A new report from The Boston Consulting Group (BCG) and the Grocery Manufacturers Association (GMA) warns that CPG companies that simply replicate brick-and-mortar strategies without tailored and effective digital capabilities face stagnation and market share decline.
“The Winner-Take-All Digital World for CPG” highlights that today’s CPG companies are facing a “winner-take-all world” in which about half the sales growth is coming from digital channels.
In this rapidly transforming world, the competition is quick and nimble and while it’s hard for big organizations to change quickly, CPG companies need to adapt the way they play – refocusing their efforts, organizations, and budgets toward winning in digital channels.
Analysis from BCG estimates that the difference between winning and losing for a $10 billion company with a 30% brick-and-mortar market share could reasonably reach $1.65 billion— approaching 20% of sales (Exhibit 1).
The report suggests that the most likely sector-wide scenario is for US eCommerce to average 5% of the CPG sales mix by 2018, or some $36 billion annually, which would represent about half of expected CPG sector growth overall (Exhibit 2).
According to Gabrielle Novacek, a BCG partner and a co-author of the report, CPG companies that assume their 20% off-line share will translate to a 20% online share are playing to lose.
“Winners get in early, with strategies and campaigns designed for digital, and they make the often-significant investments necessary to grab share and build an early lead. They stay out front and frequently increase their leads because sales rankings and eCommerce algorithms are self-reinforcing. Slower competitors are relegated to also-rans, a position from which it is hard to catch up.”
The report makes the case that major CPG players essentially need to start from scratch in digital commerce against a host of competitors, many of which have never even shown up on the brick-and-mortar radar screen – and where even small companies can be massive disruptors.
The report references emerging brands such as KIND which have taken significant digital market share – and as shown in our monthly FastMovers, KIND is the best-selling snacks brand on Amazon.
As the pace of change accelerates and first-mover advantages solidify, CPG companies that want to win need to take action – and quickly. Below we summarize BCG’s six key areas to focus on in the new digital world:
1. Gain Shelf-Space Prominence
While the number of available SKUs is theoretically endless in the online channel, the far more relevant consideration is the number of choices most shoppers actually see and the purchases they actually make.
For CPG manufacturers, entrenching their products on the first page of search results is critical, but getting there is a fundamentally different game than winning shelf space in a brick-and-mortar store. CPG companies need to understand how the drivers of each retailer’s unique algorithm can be influenced through manufacturer activity, and in turn focus their marketing and sales efforts on influencing those drivers.
For CPG brands online, out of sight means out of mind. And companies have much less control over where and how their products are displayed in the eCommerce channel.
2. Create a Strategy for Amazon
Just about every CPG company needs a strategy for working with Amazon, which has very different goals and operates by very different processes than manufacturers’ traditional retail partners.
To succeed on Amazon, CPG companies need to develop the right assortment strategy, put a priority on achieving high first-page rankings for their brands and products, create top product content, as well as continuously build good consumer reviews.
CPG manufacturers also need to rethink packaging and innovation for eCommerce and adapt their supply chain to keep up with Amazon’s expansion.
3. Develop a Capability for Click-and-Collect
BCG believes that the most important and most disruptive model for many CPG categories will be click-and-collect, under which consumers can order online or on their smartphones and pick up their groceries at a store, a dedicated facility, or a locker later in the day.
Geographic considerations and consumer shopping patterns indicate that the environment for the growth of US click-and-collect is ripe, a format that has already proven very successful in Europe. Several major supermarket chains and mass-market retailers—such as Kroger, Wal-Mart, Target, and Whole Foods—are piloting or building out click- and-collect services, and some big new names are entering the online grocery game.
As click–and-collect grows in importance, BCG warns it will be especially disruptive to categories that depend on impulse purchases because it often involves drive-through, rather than in-store, pickup.
4. Keep Up with New Models
CPG companies will have to not only concentrate resources on clear winners such as Amazon and the click-and-collect model, but also place early bets on other emerging models (such as Jet.com) to both develop shelf positions and gain intelligence and expertise.
Manufacturers need to establish positions in new formats and try to gain some scale and leverage as they manage presence and content across various platforms and partners, until they see signs of specific formats taking off and can reprioritize and increase their efforts
5. Retool Marketing and Media
To be effective at digital marketing, CPG companies need to do more than simply reallocate brand spending online. A big challenge for many, if not most, CPG companies is that that they do not currently possess the necessary skills and capabilities in testing and other essential areas.
Most need to transform their marketing functions, making the development of digital capabilities a top business priority, rewiring the organization accordingly, and significantly boosting learning-and-development programs to produce the needed skills. With digital channels and tools constantly emerging, marketing organizations must become more agile and quickly adapt to rapidly changing conditions.
6. Lead from the Front
To win online, leadership is critical. Tough choices need to be made on where to go, how fast to get there, what resources will be required for the journey, and which people and skill changes will be needed on the way.
Many companies are looking at the need to build a business that will be as big as 10% of their current business. This requires big bets, often with payoffs that aren’t immediately clear. It also requires conviction and knowledge and the development of an aggressive digital mind-set across the business leadership team.
Achieving a disproportionate prize—one that could be in the region of winning or losing 10% to 15% of a company’s revenues—requires aggressive effort, especially when you are most likely starting from behind.
In this new winner-take-all world, the report concludes that the competition is as quick and nimble as traditional players are deliberate. Though it’s hard for big organizations to change quickly, CPG companies need to alter the way they play—speed is an ally; hesitation means falling behind.
CPG manufacturers that want to continue to grow need to start refocusing their efforts, organizations, and budgets toward winning in digital channels now.
For further guidance on how to plan for success in the online channel in 2016 and beyond, check out Profitero’s new microsite where we’ve compiled our most popular on-demand webinars, insights and reports.
