Goliath is Coming: What DTC Brands Need to Know About How CPG Sales Channel Strategies Will Evolve | Coronavirus Series

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Brands that sell directly to consumers online through an ecommerce store have a unique advantage over brands that don’t: they have firsthand knowledge of consumer purchase behavior, intent, and preferences. And they can get access to this data in real-time because they own it. 

Consumer packaged goods (CPG) companies have started exploring this non-traditional sales and distribution channel, and the recent pandemic may lead to a seismic shift in how and where CPG companies plan to sell their products. 

As CPG companies delve more into online channels, ecommerce founders and marketers need to understand why these shifts may be happening and what you can do to limit disruption to your own businesses and livelihoods as a result of new, larger entrants in your market.

What are CPG companies and why don’t they typically sell directly to consumers? 

CPG companies are large businesses that operate as an umbrella company with many product divisions underneath them (think: Coca-Cola, Procter & Gamble, Unilever, and Estee Lauder). 

Their products are typically household names and “they make up one of the largest sectors in North America, valued at approximately $2 trillion dollars,” according to Investopedia.

Most CPG companies primarily distribute their products through wholesale and retail businesses like movie theaters, concerts, grocery stores, and department stores. 

CPGs typically sell products you wouldn’t normally get straight from the source for many reasons including limited supply chain capacity—their large scale prohibits them from executing agilely—and potential friction with their wholesale and retail partners. That’s why many CPGs haven’t fully invested in their direct-to-consumer (DTC) online businesses. 

Take Coca-Cola for example. You don’t typically go onto their website to order a case of Coke. You’d normally get it at your grocery store or another retailer like Target. 

Most CPG companies haven’t figured out a frictionless way to incorporate a DTC website into their omnichannel distribution strategy, and they’re afraid to strain the relationships they’ve built with their wholesale and retail partners.  

3 reasons CPG companies will expand their DTC businesses

Over the years, we’ve seen headlines about retail stores shutting down and others on the brink of collapse. The global coronavirus pandemic has further acted as a catalyst with many wholesalers and retailers either having to shut down temporarily or permanently. 

That’s why we’re likely to see many CPG companies think more about how they include DTC as part of their channel distribution strategy. Others will likely accelerate their DTC plans if they were already considering taking on the initiative.  

One thing is clear, though: Now is the time to go digital. 

“Companies that want to recover revenue need to quickly accelerate digital, tech, and analytics. The best companies are going further by enhancing and expanding their digital channels,” according to McKinsey.

CPGs will likely expand their distribution strategy to include DTC for a few reasons: 1) because they realize the importance of having access to and owning first-party data; 2) because they’ve been currently trialing the DTC channel with brands they’ve either built or bought and they’re seeing positive results, and 3) because they’ll have fewer physical doors to distribute their products through and could use their DTC business to help expand their business in many markets.

Let’s take a closer look at those reasons. 

 

1. CPGs don’t have access to first-party data and want it.

CPGs have tried their hand at selling online through sites like Amazon and Walmart, but they don’t get access to first-party data, which is data that comes directly from the customer (i.e., when a customer places an order, what else was in that order? How many products did they buy? How often has that customer shopped before? What’s the lifetime value (LTV) of that customer?) And with Amazon in the news recently for questionable data usage and practices, it might not be a channel these companies choose to prioritize. 

First-party data will help CPGs understand their customers on a deeper level, which could influence customer loyalty initiatives, product assortment development, and even programmatic advertising. 

“Consumer packaged goods (CPG) companies have traditionally relied on their retail partners to create the last mile to the consumer, and therefore lacked a deep understanding of consumer behaviors and preferences,” said John Nash with Redpoint Global. 

 

2. CPGs have already started experimenting with DTC brands through in-house incubators or acquisitions for varying reasons.

Whether it’s to stay competitive, expand portfolio offerings, or shape marketing strategies, CPG companies have been dabbling in buying or building DTC brands. 

Unilever has bought many of theirs. They have several digitally native brands like Dollar Shave Club to keep category disruptors from stealing market share. 

Clorox bought theirs. They acquired Nutranext, a dietary supplement brand, to experiment with new products and learn about customer lifetime value. 

Anheuser-Busch InBev built theirs. They have their own DTC channel to collect aggregated shopper data that will help them better serve targeted ads around future sponsored sporting events. 

Many have been happy with including DTC into their sales and distribution channel strategy, and have remarked on the positive results. 

According to Vivian Chang, vice president of Nutranext’s growth marketing, Clorox plans to use the DTC data and learnings to “help Clorox think through testing. Our testing is about holdout groups, running controls, and A/B testing. We look at the actual sales data and what that tells us about initial order behavior to start building out a lifetime value assumption.”

