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Analysis

What you need to know about consumer packaged goods companies going direct-to-consumer

The retail industry is going through major disruption as more and more innovative consumer packaged goods (CPG) brands are jumping on the direct-to-customer (D2C) e-commerce bandwagon.

Given the potential for higher margins, along with direct access to consumers and their data, D2C presents a mouth-watering opportunity many leaders want to explore. At the same time, they also have some reservations around the D2C model, for example, constraints around existing retail relationships. I believe many of these can effectively be overcome. But let’s start by taking a look at some of the key category trends in the CPG e-commerce business.

What’s trending in CPG?

In the CPG industry, the D2C trend, and e-commerce in general, continues to grow towards a point where these models are likely here to stay. From a broader e-commerce perspective, online sales will account for 10% of all CPG sales by 2022, up from just 1.4% in 2015, according to a recent report from the market research company, IRI. While the food and beverage component of CPG will reduce the average growth down marginally (with 5.5% estimated growth), IRI forecasts 18% of sales of non-food CPG products going online by 2020.

Research conducted by 1010Data in the USA and published in early 2017 highlights health supplements, pet care, laundry, dish and cleansers as the fastest growing online sales categories, amongst others:

  • Health supplements are the biggest online CPG category—With $2.6bn (£1.8bn)  in sales, health supplements were 25% of total key CPG category online sales.
  • Pet care grew 67% year over year—As one of the biggest CPG categories online, pet care is the fastest-growing among categories with at least $500m (£350) in sales, driven by specialty pet care sites with brands like Chewy and Drs. Foster and Smith which focus on natural products.
  • Laundry and dish, and cleansers are growing significantly amongst the relatively smaller categories, due to pantry box and subscription models.

A significant portion of D2C success stories in the market are startups, and large CPGs have a lot to learn from them. Startups are able to embrace an entrepreneurial culture and are faster than established CPGs in moving from ideation to implementation, learning and changing the way they do business at a rapid pace. While this doesn’t mean established CPGs cannot successfully go D2C, the reality is they will face significant challenges designing and adopting new digital marketing, supply chains and financial processes that are characteristic of the D2C model.

That said, the risk of not going D2C is significant, especially for certain categories of products. For example, prior to being acquired in July 2016 by Unilever for $1bn, Dollar Shave Club forced P&G’s Gillette to respond by launching their own D2C offering.

Unfortunately, it was too late for P&G, as Dollar Shave Club gained five points of market share in 2016, while Gillette lost 12 points. As Sri Rajagopalan, VP of e-commerce and digital sales at Johnson and Johnson mentions in his blog D2C, the why, why not and what: “Acknowledge that smaller brands that have struggled to incubate on shelf can do this easily now as there are limited barriers to entry.”

Why are CPG leaders concerned about going D2C?

Finding the leadership with the right skills and mindset is a concern in itself. For an established CPG, the road to D2C success starts with having a dedicated, influential, and entrepreneurial leader who is experienced in how startups operate and is capable of driving change across the larger organisation.

Danson Huang, head of Royal Canin (a division of Mars Inc.) D2C China, said: “Keeping the D2C business internally separate beyond the established business structure is critical for success especially during the initial stages of D2C growth,”

He added: “This way, the D2C team can have enough freedom to deal with its unique challenges of finance, supply chain, marketing, an independent P&L, along with the cooperation of supporting functions.

“Therefore, the leader of a new D2C business in a large corporation should be a true entrepreneur who knows how to build a new business and a team, and knows the most effective operating procedures. Cross functional communication skills of the D2C leader are critical to build a better operational model within an established organisation.”

Damaging existing retailer relationships is another important concern for CPG executives thinking of going D2C, especially in developed markets such as the UK where retailers control the pulse of the market and the relationships with consumers. However, I believe it is actually an opportunity for CPGs to further improve their retail relationships.

“Imagine a business model, where the retailers don’t even need to have any inventory or cash flow, and they can focus more on their strengths around trade management of end customer promotions.”

There are several potential tactics, starting with continuing to fund the programs that drive traffic to retail stores. But this can now be done more effectively and innovatively with the quality of data and insights that D2C generates. Secondly, D2C CPGs can share selected insights from their direct consumer data with their retail partners in order to help them make smarter decisions. This would enable better customer satisfaction across the value chain and more strategic investments in trade activities that generate positive returns for both trading partners.

Finally, and most importantly, if you are still thinking that going D2C may hurt your existing retail relationships, you have probably not yet realised the real value of your end-to-end value network. With dedicated entrepreneurial leadership, executive management support, a little creativity and collective trust, there is more value and less effort for both CPG and retailer partners collectively across the D2C value chain.

You may even consider sharing a percentage of future D2C sales with the retailer that you initially acquired the consumers from. Simple solutions like multi-layer quick response (QR) codes, for example, can enable tracking and sharing data between the trading partners.

Huang said: “Imagine a business model, where the retailers don’t even need to have any inventory or cash flow, and they can focus more on their strengths around trade management of end customer promotions”.

That said, going D2C is not suitable for every, product, brand and category. Organisations need to be mindful of the trend and its impact whilst asking themselves ‘why would consumers prefer to buy directly from us?’. Starting by identifying a differentiating need, and considering how the answers may vary by product category and even by geographical region, are the first steps in going D2C.


Sinan Gurman, principal at Elixirr, has over 15 years of experience in strategy, innovation and business analytics, working in consulting, technology and business process outsourcing functions.

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