Consumer Packaged Goods Market and E-Commerce
(8 minute read)
The pandemic induced lockdown has dramatically accelerated migration of grocery and packaged goods sector to e-commerce. As large sections of the population around the world hunkered down at home out of necessity or choice, much of grocery shopping and purchase of consumer packaged goods (CPGs) shifted online. Some major retailers have shown a nearly 100% year on year increase in online sales during 2020 compared to the previous year. This trend is set to continue in the coming years.
For manufacturers and retailers however, this presents a predicament. Traditionally e-commerce has always proven to be less profitable for manufacturers compared to brick-and-mortar sales where margins are thin or negligible. Yet with e-commerce seemingly one of the biggest areas of growth forecast for CPG companies, it is essential they start to find ways of generating healthier margins on e-commerce operations.
The High-Growth Low-Profit Dilemma
Generating healthy profit margins in e-commerce operations has always been a challenge for CPG companies and it still seems to continue despite consistent and even pandemic driven exponential growth.
Scale may offer one opportunity to expand profit margins, pushing greater online sales volumes. More crucial for these firms however is their ability to optimise costs across their major profit and loss drivers: investments in marketing; investments in trade and promotions; and supply chain costs.
Understanding E-Commerce Profitability
Profit margins in CPG companies are impacted typically by some major factors:
E-commerce margins are slim even in companies like Amazon, but online scale helps improve margins. Some CPG categories are more profitable than others while some online retailers will prefer being loss leaders on some key value items.
Digital advertising and logistics cost may impact margins. Costs of digital, especially on-site and programmatic advertising which situates the ads of online retailers on the ‘digital shelf’ has been steadily increasing over the last few years. Added to this, the growing costs of warehousing, and added challenges of algorithmically generated orders, packaging sizes, and order quantities, add to warehousing and logistics costs which in turn eat into margins.
Some less mature product categories – e.g. food – are not well integrated into business reporting and e-commerce metrics, which in turn presents a skewed picture of e-commerce profit and loss transparency.
Therefore, improving profit margins requires companies to focus on margin-improvement strategies. These are typically three categories:
Clarifying e-commerce marketing investment and ROIs: In many businesses, distinctions between marketing spend on shopper marketing, digital marketing, and e-commerce marketing are often blurred, making it difficult for budgets and performance monitoring. With the growth in omni-channel shopping, it is important for CPG companies to adopt a more holistic approach to measuring and monitoring their e-commerce investments. This can run across three areas:
- Building in agility and flexibility for shifting marketing spend across channels. This may include minimising spend on brand marketing and trade marketing, spending more on retail media networks, shifting channel spend where opportunities arise and focusing more on customer specific ad targeting rather than top-of-the-funnel spend.
- Having clearer metrics for monitoring cost-attribution models. This is typically difficult within the complex environment of omni-channel marketing but recent developments in areas of data analytics such as ROI modelling will improve the way companies monitor cross-channel attribution and make decisions on investment trade-offs.
- Defining performance management across stakeholder networks more clearly. Most CPG firms will have multiple marketing stakeholder partners across their internal and external networks including internal teams, agency partners, retail partners and affiliates. Clarifying boundaries of performance management and creating a ‘single source of truth’ on omnichannel performance would ensure better oversight of budget spend.
E-Commerce Revenue Growth Management: Differentiating Stock Keeping Units (SKUs) and streamlining them across channels would help mitigate intra-channel conflict within eRGM. Many CPG companies already have channel- and retailer-specific assortments which help consumers do price comparisons but often adds complexity and confusion. Some ways of maximising margins through eRGM include
- Managing retail pricing strategy consistent with fulfilment mechanisms (e.g. click and collect) or package sizes.
- Consistent monitoring of online prices.
- Developing robust online retailer segmentation.
- Streamline data sources for competitive market data.
Omnichannel Supply Chain: One of the biggest challenges for improving e-commerce margins is the high cost of shipping and warehousing. Some ways by which CPG firms can keep a tight lid on costs include:
- Better demand forecasting and precision in cost management such as more on-time deliveries and fewer out-of-stocks.
- Redesign packaging to reduce costs (e.g. more brand focused packaging for brick-and-mortar stores and more plain, reusable packing for online).
- Rethinking delivery pathways including end-to-end supply chain infrastructure.
Improving profitability in e-commerce is not unachievable provided CPG manufacturers shift their mindset to a more margin-focused thinking and embedding this into their strategic and operational planning.
