Q: What do Jessica Alba & Pepsi’s CEO have in common?

A: They both love e-commerce and are leaders in the online CPG revolution.

It’s time for all CPG leaders to fall in love with e-commerce too.

E-commerce now accounts for 15.7% of all retail expenditure. Over the next five years, GlobalData forecasts that offline sales will increase by 11.3%, while online growth will increase by an impressive 35%.

Americans will spend over $100 billion on food-at-home items by 2025. A quarter of U.S. households currently purchase a portion of their groceries online, a figure that’s expected to rise to 70% in the next ten years.

In short, CPG companies must focus on e-commerce for long-term success.

It is helpful to look to industry leaders for best practices in this flourishing channel. For inspiration, we will take a look at a startup success story and a company founded in 1898.

The New Kids on the Block: The Honest Company

In many ways, The Honest Company serves as the poster child of success for today’s CPG startups.

Founded by actress Jessica Alba in 2012 as a monthly online subscription service for nontoxic diapers and household essentials, the wellness brand has achieved incredibly fast growth, going from $10 million in sales in its first year to $300 million in 2016.

For the first few years of its existence, The Honest Company only sold its products direct-to-consumer via its website. The brand expanded into physical stores midway through 2014, however, and has experienced equal success in the offline world. As of 2017, 50% of its revenue comes from e-commerce, with the other half coming from in-store sales.

For CPG companies who have traditionally operated in brick-and-mortar, it is helpful to look at an e-commerce- launched brand like The Honest Company for inspiration on how to succeed.

D2C Model

Within the CPG industry as a whole, there has been a significant increase in direct sales over the past five years. From a consumer perspective, the top three factors driving purchases on direct-to-consumer channels are value for money, convenience of delivery, and curiosity to try something new, according to GlobalData.

As Supply Chain Dive mentions, this increase in direct sales also reflects a growing trend of brand manufacturers avoiding traditional retail channels, especially as brick-and-mortar sales decline. Today’s consumers demand a seamless buying experience, but products sold in-store are outside of the manufacturers’ control and may not be positioned ideally. By cutting out the middleman and selling direct, companies can create and execute strategies about how to best meet their specific customers’ needs.

Subscription Services

Subscription services are growing in popularity with consumers, who are increasingly looking to experiment with curated selections of unique yet affordable products. In fact, 55% of 25- to 34-year-old Americans say that they currently purchase beauty and grooming products via subscription. That is over nine times the percentage of 55- to 64-year-olds who say the same thing, suggesting that this trend will continue to increase with time.

The lesson? All CPG companies should explore a subscription model for their products. Mondelez even created the “Oreo Cookie Club,” which allows users to have Oreo cookies delivered to their doorsteps on a three-month, six-month or annual basis. By offering a subscription option, CPG brands can delight their consumers and command a premium price through the added value of the service.

Brands also can benefit by including new products, samples or items from partners in each subscription box. This approach can assist in expanding products to new audiences.

The Old Guard: PepsiCo

PepsiCo, founded in 1989, is one company that’s taking the necessary steps to fend off any beverage equivalents to The Honest Company. It has made a conscious decision to change with the times, offering consumers the products they want, whenever they want them, and however they want them delivered.

Pepsi is accomplishing this in a variety of ways, but the most dramatic is a complete overhaul of how a traditional Pepsi product exists in the e-commerce channel. The company is reshaping the form, function, packaging and fulfillment of its products to be more e-commerce-friendly.

PepsiCo CEO Indra Nooyi said in an October 2017 conference call that the company is succeeding in e-commerce because of their operational approach. Pepsi views e-commerce as a distinct and separate channel. Nooyi says, “We’re addressing growth opportunities across e-Grocery, pure-play, urban grocery delivery, direct-to-business, and direct-to-consumer models.”

Dedicated E-commerce Unit

Pepsi has executed against this mission by creating a separate 200-person operating unit explicitly focused on helping online sellers market and package soda better. It is managing this unit more like a tech company than a traditional CPG firm – from how and where they work, to the risks they can take, to their compensation.

It is beneficial for any large CPG company to create a separate, unique operations team to focus on e-commerce.

As we move into an omnichannel world where all channels are blending, an independent group seems counterintuitive. However, traditional CPG firms are experts at brick-and-mortar retail. They need a separate team with a different structure and different focuses so they can ignore historical in-store best practices and optimize for online retail. A team of e-commerce-focused employees will serve as subject matter experts for the online environment and promote their learnings within the organization.

Expanded Digital Advertising

Pepsi is also shifting advertising towards digital media and understanding how to optimize its presence online: “Our strategy is about how to get the right clicks, so we move up in the search process,” Nooyi said. According to Food Dive, “Getting those ‘right clicks’ means optimizing existing platforms, like adding ‘buy now’ buttons – as well as digital content such as product descriptions, images, keywords, ratings and reviews across e-commerce sites.”

The hard work and dedication are paying off for PepsiCo, who is on pace to hit $1 billion in annualized e-commerce sales this year. That is double the rate from a year earlier. In a struggling U.S. soft drink market, a $1-billion increase is the difference between success and failure.

Nooyi summed it up perfectly at the company’s annual shareholder meeting in May: “E-commerce is shaping up to be the next great revolution in the food and beverage industry.” Pepsi is lucky to have a leader that has a vision of the future. That position sets Pepsi up perfectly for success in our new online CPG world.

All CPG firms should follow Pepsi’s lead and execute dedicated digital media strategies that focus on optimization of online advertising and e-commerce platforms. Nooyi mentions a long list of priorities, highlighting that there is no magic formula to ensure success. Digital is much more fragmented than traditional media and is constantly changing. Because of this, CPG companies need to listen to recommendations from the digital media companies and outside partners they work with, rather than focusing inward to develop best practices as they historically have.

Where do we go from here?

There is significant revenue to reach and market share to gain as e-commerce continues to grow.

Stephane Roger, Global Shopper and Retail Director at Kantar, says that “FMCG growth is slowing, but our data shows that people are looking for more convenience which can be met by shopping online. Grocery e-commerce, although currently small, is growing fast. We forecast it will grow to 9% of the market and will be worth $150 billion by 2025.”

To succeed at e-commerce, today’s CPG companies should focus on direct-to-consumer models, subscription services, dedicated e-commerce teams, and expanded digital advertising. Learn from start-ups, and don’t be afraid of looking at Big CPG’s innovation for inspiration.

Change is always uncomfortable, and this e-commerce revolution is no different. However, companies who don’t react to these fundamental changes will find it impossible to keep up with the online CPG world that is approaching fast.