How the Internet Is Changing Everything for CPGs

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Consumer Packaged Goods (CPG) companies have built their empires on their brand identities. But as more contenders join the fray, some new entrants are leading with a different foot forward … no brand at all.

We all know them. Consumer Packaged Goods (CPGs) products. They are the items you see at the grocery store—laundry detergent, soap, cosmetics, food & beverage, to name a few. The dominating brands include Coca-Cola, Proctor & Gamble, Colgate, Unilever, and Kraft.

Whether they are the staple products in our houses or the ones with which we grew up, traditional CPGs have provided the market with recognizable, everyday products that need to be replenished often. Many rely heavily on brand loyalty and recognition to drive sales and customer loyalty (think of that Coca-Cola soda can, Tide laundry detergent, or Maybelline mascara packaging that rarely changes). They’ve also traditionally thrived in grocery and drug stores.

But, today’s consumers aren’t as loyal as past generations and not as many are making trips to the store. Many consumers have started to turn away from brand giants in favor of new eCommerce natives that focus on lifestyle storytelling (think Dollar Shave Club) and lower-costs (made possible by removing the retail store middleman).

One thing is clear for CPGs: the future is online. In fact, 9 out of every 10 dollars in CPG growth sales came from online in the past year—demonstrating a major shift in how consumers get their everyday products.

What’s Different?

CPG companies, like many traditional retail businesses, were built for a retail market that is being upended by new technology and eCommerce. They made huge investments in radio and television ads and securing optimal shelf space in grocery store aisles.

But today’s emerging CPGs don’t need those. Low-cost online marketing tools and social media channels have enabled smaller rivals to quickly challenge the old model. The movement of goods is different than it was just a few years back. And, the rapid rise of online shopping and direct-to-consumer (D2C) fulfillment is reinventing how we shop.

Customers Are Everywhere

Fewer shoppers are making trips to the store and every year more shoppers rely on eCommerce for buying what they need. As a result, every brand and retailer needs an eCommerce presence to survive.

Most businesses know this, but the Internet has made retail complicated. Selling online means more exposure to more shoppers, but it also means managing logistics to cater to the demands of a decentralized audience. Doing that is no small feat. Inventory allocation is less predictable and more dispersed, and building the infrastructure that supports fulfillment requires time and money. All the while, companies have to keep customers top-of-mind and happy—no matter where they are.

Customers Have Expectations

Aside from how we buy, the reasons why we buy are changing, too. As consumers, we have high expectations for how we shop— regardless of the channel. If we’re in the store, we want good, smart customer service. If we’re online, we expect to be able to find what we need, check out quickly, and have options on delivery times and costs.

New, “startup CPGs” are branding themselves as lower cost, more convenient, and more trustworthy. By removing the middleman, they’re offsetting the third-party seller costs (grocery store, drug store, or online marketplace) and fulfilling D2C orders. In turn, this provides a new level of  transparency and cost-savings to shoppers.

Additionally, they’re customizing their messaging to consumers, meeting them on their social channels, building a lifestyle of which people want to be a part, and creating value for their shoppers.

Who Are the Latest CPG Contenders?

Startup CPG brands are entering the market with pure-play eCommerce and subscription-based business models.

And, they’re doing it with a twist. Some have embraced a non-brand approach that sell everyday products at cost, most notably Brandless and Public Goods. With packaging that’s not much fancier than the generic beer cans from the 1970s, these companies are betting on customers who don’t want to pay a premium for brand-name products. Those shoppers are also known as survivalists. Many are millennials who would rather pay off their college loans than worry about buying the same shampoo their parents did. In contrast, another group of shoppers known as selectionists seek out high-quality goods, for which they are willing to pay more.

Other startup CPGs are focusing on more niche product lines instead of having several mass-produced product lines. Products like Bob’s Red Mill and Annie’s Homegrown focus on authenticity and healthy ingredients to attract their target consumer.

Eliminating “branding”—or the nuances of one—and simplifying product lines are just two of the ways new CPGs are squeezing down costs to attract value-conscious consumers. Brandless and Public Goods are also cutting out wholesalers and retailers, which creates more savings. The supply chain is getting shorter and simpler, with fewer and fewer stops between manufacturing and the household.

How Can Other CPGs Compete?

For the established CPG retailers, implementing an online-only or subscription-based model is challenging—and probably not the right call. Even if they get it right, they may find that success means cannibalizing their existing business, and eroding the value of the brand they’ve cultivated for decades.

But the trend is clear. More and more sales are moving online, and the value of previously precious in-store real estate is weakening. Retailers themselves are under enormous pressure. As stores close, CPGs—of all shapes and sizes—need to find new channels to protect and increase their market share.

That means mastering the direct-to-customer networks that have allowed smaller brands to rise. Legacy CPGs will need to experiment more with digital marketing to reach and retain customers. For everyday consumable items—paper goods, detergent, deodorant—a subscription delivery model could save customers time and money, and perhaps appeal to new customers.

Shoring up their customer base is essential for legacy CPGs. Losing market share is bad enough. But worse still is the risk that entire product lines could become devalued if startup CPGs establish a foothold. Just as Dollar Shave Club (now owned by Unilever) threatens to reduce margins for a high-value brands like Gillette, there’s nothing to stop a low-cost, high-quality diaper seller from disrupting Pampers sales. Quality products, offered at cost, are an unprecedented challenge. Even if they can’t stop customer defections, legacy CPGs need to refine and modernize their own business models to keep competitive on cost.

Traditional Logistics Solutions Don’t Fit Today’s Business

Just as the traditional CPG business model may not work any more, neither will a traditional logistics solution. Many retailers and brands are realizing that a lot of the cost optimization needed to succeed can be driven by digitizing logistics.

Startup CPGs are cutting costs by circumventing placement on store shelves, but that means having an end-to-end logistics strategy for D2C fulfillment. From manufacturing to inbound delivery, from warehousing storage and fulfillment resources to last-mile delivery, every business needs flexible solutions to meet growing demand and changing buying behaviors.

Look for solutions that can grow with the demands of your business and solution providers that partner with you.

 

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// from Jordan Furdock at Net-Results