Only first movers are likely to survive as the digital realm continues to take over the physical, reports Nick Shanagher.
There is no longer any turning back. The American authors of The Digital Future: A Game Plan for Consumer Packaged Goods have abandoned the optimism of management guru Peter Drucker in favour of a future more in common with Franz Kafka’s surreal and nightmarish stories.
The report by a team from the respected Boston Consulting Group (BCG) and leading information company IRI was commissioned by the Grocery Manufacturers Association in the US. It has not received much airplay in Europe yet makes chilling reading.
The fast moving consumer goods (FMCG) industry has reached a point of no return, as rapidly growing digital sales suck up all the growth. Patrick Hadlock, the BCG partner who heads up the team of authors, says that consumers are using new tools that make shopping, cooking and commuting “quicker, easier, more fun and more efficient”.
The challenge for manufacturers, wholesalers and retailers is that this is “fragmenting the purchasing pathway, as consumers regularly switch back and forth between digital and physical channels and interact digitally both inside and outside of stores”.
Published last summer, the report suggests that being a first mover will be important in gaining “tough-to-trump positions and advantages”.
The 1-5-10 world
Digital penetration is only set to increase by 2020
In the next five years, digital’s current 1% penetration of FMCG in the US will rise to 5% and perhaps 10%, the report says.
This means companies without an effective digital capacity risk being left behind. The report urges FMCG manufacturers to invest in all possible channels because no-one knows who the winners will be. Large technology companies with lots of cash are building digital grocery businesses. Small start-ups are targeting profitable and defendable niches. And brands are at risk if consumers don’t see them on their new digital journeys.
“The winning models have yet to be established and it is likely that numerous models will prevail.”
Survival will depend on new strategies for marketing and supply chain partnerships. Big manufacturers have a choice of four organisational models to choose from, based on BCG’s experience. This suggests wholesalers will face further disruption in building relationships with their largest suppliers during the transformation.
Adding to this complexity is the latest BCG matrix of marketing initiatives that compete for investment along the route to market for a typical FMCG brand. This matrix includes more than 70 options that are all competing for time and money, ranging from point-of-sale QR codes (see page 27) to delivery tracking, and from demonstrations and tastings to viral networking.
What may make this more of a nightmare for the supply chain is that multinational operators have a habit of moving graduates around their business units, which means many of the decisions they make are strongly shaped by a consumer marketing focus.
That may not sound like a bad idea in itself but close examination of the BCG matrix shows many of the decisions need an understanding of trade marketing and how the wholesale and retail supply chain operates. And that is alien territory for many graduates in their 20s.
Business as usual
For wholesalers, but not for manufacturers
An assumption of the report is that the supply chain will again be configured by the manufacturer, after decades in which Walmart, Tesco and their ilk made the key decisions. This is business as usual for the wholesale channel. But the report advises manufacturers to hedge their bets.
Manufacturers need to invest in:
- Demand forecasting that includes digital data, such as products being added to users’ wish lists on mobile phones. This is in addition to point-of-sale data and may become more important. “We are already seeing such signals of the intention to purchase in other categories such as those in which baby and gift registries are used.”
- Flexible response times
- Better data sharing
- Better processes to distinguish between rapid turnover lines and slower moving inventory that needs to be held in a warehouse. If consumers have multiple ways of buying the product, manufacturers will want to avoid duplicate stockholdings.
This line of thinking extends into the sort of partnerships manufacturers will have with retailers. Joint e-commerce projects are likely and this is likely to see investment in bricks-and-mortar teams reduce.
“It is unlikely that an account manager for a brick-and-mortar retailer will have the requisite skills for Amazon or another online retailer.”
For example, in the real world, shelf placement is understood. In the online world, with its unlimited ‘real estate’, search rankings are often based on consumer preferences. How will these be influenced?
Similarly, new ideas are needed for navigation around virtual stores, touch and feel, and information. Then all of this needs to be aligned across channels.
Manufacturers need to prepare for channel conflict where assortment, pricing, trade rules and support differ. For example, they can differ pack sizes for stock-up, online sites and top-up shops.
The report captures at top level the sheer number of decisions that need to be made. While some businesses may choose to wait and see what others do and then follow, the sentiment of the report suggests that this is a strategy for losers.
…or retailers will be the ones who set the margins
If manufacturers don’t act, they risk letting retailers shape how e-commerce evolves and then set the margins. Dynamic pricing and consumers’ ability to receive real-time price comparisons will squeeze margins.
E-commerce also levels the playing field for niche brands. The clout that large trade promotion budgets gives FMCG companies with bricks and mortar retailers “doesn’t count” online. Consumer interest rather than trade spend drives “shelf” position.
For example, the list of top-selling breakfast foods on Amazon on a random day in May 2014 showed eight of the top 10 places occupied by a niche product. Only five of the top 20 places were held by a major FMCG company.
Similarly, Dollar Shave club has racked up more than 700,000 subscribers since launching in April 2012. FMCG companies will “find it difficult to dislodge entrenched front-runner products further down the road”.
Trade near-term profitability to gain market share
The report shows how new consumer behaviour is reshaping the market.
“Not so long ago, mom prepared a menu of dinners for the week, checked recipes in a cookbook, wrote out a list and went shopping. Today, more and more people receive menu suggestions daily on their computers or phones, order the ingredients online and have them delivered or pick them up already packed on their way home from work.”
It is illogical to think that consumers will continue to shop for the same goods in the same ways, the report argues. People will search online and the report recommends that all brand websites have an “add to cart” purchase option.
In the US, the big technology companies will drive progress. “We can count on Amazon to make sure that warehouse delivery models exist, on Google Shopping Express to expand store delivery and on Walmart to offer click-and-collect in more markets.”
Retailers are having to respond because they risk losing their best customers. Online shoppers spend more. For traditional retailers, losing just a single-digit percentage of revenue from a profitable long tail of SKUs puts a store into the red.
The economics of digital commerce are defined at the SKU level by a simple cost-to-value ratio. For FMCG, home delivery for single items starts to be feasible at a $20 to $30 price point subject to weight and stockturn. This is much higher than the price of most FMCG goods. But membership and delivery fees change the economics. Online retailers will target weekly replenishment and monthly stock-up shopping.
Using data from the UK, the report says that delivery costs eat up a third of sales for home delivery and a quarter for click & collect.
“But as order density rises, costs fall quickly and can be more than halved for high-density operations.”
In order to make the economics work, retailers need to make a series of trade-offs between pursuing near-term profitability and gaining market share. Do they focus on locations with high-density populations and high internet and mobile penetration? Or do they try to serve broader geographic areas?
While the report does not include assessment of the challenge for wholesalers, it presents both opportunities and threats. The 2015 strategic challenges are clear and plenty.