CPG E-commerce Case Studies
PepsiCo. and Nestlé are examples of CPG brands that have transitioned to an online DTC approach. Details and success metrics of each example have been presented below. Additionally, the following trends have been identified in the CPG e-commerce space: subscription models, larger pack sizes, and an increasing share of the market among non-Amazon companies as they adopt click-and-collect models. A deep dive of these findings have been provided below.
Case Studies: CPG Brands That Have Transitioned To An Online DTC Approach
- Overview: In 2020, Pepsi announced the launch of two D2C websites where customers can buy the company’s products. This appears to be the next phase in Pepsi’s online DTC transition, which has been taking place for several years already. According to the company’s CEO in 2017, the DTC transition was being driven by the “need to creative impulse-buy opportunities online for [the] newest generation of shoppers who do all buying online, which includes improving direct-to-consumer sale capabilities.” At the time, the company also prospected a future vision of incorporating VR tools to create an online grocery store experience simulation, however they don’t appear to have yet launched anything like this. However, the new e-commerce sites launched in 2020 is a response to the amplification of the online shopping trend as a result of the pandemic. This shift, as it relates to the pandemic, is particularly relevant to Pepsi’s product lines as the company supplies a wide range of products that consumers were rushing to stock-up on during the lock down (particularly non-perishable CPGs). The drive to create two sites for DTC sales, as opposed to one, was in order to target specific needs/verticals. In alignment with this, the sites are aptly named, PantryShop.com and Snacks.com. In doing so, these sites bring together the company’s various brands into two product silos, rather than turning each individual brand’s website into its own e-commerce site. The drive towards DTC seems especially important for PepsiCo. at the present day, as the company’s sales have been affected by the closure of restaurants and other businesses that sell Pepsi products during Q2 2020. The company is likely hoping that
- Success Analysis: In 2017, Pepsi’s CEO relayed to investors “the company’s e-commerce sales are ‘growing brilliantly‘.” After launching its new e-commerce sites in 2020, the company reported a strong growth in sales of many of the brands it had made available on the sites, including Cheetos and Quaker. Pepsi’s CEO attributed this growth to the company’s investments in growing its e-commerce business.
- Overview: In the realm of CPG companies going D2C, Nestlé was a bit of a pioneer, having launched an e-commerce subscription service way back in 2015. The service, called ReadyRefresh, was to deliver Nestlé beverage products directly to consumer’s homes across 23 states in the U.S. The beverages included Nestlé Waters, Nestea, San Pellegrino, and others. According to Antonio Sciuto, an EVP at Nestle, “It was a very unusual move for a CPG company, but it gave us a direct way to accompany our customers at every step of their journey.” Since launching its subscription service in 2015, Nestlé has expanded this model to include a range of other subscription-based services as well. These services include Sweetbake and Nespresso Club, among others. Nestlé’s ultimate goal was to have more control over its costs and increase revenue while fostering a closer relationship with its customers. The company’s venture into the subscription-service space was not it’s first foray into the D2C space. The brand had been experimenting with various ecommerce sites across its individual brands and across various global markets even prior to 2012. For example, company launched an e-commerce platform in the Spanish market in 2012, which allowed consumers to order personalized chocolates. This launch was a followup to similar initiatives the company had launched for two of its other brands. At the time of these launches, the company’s CEO stated that innovation was a top priority for Nestlé and that these launches were spurred by consumer trends in the areas of product personalization and online shopping. Today, the company’s development of its D2C business is online, particularly as a result of COVID-19. In it’s 2020 half-year update, the company stated that it had “accelerated the development of its digital capabilities and expanded e-commerce and online communication.”
- Success Analysis: It appears that Nestlé’s investments into D2C subscription services paid off, as the company’s e-commerce share of its total sales increased from 2.9% in 2012 to 6.2% in 2017. This growth has continued into recent years, reaching 8.55% in 2019 and 12.4% midway through 2020. Likewise, the company’s mid-year 2020 report noted that the company saw it’s e-commerce sales grow 48.9% as a result of the pandemic.
Trends: CPG E-Commerce
1. Subscription Models
- Trend Description: As noted above, Nestlé was an early adopter of this trend in the CPG space, which has led to significantly positive results. Subscription boxes are a type of e-commerce service model. These boxes contain a range of different products, generally those that share a type of theme (e.g. beauty, meals/food, pet supplies). The boxes are delivered to a consumers home at regular intervals, based on a subscription that the customer signs up for. In 2019, Fast company reported that there were 3,500 subscription box services as of 2018, which was a 40% increase YoY. And although some marketers have lamented over slowing growth in more recent years, a survey published in 2019 revealed that only 25% of consumers currently use such a service, and 32% of respondents were planning to subscribe in the near future, with even baby boomers getting into the mix (22% said they planned to subscribe in the near future with 8% having already subscribed to one).
