Are CPG companies giving up too much to Amazon?
Through a special arrangement, what follows is an excerpt of an article from WayfinD, a quarterly e-magazine filled with insights, trends and predictions from the retail and foodservice experts at WD Partners.
Are CPG companies consciously deciding to align with the logistic powerhouse of the future instead of the distribution giants (brick-and-mortar retailers) of the 20th century?
It’s not so far-fetched. Early signs indicate that’s where we are headed, with Amazon’s well-known ambition and nascent expansion into grocery delivery. If Amazon can habituate people to repeat purchases through scheduled deliveries, where does that leave retailers or upstart, category-busting brands?
Despite commanding only 6 percent of total retail sales at the end of 2012, CPG companies like P&G, Georgia Pacific and Seventh Generation have given Amazon every advantage it needs to cement and automate consumer purchases on a weekly or monthly basis. By inviting the online behemoth into its warehouses, as recently reported, CPG companies are basically saying to retailers, "Sure, you helped me build a billion-dollar brand, but now we are going to help your biggest competitor!"
In 2014, I see three shifts worth watching around this development:
The duality of consumer v. shopper will be dismantled: The consumer is where you focus to build a brand; the shopper is where you focus to close the sale. Maybe that’s the way it has worked for decades, but not in the future. Those once clear strategic lines are increasingly muddled by the disruptive role mobile plays along the path to purchase. This demands a radically different go-to-market strategy for brands.
The wildcard of Millennial preferences will keep everyone guessing: For retailers, the enemy is Amazon. For CPG companies, the foe is private-label. Or is it? After all, somewhere between these pitched battles is another threat: Millennial apathy toward big, multinational brands. They don’t want them. They want local, small-batch and environmentally responsible. Yet if the next generation wants the new, the local and the ethically sourced, why are CPG brands working with Amazon to build a system that caters to the established, the tried-and-true, the blockbuster brand only? More importantly, are retailers or Amazon better suited to help CPG companies appease the counterculture tendencies of Millennials?
Retail isn’t theatre anymore, but it could be again: If all those automated purchases budgeted with smartphone apps handle all the necessities, what happens to the extra money left over? What promised novelty and newness will drive consumers back to stores again?
Amazon’s aggressive push into every corner of consumption and consumer culture isn’t inevitable. CPG brands need to consider whether they are ceding too much of the already limited margin they have for changing consumer behavior.
Discussion Questions
Will consumers’ growing acceptance of an automated online grocery purchase cycle stifle innovation in CPG categories? Should CPG brands be cautious of overly supporting Amazon’s push into online grocery?
When I look at the pantry-related items I buy from Amazon, I think of it as a competitor to Costco rather than local grocery stores. In order to get free shipping, I end up buying large quantities. So if CPG companies haven’t been pummeled by selling the warehouse stores, why should they be pummeled by allying with Amazon?
I don’t think we have to be overly dramatic about the death of brick and mortar retail, nor do I think it’s time to pass the hat for CPG companies. People are social, and they like to shop.
I can’t envision a situation where I buy fresh items without looking at them, and I don’t always know exactly what I want to buy for dinners, etc.
By aligning with Amazon, CPG companies insure they won’t lose share to Amazon’s private label (which as of this moment, doesn’t exist for food). Don’t forget, they are definitely losing share to private label in stores.
For some perspective, it’s worth reading an article in the new issue of The New Yorker about the impact that Amazon has had on the book publishing business. (Obviously huge, but arguable that without Amazon it was a “dinosaur” industry.) There are really two questions here: First, can the CPG industry survive over the long haul as their sales continue to migrate from conventional bricks-and-mortar to providers like Amazon? (Clearly, the answer is no.)
The second question is more complex: Can CPG companies sustain the sort of negotiating power they may have in their current relationships with retailers, while dealing with a completely different logistics and demand model? This is much harder to forecast, but younger consumers’ decreasing loyalty to specific brands may be a complicating factor over the next several years.
Andrew – great article!
CPG has to play all sides of this issue. Physical retail for staple items is not going anywhere, anytime soon. There will definitely be a chipping away effect from online, but we’ll see other categories get into series trouble long before the places that sell CPG have serious issues.
So CPG brands have to work both sides of the street. As the article points out, their long-term threat may come from small independent brands that get the same exposure in markets like Amazon. Since there’s no slotting fees or end caps to fight over, it’s conceivable that a smart start-up that can work SM well, utilize experiential marketing, and tap new moralities, can make inroads into big name CPG territory.
My guess is that in the coming years, we’ll see many CPG acquisitions, like what happened with Burt’s Bees and Tom’s Of Maine.
It so behooves CPG to play the Amazon card. Why not? Their retail partners have been unable to provide enhanced physical environments to help them sell not only existing but new product, so turning to another form of retail makes sense. And besides that, it’s clear that Amazon holds a LOT of promise.
