment and trust. William Sonoma isn’t staying up at night worried that Le Creuset and Calphalon have direct websites. Walmart isn’t too worried about pgestore.com.
When manufacturers do start selling direct, they become better partners. Retailers expect great syndicated content from manufacturer’s (product descriptions, reviews, user generated content, rich media, etc…); when manufactures get in the direct selling business, they get much better at creating/testing/providing content that supports e-commerce. And manufacturers that sell direct are much better at drop shipping for retailers.
In most cases consumers pre-shop a manufacturer’s site, and then buy on a retailer’s site (or in-store). Manufacturers that are in the e-commerce business almost universally have better sites to pre-shop.
So at the end of the day. CPG’s that offer an e-commerce site are almost universally better partners for retailers, and typically refer more qualified buyers to retailers sites.
That’s an entirely different matter than CPGs partnering with Amazon as a new competitor. William Sonoma may think store.calphalon.com is cute, but the Calphalon store on Amazon (http://www.amazon.com/b/ref=sr_1_1_acs_h_1i_2586681011&node=2586681011?ie=UTF8&qid=1394719653&sr=8-1-acs) is serious business!
Per the WSJ article (http://online.wsj.com/news/articles/SB10001424052702304703804579380792664369028) Target reacted aggresively to P&G’s partnership with Amazon, not P&G’s direct selling efforts on pgestore.com.
When big box category killers first emerged (CompUSA, Toys ‘R US, Best Buy, etc..), the incumbent channel of specialty retailers revolted. Ultimately the big boxes had the buying power and therefore the leverage. Today the same thing is happening to incumbent big boxes as they face a new competitor in Amazon.
Q1: No one has full visibility into channel activity. There is no such thing as a confident e-commerce strategy. Q2: Yes, as long as the supplier can manage online pricing adequately. Q3: It’s not about channels anymore. The marketplace is diffusing as personal access to technology and sourcing options increases.
Amazon gets too much blame/credit for the changes that are made possible by digital commerce. Reminds me of the failed attempt to stigmatize “alternative channels” a few short decades ago. Like trying to put out a fire with gasoline.
The 20th century is over for almost a decade and a half as of today. It is not a question of CPG company visibility, but rather continuing growth, expansion, and viability in turning to e-commerce for sales. Why any profit taking business would own a business plan that does not include an expanding e-commerce presence is simply total mismanagement.
As for Amazon, they may not be the e-commerce force to recon with that they once were. Their sales growth numbers are not keeping pace with the whole e-commerce market and this gap continues to widen in spite of their efforts. For that reason, I see the entry into CPG as just another step to insure safe levels of profit taking from the market. The world is watching a new e-commerce economy that is still very much in its early stages.
CPG brands typically have the data to make these kinds of decisions. One challenge lies in the insights gained from the analytics of assortment planning, inventory productivity, etc. The suggestions made in the article, such as “Plan assortment on physical shelves around SKUs with the highest productivity” are good, relatively basic table stakes.
I think CPG brands need to work with retailers to implement their D2C strategy, more than think of it as purely competitive to retailers. Low productivity of store shelves helps neither party. Leveraging D2C can and is driving incremental revenue for innovative CPG brands. Also, I see some CPG brands offering unique, specialty items online that are not able to get space on shelves or the CPG has chosen to take an “exclusivity” path for the products.
Whilst CPG e-commerce still represents a small percentage of overall sales, selling direct is inevitably where the market is heading as more consumers move online — whether that be to purchase or research.
Nielsen reports that 42% of all CPG buyers research brands online and 62% of all CPG buyers choose new products online, and this is only going to increase. Selling direct therefore represents a huge opportunity for CPG manufacturers but having visibility into a brand’s positioning online is key.
I think there is a convenience factor. Consumers’ purchase decisions are directed in part by how important the decision is and how it relates to the cost of the purchase. If consumers are conducting research on electronics and high priced items, there will be a threshold that some products won’t reach. In other words, at what point in time is the convenience of buying online meeting the convenience of buying in-store?
CPG companies must know how much time their customers are willing to invest in their shopping experience. Is shopping online for this product more desirable than picking it up on a supermarket trip? It seems to me that there is an opportunity to examine what is purchased in any given week online and in-store and to what extent the channels are interchangeable or exclusive in the minds of consumers.
