Thriving on disruption: Competing with the “Amazon effect”

This paper series explores the impact of digital technology and changing consumer expectations on the CPG value chain, from the Enterprise Resource Planning (ERP) to freight and logistics, and how those in the industry can afapt to thrive on change and win in this hotly competitive landscape.

Whether you’re shopping for a stepladder, clothes, pet food or a pair of shoelaces — anything you can name, really — it’s available for sale online. A quick search, a couple of clicks and a delivery is outside your door within 2 hours to 2 days. Six to eight weeks for delivery? Forget it.

This new consumer expectation has become known by many as the “Amazon effect.” But even if you’re aware of it, the degree to which Amazon and similar companies are driving this shift is still surprising. While online sales represent about 10 percent of all U.S. retail sales, Amazon sales account for an estimated 43 percent — and growing — of U.S. online retail sales. What’s more, Amazon is where half of U.S. online consumers begin their product search.

Even more sobering is the realization that these statistics represent the beginning of the transformation curve, not the end. As evidenced by the growing revenues captured by new entrants, online sales channels are expanding beyond the U.S. market, with established players that include Amazon, Jet and Alibaba. Retailers such as Walmart and Target are catching up, generating growing demand with channels of their own. E-commerce transactions through social media platforms such as Facebook and Twitter are growing in volume as consumers are presented with highly targeted products driven by sophisticated analytics.

The retail fallout from online shopping has been thoroughly documented — millions of square feet of empty retail space serve as evidence of its impact. But the implications for retailers and CPG companies reach well beyond the slick shopping sites and subsidized shipping costs that consumers now expect, extending to the very core of the industry. From product design, marketing and planning to manufacturing, fulfillment and shipping, every component of the CPG value chain is being pulled apart and reassembled to match the shift in consumer preferences and behavior.

The industry responds

CPG companies aren’t looking for condolences; they’re looking for answers. One thing is already clear: Customer intimacy matters. But more than just detecting trends and changes in taste, CPG companies need to be able to respond quickly and directly to keep customers interested and connected. New market entrants have built this kind of response mechanism into their DNA.

Frustrated by the high cost of razor blades, entrepreneurs Michael Dubin and Mark Levine launched Dollar Shave Club in 2011, offering consumers a low-cost, direct-ship source for personal grooming products. Never mind the billions spent on marketing to build brands such as Gillette and Schick. Dollar Shave Club’s disruptive innovation — value pricing, quality products and a convenient subscription model — made a rapid impression on the industry and customers. From its membership launch through 2016, the company amassed over 3 million subscribers.

Established CPG companies aren’t standing still either. They’ve realized that they can’t stay relevant if they remain at arm’s length from consumers. In some cases, the answer is to acquire those nimble startups, as Unilever did, purchasing Dollar Shave Club in 2016 for a reported $1 billion.

In other cases, the clearer path forward is to adapt and evolve to meet customer demand. Office supply companies are taking this approach, building the capacity to profitably deliver supplies in small quantities to homes and businesses. The same is true of companies selling perishable items and other lower-value, commodity items. No one is standing still.

Getting even closer to the customer

The challenge to CPG companies isn’t creating a channel to serve customers. CPG companies are already connecting to the most prominent demand aggregators, and many have established direct channels, too. The challenge is building closer relationships with customers, creating a deeper level of personal brand loyalty, doing it profitably, and essentially protecting decades of investment in product brand loyalty from emerging purchase and delivery models. Capturing and monetizing such loyalty-inspiring insights requires change that penetrates deep into the enterprise.

Every company has arrived at this new frontier from a different point of origin, which means each is left to seek its own unique path forward. But they do have one thing in common. Every CPG company has many of the solution components it needs to develop direct customer relationships. The companies just don’t know how to effectively transform and integrate the new as well as existing technologies to leverage their strengths.

Typically, CPG companies are organized to serve traditional channels built around enterprise resource planning (ERP) systems that support a traditional retail customer business model. The problem is: ERP systems can’t change at the rate the market demands. Each system has a distribution channel, but it’s structured to bill and ship by the pallet, not by the box. Each channel has extensive manufacturing capabilities, but they may not be located where the company needs them or flexible enough to switch from Product A to Product B as quickly as the company may now require.

CPG companies have sophisticated marketing capabilities with insights into brand loyalty and consumer behaviors. Often, though, those insights are based on market segmentation that can tell you what the average 30- to 45-year-old female would buy, or what the 18- to 24-year-old college male would buy. What they lack is the individual consumer intelligence that can predict what Susan or Brandon specifically will buy.