Another factor is the decline of foot traffic at retail this past holiday. The writing’s on the wall that if physical retailers can’t make their experience worth a visit, the alternative (Amazon) will.
I just bought a 72 oz bag of chocolate chips from Amazon that arrived last night. I agree with Paula that this was purchase stolen from Costco, and not so much my local grocery store, but with a household of 5 people and the space to store it, if I could get all the things that I get from my local grocer (particularly the shelf-stable stuff) on subscription, even if it requires mass quantities, then both Costco and my local grocer (Target, in my case) will suffer. In fact, I already started my own article on the topic – look for it in RSR’s newsletter next week!
Timely topic indeed!
Very cautious. Eventually Amazon is going to have to increase margins to improve return to stockholders that are going to eventually get tired of Amazon’s inability to generate a decent bottom line. Yeah, the convenience of Amazon is great, but once the consumer has to actually pay for that convenience, will they, and how excited will brick and mortar be about welcoming back CPG brands that chased the unsustainable model at their expense?
The posted questions miss an important point: the mass market is now the mosaic market. Sure Millennials want something different. Ditto the mobile users, who are not all Millennials. Ditto the boomers, etc. Successful CPG companies and retailers will execute their strategies on multiple levels.
Press the pause button. We’re evolving as consumers and as marketers. As shoppers, we’ve become more agile in gathering information and accessing products. We’re using all kinds of media, whatever suits our immediate need. If it’s electronics, we may take a longer time than if we’re looking for salad dressing or paper towels. But it’s a different path to purchase.
Amazon is making inroads, not by adapting, but by innovating. In turn they have impacted the path to purchase and they’re not slowing down. CPG companies may ride the wave created by Amazon, but it may not be enough to sustain their future growth goals. Amazon develops new delivery systems as well as presents products to generate revenue. If CPG companies look at Amazon as simply another distribution source, they may overlook how they have to harness the new paths to purchase overall.
So I don’t think it’s a question of overly supporting Amazon. Instead, it’s a question of allocating marketing efforts in the various directions of their shoppers’ attention and behaviors…as fragmented as that might become.
There will only continue to be a need for CPG innovation with increased competition online. New products introduction failure rates exceed 70%, so CPG companies need to leverage new channels to drive brand awareness and increase brand value.
I doubt that will occur. However, it will require a significant modification in the “go to market” strategy of manufacturers. Currently, the model is based on consumer segmentation, matching branding with customer profiles and developing the appropriate communications and retail strategies.
Online will require a new path to purchase. This digital path will merge product content with data relationships and customer order/browse and search history.
In this model, marketing is done in real time, content is extensible (image, weight, attributes, etc.), the message is direct to the consumer whose individual needs are highly predictable, and the outputs generate clear metrics.
There are challenges indeed with this paradigm shift, but this is the future which needs to be understood and properly incorporated into future consumer and retail strategies.
I think if anything, innovation will increase among big CPG, both at the product level, but also the “product experience” level around how the product is marketed and presented to consumers. Channels like Amazon promise opportunities for those smaller, regional and more empathetic brands to sell to Millennials than the typical retailer/grocery channel that has the shelf locked down with the big national brands. So I think it’s wise for the big brands to sell through channels like Amazon, but ultimately they need to balance those sales against direct ecommerce themselves and traditional brick/mortar retail.
It seems the future promises simply more channels to sell through than in the past, which leads to complexities around pricing and distribution. If Amazon exerts too much pressure on both CPG and retail, maybe we’ll see the manufacturers and retailers start to collaborate more closely to provide the best blend of in-store, e-commerce, product assortment and pricing. For a company like Teradata, it’s a good movement that should ensure continued data and analytic innovation in the retail and CPG industries.
Exactly sure what alternative(s) is(are) being suggested here (?)…it’s not like a company can say “no, we don’t want you selling our products.” And even if they could, would a stand alone effort make any sense? Wouldn’t the business just go elsewhere?
Perhaps P&G’s facilitation is leading to their marginalization in the long run, but I think it helps their sales right now; long-term thinking is great, but I have a hard time picturing an exec proclaiming “we’re giving up $XXX dollars in sales over the next five years because we don’t want Amazon having too much power by 2035.” And I’m not sure I’d think favorably even if I did hear those words.
Absolutely not, innovation in the CPG arena will accelerate innovation overall. Why would I say that? CPG manufacturers have been hindered by retail presentation. They have designed packaging to show as much “brand” as possible because they did not control shelf space or position unless they paid the retailer substantial dollars for that shelf space and position.
Additionally, CPG manufacturers have long detailed stores with their own employees or broker personnel to ensure that they were receiving the shelf space and position they had paid for. If CPG manufacturers are freed of these burdens and expenses, they can work on concentrating their products (powdered milk vs whole milk, concentrated detergent vs hydrated detergent). This will reduce the cost for the consumer rather dramatically just on freight savings alone.
