Industrial Engineering

Direct-to-Consumer Strategies for CPG Manufacturers

https://www.iise.org/iemagazine/2019-01/html/gopal/gopal.html

ISE Magazine January 2019 Volume: 51 Number: 1

By Gurram Gopal and Inés de Madariaga Azcuénaga

Consumer packaged goods (CPG) are purchased items that consumers need to replenish frequently, such as beverages, packaged foods and household products.

Before 1930, packaging and marketing did not play an important role in bulk deliveries as households bought items daily from these small stores. The first direct-to-consumer approach appeared at the beginning of the 20th century when manufacturers such as Avon began sell-ing beauty products door to door with housewives as the tar-geted customers. Door-to-door selling techniques experienced a rapid decline after 1980 when women joined the workforce in larger numbers.

In recent years, the CPG industry has struggled to sustain growth with sales flat between 2013 and 2016. Large manu-facturers have focused on cost-cutting and trimming brands while seeking new avenues for growth. The appearance of e-commerce channels, the strengthening of powerful retail-ers and changing customers’ needs and priorities inevitably led CPG manufacturers to reconsider their strategy and adapt to new market trends. Direct-to-consumer (DTC) sales is a promising avenue for appropriate manufacturers to drive growth in the e-commerce driven marketplace.

CPG consumers are demanding more

The CPG industry is facing several challenges, including shift-ing consumers’ preferences, the appearance of disruptive com-petitors in the market and development of new distribution channels. Digital consumers are increasing, and according to McKinsey and Co. “as much as 30 percent, or $50 billion, of the CPG industry’s sales growth in the next five years will come from online.”. According to a study by the marketing and analytics firm IRI, 20 percent of consumers say it is easier to find needed grocery items online.

Consumers are also active on social media. Recommenda-tions from people they know or from online platforms such as YouTube, Instagram and Pinterest influence purchase decisions of most millennial consumers. Therefore, companies can use social platforms to boost online sales through targeted adver-tisements. Customer-centricity is becoming the key – consumers want personalized, end-to-end shopping ex-periences.

Decades ago, people deciding what items to purchase trusted advice given by the owner of the small general store they fre-quented. These shop owners could influence buyers’ tastes and try to sell them more products. Today, physical retailers do not offer such suggestions, leav-ing shoppers often overwhelmed by the extensive variety of products available. Online sites that offer recommendations and reviews from customers have emerged as a solution and disrupted the traditional retail market.

A direct-to-consumer (DTC) business model could best fit the current needs of the CPG manufacturers. In a DTC mod-el, a customer orders directly from the manufacturer, mostly through the company or product website. The customer then receives the product through arrangements made by the man-ufacturer.

Advantages to a DTC strategy are numerous

The decision to undertake a DTC strategy can help CPG man-ufacturers support the changing marketplace and engage close-ly with consumers. Information about end-consumers will al-low CPG manufacturers to effectively redesign their product portfolio and target different product assortments to a niche segment of customers and manufacturers will hold a higher price control and push products at com-petitive prices, plus effectively use promotions and discounts. Moreover, it will be easier to perform quick tests about new products and obtain valuable customer feedback.

By selling directly to the end-consumer, CPG manufactur-ers can capture more value from the brand while other prod-ucts under the same brand will more likely be pushed to the market. Additionally, manufacturers can reach potential cus-tomers everywhere in the world through e-commerce, broad-ening the potential market.

DTC strategy comes with challenges

CPG manufacturers willing to build an e-commerce chan-nel from scratch and sell directly to consumers. CPG companies need to carefully choose the right business model and commit to the strategy. They need to come up with a clear and different value proposition for online customers: Will they offer convenience, personalization and new products or the same products sold in stores? These are concerns that will shape the success of their direct-to-consumer strategy.

Variables to DTC success

CPG covers a variety of product categories with their own characteristics. We have identified a key role in de-termining the success of a DTC strategy based on industry research and discussions with managers of five CPG companies and two large retailers. Frequency of usage is a key factor in DTC as products that are used and replenished more often can generate sustainable and predictable demand.

Product category growth rate in e-commerce is another primary factor; categories that can benefit from price reduc-tion when being sold online (razors, makeup, etc.) experience strong growth. Personalization capacity, the ability to offer personalized products that can create engagement and enhance online shoppers’ experience, is the third primary variable.

Depending on the values of the primary factors, CPG com-panies can find themselves in one of the following groups:

  • The “Not Yet Ready” group consists of companies that have low scores for the primary variables required for a DTC success and thus are not suitable for selling directly to end-consumers currently.
  • The “Promising” group are companies that meet the basic requirements but need to improve on one or more variables to reach the “front-runner” group. A company might sell a frequently used product like toothpaste and might have high online growth rates, but its ability to personalize might be weak. Some companies might manage to improve and move to the front-runner group while others might be stuck in this group.
  • The “Front-Runner” group: Companies that have high values of the primary factors required to have a high prob-ability of DTC success.

Have an effective  marketing strategy

CPG manufacturers must leverage social media campaigns to gather insights on potential consumers and create engagement before launching products. Later, companies should continuously collect con-sumers’ data and use advanced analytics to direct marketing efforts to the right consumer groups and change their offerings according to consumer’s preferences. Companies will have to devote significant marketing resources to drive DTC success via customer acquisition efforts.

The consumer-packaged goods industry is changing rap-idly. Consumers have increasingly high expectations of con-venience and personalization, retailers are consolidating and startups are disrupting the traditional marketplace. The framework proposed in this article highlights the critical fac-tors needed to undertake a direct-to-consumer approach. A successful DTC effort not only drives growth but also gives manufacturers valuable end-consumers’ information, which can provide the ultimate competitive advantage.