The Hidden Threat for CPG Companies

Last week I was invited to a roundtable with other CPG industry experts, and we were asked if we thought the competition for CPG companies was going to intensify or decrease over the next 12 to 24 months. My answer was similar to the other experts’, but I gave different reasons than many of them. After a few days pondering about the answer I gave, I realized that I was way off base. While other experts reasonably argued that competition would increase due to the pressure retailers create by promoting private label brands, I justified my answer saying that the raise of eCommerce would force CPG companies to develop skills and knowledge not currently in their repertoire, forcing them to compete in a field mostly foreign to them. Now I realize I was completely off. Let me explain why.

In my answer, I argued that the rise of eCommerce was causing four major trends to which CPG companies would have to react.

The Search for Authenticity

In the past few years, we have seen large brands (historically epitome of trust) losing out to smaller brands as consumers seek “authenticity”. A BCG study shows that between 2011 and 2016 in the US, larger brands have lost 3 percentage point in market share to smaller brands like Tito’s Vodka, Harry’s Razors, and Kind Bars. If that doesn’t sound like a lot, consider that it represents $22 billion in sales.
The problem for large CPG companies is that everyone with an Instagram account can launch a brand (see for example the brand Swish by The Fat Jew). As a result, large companies go out and “buy authenticity,” either by acquiring brands or hiring influencers. AT Kearney data show that M&A activity below $30 billion in the CPG space peaked in 2016 with $335 billion, dropping only 2% in 2017 for deals below. Meanwhile, Statista estimates the global Instagram influencer market size in 2018 will be $1.6 billion and that it will more than double in 2019 to $2.36 billion.

AT Kearney Analysis using Datalogic data: M&A volume and value over the years

Companies that pay-to-play in the world of authenticity have a tough road ahead of them. M&A deals can often jeopardize what made the brand desirable in the first place, and influencer marketing is still highly unaccountable, hard to measure, and heavily reliant on capabilities outside the company.

Consumer Expectations that Erode Margins

The next shift comes from the Venn-diagram intersection between the consumer and the channel. It is how the channel has shaped consumer behavior.
In April 2018, Jeff Bezos reported that Amazon Prime now has more than 100 million paid subscribers. Besides what it means for the business itself, this is critical for the way it’s shaping customer behavior. Prime members (me included) have learned not to pay for shipping and to be outraged when they have to wait more than 2 days to have something delivered to their home. Even if what you sell is not currently listed on Amazon, fast free shipping is the benchmark you are measured against.
The phenomenon only increases when customers order fast-moving consumer goods online and realize that there are better alternatives to their daily consumer annoyances. They no longer have to carry a heavy bottle full of liquid all the way from the supermarket. There is no more worrying about running out of toilet paper. These things can be delivered automatically. They’ll also never forget their usual purchases because their frequently purchased items will be in their face when they log in. E-retailers know this very well and have permanent first-purchase options; they know it’s worth it because once they are hooked, customers will go the extra length to qualify for free shipping: a whopping 48% of them will add items to the cart until they qualify for free shipping. It’s free, and they don’t need to carry it!

Actions Taken by US Digital Buyers to Qualify for Free Shipping, Q1 2017

Amazon Prime has an unbelievable renewal rate of 96% according to a Customer Intelligence Research Partners. While consumer expectations will only increase over time, so will last-mile logistics costs and eroding margins. E-retailers will try to pass the cost on to companies to make up for them.

Actions Taken by US Digital Buyers to Qualify for Free Shipping, Q1 2017

The Incredibly Competitive Virtual Shelf

The US Census report shows that e-commerce represented 13% of retail sales in the US, so CPG companies now need to compete within the “virtual shelf.” What many companies have failed to realize is that this virtual shelf is much more competitive than the classic retailer shelf negotiated through years of retailer relationships. Machine learning algorithms are cold-hearted mechanisms that reinforce the position of the first mover who gets more sales and in return gets pushed higher in search results, building an impregnable position. In this context, time and early investment have a compound effect that is hard to quantify since we are in the early stages of channel development. It is true that you can often buy ads to rank higher, but you are burning money in the process.
If companies are not investing in building capabilities while paying to be on top of search results, they are going to be in trouble. Companies need to learn to do online category management, think about keywords, descriptions, and meta-data, and shoot multiple product images to allow for a 360 view of the products and “secondary displays” in the e-retail space (banners, cross-merchandising and recommendations).
While most of the workforce is very familiar with traditional metrics like stock out and assortment, eCommerce experts are producing an incredible amount of content and continuously thinking about how to tailor their offers to specific customer needs and occasions in an effort to allow for “mass-customization.”

Photo by JJ Ying on Unsplash

The Impact of Technologies that Don’t Quite Exist (Yet)

ComScore predicts that 50% of all searches will be voice searches by 2020, and it’s not hard to believe considering that 40% of adults now use voice search once per day. With the rise of voice, it’s Amazon and Google that decide what gets in your customer basket. For example, when you ask Alexa to buy you an iPhone charger, you’ll get an Amazon Basics product and not an Apple product that costs 3X more. If the CPG experts are currently concerned about private labels, in the digital voice-powered shelf, private labels are the incumbents that large brands will need to displace.
And this is not even considering when your fridge becomes “smart” and Amazon delivery people will have the ability to get into your house to restock it or when Walmart will act on its patent to build a store inside your house. You’ll have incredible consumer loyalty because changing brands will be too much work. Customers will have to make their choice of brand once and never change it again.

Amazon Dot – Photo by Rahul Chakraborty on Unsplash

Where I Was Wrong

All of this makes sense, so why do I now believe I was wrong? The race has already started, and companies that are not currently making significant investment in this space and building capabilities won’t have a fighting chance against those who are taking a strategic bet by putting energy and resources in place.
What do smart investments and changes look like? Well, they aren’t trivial. These are serious changes that need to be carefully considered if they are going to be effective. Here are some of the primary considerations:

  • Organizational structures will need to change.
  • Exploration and efforts to drive future growth will need to be supported.
  • Growth, innovation, and testing funds will need to be allocated and protected.
  • The C-suite needs to obsessively track the progress of the organization against current trends.
  • The entire team needs to be pushed to break inertia and try new things.

These types of changes present some obvious challenges. Too often funds for growth and innovation are the first to be cut, and keeping (or expanding) them will require a shift in perspective. There is a clear conflict between short- and long-term incentives, and it can only be resolved if the Board fully supports a future-focused view.
To go back to the original question asked (will competition for CPG companies intensify or decrease?), I still believe it’s going to be challenging for CPG companies to be successful in the future because they are going to be fighting in a completely new field. However, I now realize the competition between them is going to be less, not more. Those who have failed to embrace these trends and changes are not going to be able to survive in this rapidly evolving scenario, and because of that, fewer players are going be left to conquer the available market.

Author: Paolo

Economist by education, marketer by profession, coffee roaster by hobby.