Article What you need to know about CPG companies going D2C Looking at the impact on the future of retail & CPG… 20 Apr 2018 — 5 min read The Team Elixirr https://www.elixirr.com/wp-content/uploads/2018/04/What-you-need-to-know-CPG-to-D2C.mp3 The retail industry is going through major disruption as more and more innovative consumer packaged goods (CPG) brands are jumping on the direct-to-customer (D2C) e-commerce bandwagon. Given the potential for higher margins, along with direct access to consumers and their data, D2C presents a mouth-watering opportunity many leaders want to explore. At the same time, they also have some reservations around the D2C model, like constraints around existing retail relationships for example. I believe many of these can be overcome. Before we address how, let’s start by taking a look at some of the key category trends in the CPG e-commerce business. What’s trending in CPG? The D2C trend (and e-commerce in general) continues to grow, proving that these models are here to stay for the foreseeable future. From a broader e-commerce perspective, online sales will account for 10 percent of all CPG sales by 2022, according to a recent report from IRI, up from just 1.4% in 2015. While the food and beverage component of CPG will slow this growth down (marginally with 5.5% estimated growth), IRI forecasts 18% of sales of non-food CPG products going online by 2020. Research conducted by 1010Data in the USA highlights health supplements, pet care, laundry, dish and cleansers as the fastest growing online sales CPG categories: Health supplements are the biggest online category. With $2.6 billion in sales, health supplements were 25% of total CPG online sales. Pet care grew 67% year over year. As one of the biggest categories online, pet care is the fastest-growing category among those with at least $500 million in sales, driven by specialty pet care sites with brands like Chewy and Foster & Smith which focus on natural products. Laundry, dish and cleansers are growing significantly amongst the relatively smaller categories, due to pantry box and subscription models. A significant portion of D2C success stories in the market are startups, and large CPGs have a lot to learn from them. Startups are able to embrace an entrepreneurial culture and are faster than established CPG companies in moving from ideation to implementation, learning and changing the way they do business at a rapid pace. While this doesn’t mean these established companies cannot successfully make the move, the reality is they will face significant challenges designing and adopting new digital marketing, supply chains and financial processes that are characteristic of the D2C model. That said, the risk of not going D2C is significant, especially for certain categories. For example, before being acquired for $1 billion in 2016 by Unilever, Dollar Shave Club forced P&G’s Gillette to respond by launching their own D2C offering. Unfortunately, it was too late for P&G. The Dollar Shave Club gained 5 points of market share in 2016, while Gillette lost 12 points. As Sri Rajagopalan, VP of e-commerce & Digital Sales at Johnson & Johnson mentions in his blog D2C: the why, why not & what…“Acknowledge that smaller brands that have struggled to incubate on shelf can do this easily now as there are limited barriers to entry.” Why are CPG leaders concerned about going D2C? Finding leadership with the right skills and mindset is a concern in itself. For an established CPG, the road to D2C success starts with having a dedicated, influential, and entrepreneurial leader who is experienced in how startups operate and is capable of driving change across the larger organization. “Keeping the D2C business internally separate beyond the established business structure is critical for success, especially during the initial stages of D2C growth,” says Danson Huang, Head of Royal Canin (a division of Mars Inc.) D2C China. He adds, “This way, the D2C team can have enough freedom to deal with its unique challenges of finance, supply chain, marketing, an independent P&L, along with the cooperation of supporting functions. Therefore, the leader of a new D2C business in a large corporation should be a true entrepreneur who knows how to build a new business, an outstanding team, and knows the most effective operating procedures. Cross-functional communication skills are critical to build a better operating model within an established organization.” Damaging existing retailer relationships is of chief concern for CPG executives, especially in developed markets where retailers control the pulse of the market and the relationships with consumers. I believe, however, that it is actually an opportunity for CPGs to further improve their retail relationships… “Imagine a business model, where the retailers don’t even need to have any inventory or cashflow, and they can focus more on their strengths around trade management of end customer promotions.” There are several potential tactics, starting with continuing to fund the programs that drive traffic to retail stores. But this can now be done more effectively and innovatively with the quality of data and insights that D2C generates. Secondly, D2C CPGs can share selected data insights with their retail partners in order for them to make smarter decisions. This would enable better customer satisfaction across the value chain and more strategic investments in trade activities that produce positive returns for both trading partners. Finally, and most importantly, if you are still thinking that going D2C may hurt your existing retail relationships, you have probably not yet realized the real value of your end-to-end value network. With dedicated entrepreneurial leadership, executive management support, a little creativity and collective trust, there is more value and less effort for both CPG and retailer partners collectively across the D2C value chain. You may even consider sharing a percentage of future D2C sales with the retailer that you originally acquired the consumers from. Simple solutions like multi-layer quick response (QR) codes, for example, can enable tracking and sharing data between the trading partners. Huang notes, “Imagine a business model, where the retailers don’t even need to have any inventory or cashflow, and they can focus more on their strengths around trade management of end customer promotions”. That said, going D2C is not suitable for every, product, brand and category. Organizations need to be mindful of the trend and its impact at the same time as asking themselves “why would consumers prefer to buy directly from us?”. Starting by identifying a differentiating need, and then considering how the answers may vary by product category and by geographical region, are the first steps in going D2C. I will answer these questions along with the valuable insights CPGs can generate with D2C data in a series of forthcoming blogs. It will be interesting to see who reacts to the trend – who will go D2C next and who will be left behind..? This article was originally published by retailsector.co.uk.