I think it works in a different way, this “must-have internet visibility” conundrum for CPG vendors. Here’s my thought: The internet offers manufacturers a way to circumvent the vagaries and bribe-intensive culture of product placement in supermarkets. It gives consumers a way to get the stuff they want even if their local stores couldn’t extract enough money from vendors to justify placement on their shelves.
A couple of cases in point: Our family in NorCal is a fan of Hellmann’s Dijonnaise Creamy Dijon Mustard. Can’t find it in local stores, so we order it through Amazon.com. With Amazon’s Prime shipping program, it’s not very expensive. This is a great solution for us and for the manufacturer.
The other case in point is that of Tia Rosa tortillas. They make and had distribution for a 10″ corn tortilla here that was a critical ingredient for an enchilada dish we love. Now Tia Rosa is gone from this area, with no viable substitute product available from competitors. I called Tia Rosa HQ, a division of Bimbo Bakeries (yes, that’s their name), and discovered that they were unprepared to ship my favored tortillas to me. UNPREPARED TO SHIP THEIR PRODUCT TO ME!
And that’s a problem. If consumers come hunting for your product when it’s become unavailable to them locally, manufacturers owe it to them to provide the desired product via any means necessary. It’s the least expensive way for them to rebound from market exclusion through unwillingness to bribe the local retailers for shelf space.
“Follow the money” is entirely wrong when it comes to CPG DTC/D2C/B2C. Compete unique visit data is enough to prove that the traffic is not going to brand sites – by and large it’s going to Amazon. Walmart.com. Target.com. etc.
That said, who is going to brand sites? Loyals. Plus, those researching ingredients or seeking hard to find/long tail products. The common thread is they’re all highly engaged.
DTC is HARD. And EXPENSIVE! Let’s face it – manufacturers make product. Retailers sell it. When mass market manufacturers try to play retailer, they inevitably face disappointment, missed goals and expectations, and lots of red ink.
Therefore, DTC is NOT about revenue. It WON’T fill any business plan gaps or offset share or sales losses. It WILL, however, meet loyal and engaged consumer expectations, and offer a rich environment to build those relationships, collect data, and build brand equity.
Enter DTC with KPIs around engagement, loyalty, equity, dwell time, repeat visit/purchase, and so on. Utilize KPIs around sales and profit only at a brand’s peril.
For those willing or desiring to shop on line for CPGs, it is unlikely that most consumers will prefer to buy these products direct from the manufacturer vs. an online CPG “store” or aggregator, like Amazon or WalMart.com. However, if CPG manufacturers focus what HBR this month calls “superconsumers,” those who not only buy outsize amounts of a particular product but who are also emotionally attached to the product and will be creative in consuming more, their direct to consumer digital activities just might bear fruit.
E-commerce for CPG is still a brave new world – convenience is king and e-commerce can clearly own the realm of bulk, low engagement, habitual purchases in the future. So where does that leave Bricks & Mortar? As Deloitte makes clear, there’s still a role for Bricks & Mortar to deliver both immediate convenience and delight with new products – but let’s push beyond that. With nearly 1/2 of all consumers ambivalent about shopping in B&M the challenge is bigger than just new news on shelf. What role does physical retail now play? It has to move towards a bigger experience that rewards customers for leaving the tablet behind and getting in the car. Advice, entertainment and a sense of connection and community have to complement the ‘quick stock up’ mission and the impulsive purchase on the fly. CPG’s are finding their e-commerce feet through trial and error – the need is to take a holistic strategy so that the brick and mortar strategy too evolves in parallel – otherwise we’ll see consumer demands moving faster than our ‘omni-channel’ strategy. Amazon is the spur for many companies to finally try to tackle this head on and the next few years will be key to see who leads the field in developing sustainable models for delivering both delightful AND convenient experiences in both channels.
The online channel is a reality which both manufacturers and retailers acknowledge albeit with differing degrees. So I think the risk of disturbing existing relationships is lower. Also with Amazon pushing into CPG, it’s time to strengthen relationship with “retailer.com” and form joint e-com strategies. A lot of work, but what are the options?