As the notion of channel conflict subsides, consumer packaged goods companies who don’t elevate their digital game are playing to lose and a new study from a two industry leaders shows just how much.
Consumer packaged goods companies are facing a winner-take-all world in which about half the sales growth, even more in some categories and markets, is coming from digital channels. That’s a scary revelation for companies relying on traditional retail trading partners for distribution and vying for shelf space, but it is among the key findings in a new report from The Boston Consulting Group and the Grocery Manufacturers Association (GMA).
The report is provocatively titled, The Winner-Take-All Digital World for CPG and identifies four factors that are shaping the market for CPG companies. They include:
• The emergence of multiple business models, including a few that will be disproportionately influential. These include several models advanced by Amazon (such as home delivery and Prime) and click and collect, which has demonstrated success in Europe and is well suited to the lifestyle of busy and mobile U.S. consumers.
• Go-to-market approaches increasingly played by new rules requiring very new skills.
• Early-adopter consumers who are already settling into patterns of digital buying behavior.
• Success breeds exponential success which means once brands establish leadership positions online, they are tough to dislodge.
The study’s author’s envision a scenario in the U.S. where e-commerce accounts for about 5% of the CPG sales mix by 2018, or roughly $36 billion in annual volume. At that level, e-commerce will account for about half of expected CPG sector growth overall. As a result, companies that lack effective digital capabilities risk stagnation, share loss, or, in some categories, shrinking sales.
"CPG companies that assume their 20% off-line share will translate to a 20% online share are playing to lose," said Gabrielle Novacek, a BCG partner and a co-author of the report. "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 e-commerce 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. It is a fundamentally different competitive set, and even small companies can be massive disruptors. In category after category, many such new competitors have already discovered how to win and have created substantial leads, according to the study.
"This research shows that CPG companies must rethink everything from business models to marketing to supply chain in order to respond and stay competitive," said Jim Flannery, GMA’s senior executive vice president of operations and industry affairs.
The report lays out the basic digital building blocks for CPG companies and understanding the dynamics of the digital store is the first big step.
"The myth of endless digital shelf space is exactly that – a myth," said Bob Black, a BCG senior advisor and a coauthor of the report. "Consumers search for what they want online, they get offered a handful of top-ranking choices – which are determined by a sales or popularity algorithm – on a small screen, and, more often than not, that's what they choose from. Brands have to be present to win, and screen position has to be earned rather than bought."
A copy of the report can be downloaded at bcgperspectives.com.