Anheuser-Busch InBev’s DTC sales in China are also growing substantially right now due to the pandemic and they’re helping the brand offset $235 million dollars in lost revenue. 

“Our DTC business in China is growing very fast because people at home are demanding more deliveries in a market where we have a large share of the ecommerce channel,” Anheuser-Busch CEO Carlos Brito told Digiday

 

3. Their current channel distribution strategy has already shifted because  many retail and wholesale stores are either going out of business or will have fewer customers in stores due to social distancing. 

Brick-and-mortar retail stores have been shutting down for years. According to Business Insider, there were 8,000 store closures in 2017, 9,000 store closures in 2019, and retailers are expected to close more than 3,000 stores in 2020. 

As a result of the pandemic, closures have catapulted and CPG companies have been hit hard. 

Coca-Cola’s global wholesale business saw a 25 percent decrease in volume in April 2020, according to the Associated Press. And it’s worth noting that about half of Coca-Cola’s sales are from its wholesale business. 

Target, a retailer that sells many CPG products, noted that while it’s sales were up 20 percent for March 2020 (year-over-year), it’s profits were lower than expected because demand for high-margin products like apparel were down and it was more expensive to operate due to staffing and cleaning their stores, according to the Wall Street Journal

Target also plans to decrease their number of remodels and store openings this year. Instead, they’re pushing that plan out to next year.

With fewer stores available to sell through and with fewer customers frequenting current stores, CPG companies will look to DTC online stores to distribute their products. 

What does all this mean for DTC brands?

If CPG companies create a way for consumers to buy from them directly through their own ecommerce store, it could create a very crowded, competitive, and expensive space for brands to stand out. 

Pre-coronavirus, DTC brands were spending a lot on paid advertising as a way to acquire new customers. Brands and agencies were spending 43 percent of their marketing budgets on ads with Google, Facebook, or Amazon, according to a report from Lawless Research and Factual. And in December 2019, Facebook advertising costs were up 90 percent year-over-year, according to Adstage.  

With the onset of the pandemic, though, came halting changes to advertising spends. 

Last year, digital ad spend in the U.S. overall came in at $129 billion, leaving the decrease so far this year likely around $40 billion,” according to WWD.

Many brands in essential and new essentials categories, like housewares, health and fitness, and beauty and cosmetics, are reporting a higher return on ad spend due to more eyeballs and less competition for their categories. But this could be temporary if CPGs flood their millions of dollars into ad sales. 

If you run or work for a DTC brand that sells essential or new essential products, consider inspecting your return on advertising spend (ROAS) and see if you can afford to ride the wave. 

But don’t rely on paid advertising alone. 

Owned marketing channels, like your website, email marketing program, and mobile marketing strategy, have always been an important part of the marketing mix, but they’re now more important than ever for brands to survive—especially ones that don’t have a large marketing budget. 

The good news: DTC brands have had a head start with owned channels and have what CPG companies covet—data. 

CPG brands want data to help them understand consumer behavior, intent, and preferences. They need it to provide further clarity about pilot programs, product assortments, and demand forecasts. And they need it to, most importantly, develop customer loyalty through repeat purchases and increased lifetime value.

Now is an important time for DTC brands to review and optimize traffic and engagement across owned channels: organic search (SEO), website conversion rates, email open and conversion rates, and organic social media content. 

Understanding who your customers are and developing relationships with them now will set DTC brands up for a higher likelihood of financial success during big volume sales events like Cyber weekend. 

“Customers who have a longer-standing relationship with your brand are more likely to make bigger purchases. That means that building trust with consumers throughout the year pays dividends when it comes to Black Friday/Cyber Monday (BFCM) sales,” according to Klaviyo

Key takeaway

CPGs may soon start investing in DTC as a way to learn more about their customers and expand their product distribution. It’s important for ecommerce founders and marketers to recognize this possibility and take action to limit the potential disruption to their own businesses and livelihoods as a result of these new, larger entrants in their market.

It’s go-time for DTC brands. It’s time to develop and optimize your owned marketing channels—the ones over which you have control—and build personal relationships with your customers at scale before the CPG tsunami comes. 

One piece of advice: don’t treat each customer the same. Create customer segments based on things like their engagement or purchase behavior, and provide them with relevant content to deliver a more personalized and compelling experience with your brand. 

Looking for some tactical tips on how to use email and SMS marketing to build high-value customer relationships? Check out these resources. 

Are you adjusting your marketing strategies as a result of the coronavirus crisis? These resources may be helpful to you.

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