Most CPG brands have been late to the e-commerce party. Compared to other consumer product categories, CPGs are faced with overcoming a vast array of diverse challenges in the e-commerce space. Because of that, much of the industry perpetuates news that paints e-commerce in a “doom and gloom” light.
Regardless of the picture painted by the industry, e-commerce growth in the CPG space is a trend that shows no sign of slowing. However, your brand’s e-commerce success is not guaranteed, especially if you do not address some of the key challenges facing the industry.
Small CPG Startups Are Fragmenting the Market
The barriers to entry for CPG startups to get on the “digital shelf” are lower than the barriers to get on traditional food, drug, mass and convenience (FDMC) shelves — especially when it comes to marketing and distribution. This means that the gap between organizing an initial idea and successfully taking that idea to market has significantly decreased over time.
This perfect storm of positive environmental attributes, created by the Internet, has also forged a double-edged sword of increased global competition. This increased competition has not only led to more entrants into the market, but it has also further fragmented the product categories due to the psychographic-level targeted marketing that’s universally available from social media companies like Facebook.
CPG brands can adjust in several ways to accommodate this change in the competitive landscape:
- Analyze the market: This fragmentation of targeted product offerings by small CPG startups can be used as a market analysis. Traditionally, legacy brands had to use techniques like market surveys to find these new available opportunities.
- Acquire innovation: As new CPG startups find success with their targeted product offerings, legacy CPG brands can highlight these as possible acquisition targets.
Impulse Buys Can’t Be Replicated
E-commerce creates a habitual buying behavior for consumers that is less adventurous compared to shopping in stores. Since consumers are not walking past other brands in the aisles of FDMC stores, it’s harder for CPG brands to break their habits. Even though online search allows for enhanced discoverability, relatively few consumers use e-commerce to find new products. This is partly due to the overwhelming amount of product choices online, but it is also exaggerated by the algorithmic nature of search engines.
CPG brands can adjust in several ways to accommodate this change in the buyer behavior:
- Shift marketing paradigm: The intent of your marketing is still to intrigue and seduce consumers into being interested in a product, but now you need to use online marketing to encourage frictionless, immediate buying decisions.
- Invest in search engine optimization and marketing: Create a “new-age” impulse buying behavior by executing proven SEO and SEM strategies that make your products stand out from competitors in search results.
Unit Economics Don’t Make Sense
E-commerce has additional layers of costs that can hurt CPG unit economics compared to wholesale relationships with FDMC retailers. The sheer nature of CPG products being consumed quickly and priced at a relatively low level is counterintuitive to being able to absorb additional direct or indirect cost layers.
CPG brands can adjust in several ways to accommodate this change in unit economics:
- View logistics as customer experience: The biggest additional cost layer in e-commerce comes from the logistics of sending parcels to individual consumers instead of sending pallets to FDMC retailers. Logistics now becomes an integral part of the customer experience. Additional opportunities are available with optimizing packaging for e-commerce.
- Be like the club channel: Though unit economics might be skewed in current CPG product offerings, an easy fix is to increase pack sizes. Additionally, take a page from the successful club retailers like Costco and add variety packs for increased value perception.
Corporate Resources Are Misaligned
Compared to FDMC channels, e-commerce requires distinctly different corporate resources in order to be effective. Most CPG brands are fundamentally built with a corporate structure that is heavy on regional sales professionals. These sales professionals are tasked with building their market by handling sizable corporate accounts or distributors and utilizing “push marketing” methods. Unfortunately, this is the opposite of the corporate resources needed to handle individual customers, who require “pull marketing” methods.
CPG brands can adjust in several ways to accommodate this change in corporate structure:
- Leverage internal social media influencers: A sound pull marketing strategy requires social media influencers. Sales professionals who have been pushing on retailers can create value to brands by creating pull with individual customers on social media, acting as influences and brand advocates.
- Shift from outside to inside: As margins get squeezed from all angles in the CPG industry, brands need to cut costs in additional ways. With the growth of e-commerce, outside sales professionals will be needed less in the future. These sales professionals are usually paid more directly than inside sales professionals, and they also have added costs from travel that could be eliminated.
Product Attributes Don’t Allow for It
E-commerce creates an inherent hurdle for some CPG categories that have restrictive product attributes. These product attributes could be heavy to ship, large surface area, perishable, fragile or temperature-sensitive.
CPG brands can adjust to accommodate this restriction from product attributes:
- Think past pure-play: Most CPG brands think about e-commerce in the sense that items are shipped through a logistics partner like UPS or FedEx. This is actually just one side of the current e-commerce coin. The other side allows for essentially all product restrictions to be overcome. This is done through partnering with FDMC retailers that have click-and-collect capabilities and/or final-mile partners like Instacart.
Today, CPG brands can no longer avoid e-commerce and stay relevant. The vast majority of growth in the CPG industry is from the e-commerce channel. Though there are numerous challenges faced by CPG brands due to the digital shift, opportunities are also boundless for those that can adapt.
Joshua Schall, MBA has an 11-year background in the emerging and intersecting CPG/FMCG categories of functional food and beverage and nutritional products.
He currently is the owner of J. Schall Consulting, an Austin, TX-based boutique management consulting company that focuses on digital growth strategies for CPG/FMCG brands that range from pre-launch to portfolio companies with $500M in yearly revenue.
Joshua enjoys an active healthy lifestyle but still finds himself spending way too much time scanning social media and digital grocery aisles for new consumable brands.