CPG Retailing, Branding, and Manufacturing in the 21st Century
Looking around, it seems like every other day there is a new consumer brand announcing a $3MM Seed financing to launch a highly consumable CPG product across categories including feminine hygiene products, razors, snacks, beauty products, and so much more.
Incumbents tend to be stodgy and move slow, and they have not kept pace with the technological developments that consumers have embraced.
CPG e-commerce sales will represent the most rapidly growing consumer product categories sold online over the next 10 years.
A reluctance of large established brands — and their brick and mortar retailers — to significantly adapt to this digital age, is what allows these fledgling brands to quickly command noteworthy market share.
These CPG start-ups capitalize by owning the entire customer experience. It appears brands know how to give their target audience a shopper and customer experience they prefer. It makes perfect sense if you think about it.
Emerging direct-to-consumer digital retail models are efficiently disrupting the status quo by consolidating the CPG world (brands and manufacturing) with traditional retail. Owning the end-to-end customer experience enables these early-stage companies to gain serious momentum that threatens incumbents to the extent their legal teams come out.
The Forces of Vertical Integration Driving Consolidation of CPG and Retail
- The overhead costs of brick and mortar retail immediately hand over the advantage to digital retailers driving all or an increasing rate of sales volume digitally
- Vertically integrated CPG brands yield a much better margins at the unit economic level when they sell direct-to-consumer. The transaction for the CPG company is incredibly profitable when they’re selling at MSRP as opposed to wholesale prices
- Perhaps the most critical advantage vertically integrated brands have going for them is owning the customer experience. I don’t know about you, but I’m much more loyal to continuing my Apple experience, relative to my loyalty to Best Buy. In this particular example, my relationship and commitment to the retailer is not as trusted within the context of how I prefer to shop for and “consume” consumer electronics.
In order for large, established, incumbent retailers to adapt, they need to develop strong digital channels, and the time to do so was yesterday.
The threat this consolidation presents to the status quo is two fold:
- CPG companies need to think more critically, creatively, and strategically about how to drive sales volume through digital retail channels while owning more of the shopper experience and the much deeper customer experience.
- Retailers need to look in the mirror, and ask themselves if they can afford to take the risk of not doubling down on their digital capabilities. Retailers win when they provide customers with their preferred way to buy the products they love.
While CPG retail sales have been slower to gain e-commerce penetration, these relatively low levels are no indicator of future market behavior. Established players would be smart to heed the lessons of other disrupted markets that experienced rapid and devastating changes.