by Tien Tzuo, CEO of Zuora.
Originally published in TechCrunch.
Consumer packaged goods are big business — valued at more than $2 trillion — with much of that market share dominated by CPG powerhouses like Unilever, P&G and Nestlé. These CPG leaders know a lot about packaged goods — a lot about how to manufacture and market and sell at scale. But, as is becoming more and more apparent, they don’t really know very much at all about their customers.
And this is proving to be a problem.
The issue is built into the category: The large CPG companies don’t sell directly to their consumers. They sell to retailers like Walmart, who then sell to consumers. So the CPG giants miss the whole direct-to-consumer relationship. They have no access to — or insight into — the people who actually buy and use their products.
And now they’re under attack by a new breed of digitally native, vertically integrated startups that are reinventing what it means to buy everything — from razor blades to toothbrushes to mattresses. Bonobos, Warby Parker, Birchbox, Harry’s, Casper… the list goes on. These guys are keenly interested in establishing smart relationships with their customers, and they are establishing flexible, recurring revenue-based business models to make it happen.
In this new environment, it’s getting harder for CPGs to grow as they’ve traditionally done. Look at P&G (owner of the Gillette razor brand) which lost 12 percent share of the men’s razor and blade industry last year, while upstart direct-to-consumer razor startup Dollar Shave Club claimed 5 percent of the market.
The big vendors can try to buy their way out of the problem — much like how Unilever eventually bought Dollar Shave Club. But in order to stay relevant, they’re going to have to embrace digital transformation and incorporate direct-to-consumer strategies into their own business model.
Here are seven strategies that leading CPGs can — and must — adopt to better engage with consumers in the digital age.
1. E-commerce. As recently as 2013, only about 3 percent of non-food consumer packaged goods was purchased through online sales. But online sale of consumer packaged goods is starting to pick up, and the CPG powerhouses are getting on board. In the 2014 Customer Channel Management Survey from McKinsey, which surveyed 50+ CPG leaders, e-commerce was “ranked as the second leading driver of change over the next five years.”
The potential for CPG online sales is only going to grow as e-commerce giants like Amazon increase their focus on the sale of groceries and personal care products with Amazon Pantry. In addition, CPGs can explore distribution to niche online retailers like Ulta or Drugstore.com, as well as individual brands selling direct to consumers online.
2. Social. Leading CPG companies are used to selling their consumer goods through the middleman of retail partners and rely heavily on in-store marketing to propel their brands. Startups, without the deep pockets of these CPG powerhouses, must look elsewhere to create their brands.
Consumers have changed — and the consumer packaged goods industry needs to respond.
Social is the solution. People have always looked to their networks for trusted recommendations, but now this old-school practice has met the digital age as consumers look to their online social networks for product suggestions.
Companies can use social platforms to spread the word and build their brands, while capitalizing on accessible platforms like YouTube to generate buzz. For example, Dollar Shave Club led a master class in social with their hilarious 2012 YouTube video introducing their brand: “our blades are f**king great.”
Just six hours after release, their entire inventory sold out and the video has gone on to garner over 4.75 million views. When done well, social is an effective (and inexpensive) way to connect directly with consumers to create accessible, and sought-after, brands.
3. Digital first. Brick-and-mortar retailers used to be paranoid about people coming into their stores and then finding cheaper things online. Now people are doing online research and using retail stores as showrooms. The digital influence has flipped the script.
Smart companies are using digital to create a brand, and a brand experience, rather than push products. For example, look at a company like Casper, which doesn’t promote itself as merely a mattress company, but rather a digital-first brand focused around the concept of sleep.
4. Subscriptions. The CPG industry is made up of products that people are always going to need, and that frequently need to be replaced. You know what this sounds like? An industry ready to be subscriptionized!
A subscription model isn’t just about the recurring revenue derived from repeat purchases; it’s a key to developing ongoing relationships. When your consumer becomes a subscriber, that establishes a relationship — and that foundation is one that businesses can build on and monetize.
5. Niche focus. We’ve seen CPG leaders cutting smaller brands and not seeking out new brands as they instead focus their efforts on a small number of core brands. For example, P&G announced last year that they were planning on divesting about 100 “non-core” brands in favor of honing their focus on 70 choice brands.
6. In-store technology. As consumers demand ever-improved shopping experiences (and the best deals), many retailers are looking to technology to enhance the consumer experience. This includes more prosaic options like price-checking stands, but it’s also transformative technology like Sephora’s Fragrance IQ, an interactive kiosk that uses tech to provide consumers with customized fragrance recommendations. And it’s also beacon technology: hardware that sends push notifications to targeted consumers. This means that RiteAid can send you discount coupons as soon as you enter the store.
7. Internet of Things. We’re just starting to see the potential of IoT, but already we can see that it poses a huge opportunity for CPG companies. As connected devices become more popular, they’re going to completely cut out the middleman, with washing machines ordering more detergent when they’re running low, or refrigerators placing a milk order.
In short, consumers have changed — and the consumer packaged goods industry needs to respond. The leading CPG Goliaths may not yet be fearing the advancing Davids, but they should be watching. The share shift to these direct-to-consumer brands is gaining momentum, and these upstart brands are collectively leading a movement.
If the CPG giants can ride the wave of digital transformation and adapt to the Subscription Economy, they will continue to drive growth while putting the “Consumer” back into “Consumer Packaged Goods.”
Learn more about getting closer to consumers and building happy customer relationships by downloading our free guide on Relationship Business Management.