Additional reductions in marketing/promotional cost due to being able to avoid “retail buy in” (buying product on sale, but selling that product at full markup after the sale dates expire) should allow the CPG manufacturers to market directly to the consumer. This could allow a direct discount of $1 per item vs a discount of 50 cents on products on grocery shelves. The ability to cut out quite a bit of marketing and distribution expense will force CPG manufacturers to innovate at an accelerated rate to remain competitive.
Amazon and other online retailers have made their impact primarily on price. Price has always been the driver and CPG competition will ensure that pricing goes down, not up. What manufacturer would ever want to support the buggy whip guys after the Ferrari guys show up?
Online groceries are great for established brands, seasonal products, and other products the consumer is already familiar with. CPG brands need to manage Amazon as another channel rather than a substitution to grocery stores.
Consumers will always visit grocery stores to learn of innovations, new products, and gather additional insight that can’t be gained online.
It’s also important to keep in mind the demographic fluidity of the consumer. I’m certain that several products and flavors found in a contemporary shopping list did not make the shopping list a decade ago.
The numbers are in for FY 2013 retail results and all is not well. Any lackadaisical effort in the 2014 market will certainly be rewarded with red ink. In all of my years of sales I have had very few allies and fewer friends looking out for “my” interests. CPG companies need to move product wherever, however, and whenever they can, every day, or the competition will. Retailers and e-tailers are looking for A & B turn products and will buy and sell whatever they are. With little credit and fewer dollars in the hands of businesses and consumers all on the supply side need to make the most of any and all marketing outlets that get results as in orders and sales.
Retailers and their brand suppliers have long had variably tense relations. This goes back to the first half of the 20th century, when retailers were more passive in their merchant warehouseman relations, and there were not so many brands trying to muscle their way onto the the sales floor. In the second half of the century, retailers increasingly recognized that the people in the store were THEIR customers, and they leveraged their power over an increasing multitude of suppliers, supplicants for access to shoppers. By the turn of the century I operated my own business, and advised clients, “The brands have all the money; and the retailers have all the power!” The principle is sound, even if not totally accurate. 😉
I have also noted the growing erosion of retailer power – proprietary control of the shoppers in the stores – primarily as a consequence of the growing access by every Tom, Dick and Harry, from outside the store via smart phones. And that is a two way conversation between YOUR shoppers, including photos and videos, from inside YOUR stores, potentially with your most threatening competitors. Get over it, and respond intelligently, or you WILL be toast.
Relative to the present discussion, I was told years ago, back when e-commerce was young, that a number of major brands were pooling their efforts to create a cooperative brand online store, but that some major retailers threatened to break their arms and cut their legs off at the knees if they did this. Rumors, Rumors! Stuff and piffle!
Then, a half dozen years ago, recognizing the growing Convergence of Online, Mobile and Bricks-and-mortar (COMB) retail, I began to lay out a scientific response for retailers to online, in a presentation titled “The Amazonification of Walmart.” This ultimately led to the very prescriptive “Selling Like Amazon . . . in Bricks & Mortar Stores!” Five specific steps were identified, none of which seem to be characteristic of Walmart, who continues to operate, mostly, very large, maze-like stores, with no particular focus on what the mass of their shoppers SPECIFICALLY focus on.
Somewhat surprisingly, I found that Costco actually DOES sell in a manner amazingly like Amazon. I shouldn’t have been surprised that Costco is NOW the #3 GLOBAL retailer, but it now makes sense. My most recent views, “Retail ‘Spoons’” details some ways in which brands might be especially helpful to their bricks retailer partners through what I refer to as “down-stream just-in-time (JIT) inventory” management.
I really am bullish on bricks retailing, given its probable dominance globally for some time to come-in spite of the creative destruction of more than one bottom tier retailer – and a few at the top! In fact, the convergence mentioned above leads me to think more seriously of the “Walmartification” of Amazon! Just to tweak your thinking, what if Amazon ends up operating 100,000 neighborhood communal pantry stores – aka delivery facilitating warehouses – globally? Actually, I’m bullish on both Amazon and Walmart and use the terms of Amazonification and Walmartification as laudatory terms of endearment! 😉
Shopping online can appeal to the shopper visually. It can appeal to the shopper audibly. It can even garner an emotional response. However, you can’t touch, smell or taste a digital image. Being able to appeal to all five senses is an advantage that brick and mortars will always have and why they will never disappear. That’s not to say that brick and mortars don’t need to make adjustments to take advantage of new technologies in order to compete with alternate channels. However, they should focus on their strengths in creating immersive experiences for their customers while being strategic about how to integrate online opportunities.