As the retail industry builds more springboards to vault the middleman, consumer packaged goods (CPG) companies find themselves looking to shift from a wholesale to a retail mindset to increase brand awareness, get closer to their consumers and drive profitable growth.
Across the retail landscape, online sales are continuing to rise, while store-based retail sales have stagnated. EMarketer expects the compound annual growth rate for retail e-commerce sales between 2015 and 2020 to be 11.7%.1 (See Exhibit 1.) The shift is even more dramatic at individual retailers: Growth in e-commerce in the fourth quarter of 2015 was 34% at Target and 30% at Kohl’s, which reported a 52% increase in its online penetration rate in 2015. Walmart saw a 22% annual increase in e-commerce last year. The trend looks to continue in grocery and CPG, where the estimated 2012 to 2017 compound annual growth rate for U.S. retail e-commerce sales is 17% for food and beverage and 14.2% for health and personal care,2 according to Statista. While retailers have recently been the ones to capture much of this growth, the case for manufacturers to go direct-to-customer is growing stronger. As has already been proven in other retail segments, by leveraging a direct channel, manufacturers have the opportunity to gain total control over how their brand is presented to and interacts with each consumer, and they can better understand and respond to her needs through access to new analytics and usage data. Additionally, they can drive more profitable growth than they have historically achieved in the traditional model of wholesale pricing and store-level promotional dollars.
For many brands and manufacturers, a direct-to-consumer model is their first foray into e-commerce. Accompanying this new channel of distribution is a set of complex business decisions and challenging analyses: which products to sell online and in what formats, how to fulfill consumer orders profitably, and which peripheral marketing components and purchase perks will best support growth and consumer satisfaction. And fulfilling directly has its own operational complexities that are also new for many manufacturers, from talent acquisition to e-commerce infrastructure to supply chain fulfillment—a brand-new operating model must be built parallel to the wholesale model. With such large hurdles, it’s no wonder there’s been minimal growth of direct selling in the CPG space, with only 47% of vendors selling direct-to-consumer through their own e-commerce sites in 2014. This is just a moderate uptick from the 41% who, in 2012, said they expected to sell directly to consumers within the year,3 according to Retail Systems Research.
With the promise of significant margins and customer connections, now is the time for CPG companies to lay out their strategies and determine how big a pole is needed to vault the middleman before making their direct-to-consumer investment decisions.
DECIDING TO TAKE THE LEAP
Delivering branded packages to individual consumers is a fundamentally different proposition from transporting pallets to retailers’ warehouses. Beyond the physical movement, most CPG manufacturers simply don’t have the supply chain capabilities, in-house experience or operational models to meet consumers’ needs. The ramifications of this shift invariably add new channel requirements to sales and operations planning, demand planning, item packaging and manufacturing.
Indeed, the same was true when retailers first embarked on e-commerce in the late ’90s. Fortunately, this means there are examples of what has worked and also of where the process can be refined. In the early days of e-commerce, retailers who quickly ramped up their direct-to-consumer fulfillment channels often took a ready-fire-aim approach of “What can I enable first with what I’ve got on hand or nearby?” rather than “What supply chain transformations make sense to my business and my customers?” They leapt before they looked, and profitability suffered.
CPG manufacturers can leverage the lessons from prior generations to build a profitable direct-to-consumer engagement strategy by segmenting their target consumers and identifying the capabilities necessary to engage with them across all touchpoints. From there, the direct-to-consumer fulfillment strategy will need to integrate with the broader business strategy and evolve continually to achieve profitability. (See Exhibit 2.) As CPG companies undertake these initiatives and create a cycle of engagement and refinement, they’ll find that the ability of their supply chain to serve as a business catalyst will grow with each cycle.
Going direct requires a compelling, personalized experience that is powerful enough to attract consumers to a manufacturer’s website and encourage return visits for future purchases, product releases and brand-related information. Brands are competing against sellers like REI, Best Buy, Amazon and the local grocery store in the user experience; if they’re not equivalent to or better at engaging with their consumers’ needs, they’ll never gain traction.
With the ability to deliver orders to doorsteps, manufacturers will have access to an enormous new set of data to help drive this engagement and experience. Historically, manufacturers have had a wealth of global consumer research but lacked valuable insight on local customers and their purchase decisions. The data that will be available when manufacturers go direct extends beyond zip codes and psychographics. Consumer purchase data will come from one-to-one purchase decisions rather than POS transactions: Who buys what, how much, how frequently and what triggers each of her purchases? How much does she buy at a time and what is the re-order or new purchase rate? And with each order fulfilled, new analytics can be developed to identify the influencers for those purchase decisions that the brand can then leverage to improve future product, engagement, merchandising, packaging, delivery and pricing.
Many manufacturers have claimed4 to already be working on defining those purchase triggers so they can be in front of customers when that buying point hits: Ninety-five percent of consumer decision making is unconscious,5 according to Harvard professor Gerald Zaltman. The successful CPG companies that go direct will leverage analytics to be “present” in the consumer’s mind precisely at that key trigger point—when the last roll of toilet paper is used or the low-battery light flashes on the game controller—so that they can break customer habits to push him to go to his mobile device and order a replacement rather than adding an item to the grocery list. The most successful CPG manufacturers will connect to their consumer in ways that push him beyond an immediate purchase to show him opportunities to refine future online purchases by presenting complementary items, delivery options, repurchase alternatives and logical adjacencies (similar to the grocery aisle) to reinforce that new buying behavior. Dollar Shave Club did this to famous success when it started selling low-cost razor subscriptions online in 2011. In 2015, its 2 million customers were valued at $615 million.
