Shortly after most of the world adopted pandemic precautions in 2020, PepsiCo launched two new websites that allowed U.S. consumers to order deliveries of bundled food and beverage products from brands such as Quaker, Gatorade, Tropicana and Frito-Lay. The pivot to a direct-to-consumer model from one of the largest consumer packaged goods companies in the world was a great move but was undercut by poor website design, suboptimal pricing decisions, and the lack of insight into how and why consumers buy those products.
As the pandemic has created new customer expectations around digital shopping and delivery, much of the CPG industry is missing out on the chance to forge closer relationships with customers through direct-to-consumer business models and ownership of last-mile delivery. By the end of 2022, this could become a lost opportunity if CPG companies fail to look beyond simply overcoming supply chain disruptions and getting their products stocked on retailers’ shelves.
The opportunity is clear as U.S. e-commerce sales are expected to soar beyond $1 trillion in 2022. More than 60 percent of U.S. consumers already reported trying a direct-to-consumer brand in 2021, and 40 percent of U.S. consumers said that they would buy more DTC products and services even after pandemic restrictions have faded. That suggests the ongoing changes in consumer behavior are likely to last and create a new business environment for CPG giants and startups alike.
But most CPG brands still exist as just another product choice when consumers are browsing e-commerce sites and in delivery apps. CPG companies that cannot fulfill a bigger basket of consumer needs will find themselves adding less and less value in the eyes of consumers over time. Those with big-name brands cannot rely on reputation alone to keep their business-as-usual strategies going in the long run.
This is the pivotal year for CPG companies to change direction and stop their long slide toward irrelevance among consumers.
The Direct-to-Consumer Challenge
Time is running out for CPG companies to compete for the last mile of connection to consumers. On the one hand, smaller insurgent brands that have gotten closer to consumers are taking away the brand value advantage of traditional CPG players. On the other hand, retailers, quick-commerce startups, and any companies that have a last-mile presence are eroding CPG brand efficiency by offering their own private-label products.
Many CPG companies are already feeling increased margin pressure from their retail partners pivoting to e-commerce and asking for concessions on pricing. By the end of 2022, it’s likely that CPGs and other companies that have not already begun to move into this space will have lost their chance.
Major CPG players have tried their hand at direct-to-consumer models or building out delivery capabilities through partnerships and acquisitions, but many have been unable to gain more traction among consumers. Forrester’s 2021 Digital Go-To-Market Review of 29 major CPG brands found that just 14 had DTC-capable websites enabling consumers to buy directly from them. But even CPG brands with DTC capability have sometimes stumbled in the execution by having higher pricing on their websites compared to anywhere else—a strategy unlikely to win over consumers shopping for the best deals.
CPGs also face the growing threat of retailers and quick commerce players offering private-label products that compete for consumers’ wallets. Costco’s signature Kirkland brand has annual sales on par with all but the largest CPG giants, while other retailers such as Walmart and Target have found success by launching multiple private labels for different product lines. Instant delivery startups such as Jokr, Buyk, and GoPuff have also introduced private-label products while competing fiercely to own the last mile space.
Certain CPG brands are especially well-positioned to pivot to a DTC model and last-mile delivery. The Enfamil brand of infant formula products made by Mead Johnson under CPG giant Reckitt Benckiser is a category leader with the favorable unit economics to pull this off. Not coincidentally, Enfamil was highlighted by Forrester as being “best-in-class” among the CPG brands that have a DTC-capable website.
For comparison, Procter & Gamble’s Tide brand of cleaning products is also a category leader but may face greater challenges because of having less favorable unit economics for the DTC model.
The Incredible Shrinking Brand
As the e-commerce market grows, CPG giants must also shift their focus away from their big “cash cow” brands and develop or invest in smaller, high-margin brands that fulfill a specific consumer need. The rise of e-commerce has reduced barriers to entry and made it even easier for smaller brands to compete with established CPG names in reaching out to consumers.
This trend is exemplified by DTC brands such as the subscription-based Dollar Shave Club eroding the market share of traditional brands like Procter & Gamble’s Gillette. Instead of clinging to the shrinking billion-dollar brand business, CPG leaders will need to start thinking of their companies as large collections of multiple $250 million brands fulfilling specific consumer needs.
This will require significant reorganization around a more local and less global strategy, along with having the organizational capability to more nimbly respond to evolving consumer trends and to experiment more quickly with new products. The smaller brand offerings will need to span the entire value chain from manufacturing through close-to-consumer services.
One notable example of this model in action is L’Oreal’s luxury cosmetics distributor Lancome partnering with retailers like Sephora to launch a premium foundation product under the brand Le Teint Particulier in 2016. The personalized premium foundation is customized according to a color-matching algorithm and skin tone measurements before being mixed on-demand in stores, while refills are shipped directly to customers’ homes.
Moving Closer to Consumers
For most CPG companies, time is running out quickly before retail giants, tech startups, and nimbler competitors eat their lunch. Getting closer to consumers will require considerable investments in e-commerce platforms and expanded supply chain networks, but the alternative for CPG players is to stand idly on the sidelines while everyone else rushes toward the goal line.
This may require CPG brands to also rethink the nature of their own packages and products for the DTC model. As McKinsey points out, one notable manufacturer of laundry products redesigned its laundry detergent by removing the liquid component to make it friendlier for e-commerce handling and shipping.
But the most significant change required is one of leadership mindset toward the DTC model and away from the traditional focus on billion-dollar brands, followed by a reorganization of CPG companies that prepares them for the post-pandemic future. Consumer habits have already turned the corner—now CPG leaders will need to catch up and get ahead on evolving consumer expectations of their relationships with brands.
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