ENABLING DIRECT-TO-CONSUMER SUPPLY CHAINS
Brands understand that there is a major distinction between shipping a bulk wholesale order and fulfilling an individual e-commerce order, and they see the changes in their supply chain as a major barrier to selling direct.
Unlike traditional orders from retailers, who purchase product in bulk, going direct-to-consumer means filling orders with a smaller quantity of units per line and a variety of lines per customer order. To make the shift from being a wholesaler to being an e-commerce retailer, brands must build a new operating model parallel to their wholesale model. Inventory planning and management become infinitely more complex, as does the supporting fulfillment network and technology infrastructure.
Many retailers offer an endless aisle assortment strategy. To minimize inventory carrying costs while meeting consumer demand, these retailers have required that their manufacturing partners fulfill drop-ship orders. In recent years, this practice has crept into multiple retail categories, from apparel to electronics to home improvement, with manufacturers building direct capabilities. In the CPG space, though, the typical grocer has yet to leverage its supplier partners to build similar capabilities. Consequently, manufacturers who make the leap will do so of their own initiative. Since these each-pick requirements can have drastic implications for a manufacturer’s distribution cost, packaging requirements and service support, savvy manufacturers will take a strategic view of these capabilities. Since going direct is initially focused on brand building and customer engagement, brands must create fulfillment capabilities that successfully build the brand—the quality of packaging, premium service and value-added services that align with the brand’s image. In addition, the service offer will have to be aligned with the marketing messages and purchasing triggers to drive consumers’ buying behaviors. It is critical that fulfillment centers be optimized to enable profitable consumer engagements with a flow that supports both the brand and the purchase triggers defined in their customer engagement strategy. For some items, this may mean fast service (i.e., batteries for the game controller or printer paper), while for other items it is about delivering reliable replenishment on a predefined or scheduled basis (i.e., toilet paper, dog food and diapers).
Once manufacturers decide to go direct, they must also adapt the customer service team to effectively provide service to the new consumer-direct segment. Whether it be a retail procurement analyst or a consumer calling to inquire about the status of an order or asking a specific product question, manufacturers need to be prepared to answer each and every query. Those manufacturers who consolidate all customer care–related questions under one department will gain a 360-degree understanding of their customers and will be best positioned for long-term success.
ENABLING PROFITABLE GROWTH
The cost-to-serve for selling direct is much higher than for traditional wholesale channels, but the upside potential is huge, and not just from the margins of selling in retail vs. wholesale. Manufacturers who split their sales among direct-to-consumer and retail buyers can reduce the amount they spend on in-store promos and on allowances made to retailers for markdowns and returns.
Initially, engagement-driven direct-selling efforts may be seen strictly as marketing or awareness initiatives that do not immediately translate to top-line sales or bottom-line profitability. In fact, they will likely be viewed as cost centers. But as brands engage directly with consumers, those engagements provide access to consumer-level data that can drive loyalty, increase sales and eventually increase market share. Manufacturers who can harness consumer data and new technology to identify pain points (convenience, cost, etc.) and then develop personalized one-to-one retailing experiences and product enhancements will develop an incredible competitive advantage.
The most crucial stage of enabling this new direct-to-consumer channel is when manufacturers eventually build out their cost-to-serve knowledge to strategize and then execute tough tradeoffs in pursuit of sustainable, scalable, consumer-centric revenue and profitability. To inform these decisions and how they are applied to various buyers, successful manufacturers will need to assess the lifetime profitability of each consumer—rather than the profitability of each transaction. They will reject the peer pressure to compete on others’ business terms in favor of acting in their own and their top consumers’ well-informed best interests. It will be critical to strike a careful balance between direct-to-consumer and wholesale demand, knowing where the manufacturer stands compared to their competitors from each channel and how to move forward from their current position.
For some products, direct manufacturer delivery may never make sense. Even Amazon has stopped letting customers order a single lightweight package of pens; the cost to get that product to the customer just doesn’t justify creating that availability.
And for others, the data analytics that inform on consumer pain points will enable profitable, tailored service for targeted groups of consumers within specific demographic sets and geographies. For instance, pet owners in urban areas don’t like carrying 20-pound bags of dog food home from the subway station; 19% of urban dog owners have pet food delivered, compared to only 12% of dog owners overall,6 according to Petfood Industry.
The direct-to-consumer business model for CPG manufacturers has gotten off to a slow start. We anticipate that future investments and additional capabilities will be rolled out in ever more capable release cycles. While we don’t expect the return of the milkman or door-to-door vacuum cleaner salesman, we do anticipate that larger brands will become more invested in online retailing with a rationalized assortment, enabled by innovative purchase options and new partnerships. Customer acquisition and data analytics can provide enough motivation to incent many wholesalers to enter the fray and begin the transformation into becoming e-commerce retailers. We expect the entire model and landscape to continue to shift with the intro-duction of new fulfillment nodes; innovation in consumer purchasing options, replenishment triggers and delivery models; the availability of new shipping methods; and the refinement of consumer engagement strategies.
The value from start to finish in this journey will continue to be consumer engagement and data analytics. The best manufacturers will revisit and refine their customer engagement strategies based on learnings from each stage, and they will do so frequently to ultimately enable higher profitability.
28 April 2016