- Trend Driver: This trend is being driven by consumer demand and the desire for convenient transaction process on behalf of both the company and the consumer. Consumers want subscriptions from CPG companies because it helps them save both time and money by automating this process. Meanwhile, CPGs that employ this model enjoy a more consistent stream of ecommerce revenue and product flow, which makes their back-of-house processes run much more efficiently (e.g. inventory, sales management, cost controls). The subscription box model is ideal for CPG companies, as CPG verticals are highly competitive and many companies struggle to deliver on the high standards of consumers while remaining profitable. The subscription box model offers CPGs a new growth channel and revenue stream.
- Expert Input: Although the growth of the subscription box industry has slowed down a bit since it’s infancy, market experts predict that the industry is far from dead. Ken Fenyo, a consumer markets expert at Fuel/McKinsey, has said “the market still has room to grow.” Meanwhile, McKinsey itself has estimated that subscription e-commerce box services is worth around $15 billion and that “the largest online subscription businesses generated $7.5 billion in combined sales in 2018, up 30% from 2017.”
- Expert Input: Senior retail analyst at Forbe’s, Andria Cheng corroborates the perspective of Ken Fenyo, noting: “There’s still plenty of room for growth. [The market size of the subscription box service market] represented just a sliver of the more than $510 billion in online sales in 2018 […] Consumer awareness also remains low. Only about half of U.S. consumers have heard of at least one of the most popular subscription services, with only about 15% of online shoppers having subscribed to at least one of them on a recurring basis.”
2. Bulk Orders / Larger Pack Sizes for High Consumption CPG Products
- Trend Description: When buying CPG products online, customers tend to buy in bulk. In respect to this, the most commonly purchased quantity sizes are 2-4 units per package. CPG brands that have been in the e-commerce space for a long time have come to realize that package sizes are a major key to a successful online sales strategy. This trend is seen, for example, in the fact that 27% of all online orders for snacks are ‘stock up trips’ and in how Amazon’s best sellers list of snack foods contains a majority of products that have pack sizes much larger than they do in-stores.
- Trend Driver: When CPG companies attempt to sell their products online the same way they do in stores (i.e. the same pack sizes), it often causes serious problems with the brand’s margins and customer experience, given that online buying habits and desires among consumers differ from the in-store expectations and demands. Overall, larger pack-sizes for high consumption CPG products save money for both the manufacturer and the consumer when purchased online.
- Expert Input: According to CPG business expert and consultant, Joshua Schall, “Optimizing [CPG] pack sizes for e-commerce can have a huge effect [a company’s] bottom line. When a brand sells the exact same offerings online and offline, it is usually a playbook for compressed margins. E-commerce has additional layers of costs that can hurt unit economics compared to wholesale relationships with FDMC retailers. The sheer nature of CPG products being consumed quickly and priced at a relatively low level is counter-intuitive to being able to absorb these additional direct or indirect cost layers. […] There is a possibility that increasing pack sizes too much can also hurt your bottom line. In CPG e-commerce, there is not a one-size-fits-all model for pack size and associated total unit pricing. One variable to consider is the product’s usage rates, as it makes more sense for consumers to purchase larger pack sizes for items that are consumed relatively quickly. For example, the average person is likely to consume a 20-ounce bottle of Gatorade faster than a 20-ounce bottle of mustard. Both products have challenges with pure-play e-commerce fulfillment, as they are heavy and have a low per-unit cost. However, Gatorade would be best sold in a 12 or 24 pack, while most customers probably don’t need 12 or 24 bottles of mustard.”
3. Edging Out the Top Competition & Click-and-Collect Models
- Trend Description: Although Amazon long held the largest share of sales and buyers in the CPG ecommerce space, the company’s share of the space has been on a downward trend for some time (within the U.S. market). In 2017, Amazon’s share of the space was at 43% but, in 2019, its share was down to 39%. According to insights published by Nielsen, “traditional and non-traditonal retailers have been accelerating their responses to Amazon by adjusting their omnichannel offerings and strategies. These adjustments have helped them steal share from the global online player.”
- Trend Driver: Amazon’s declining share has been attributed to an increasing consumer adoption of ecommerce in the CPG category overall, which has lead to high growth for players besides Amazon that have been working extra hard in recent years to boost their own ecommerce presence and growth. A key part of the success of these other players is their adoption of innovative business models, particularly click-and-collect options, such as curbside pickup. As this was already a trend in 2019, its obvious that current pandemic conditions are spurring this model even more now, which is likely to further dent Amazon’s share. Across two-years (ending in 2019), the use of click-and-collect models increased by 7%.
- Expert Input: Bloomberg analyst, Sarah Halzack, says that while Amazon is still a strong company overall, “there is one important area where Amazon’s strategy looks much fuzzier: Click-and-collect. This hybrid of online and physical shopping is proving popular, and it could potentially prove a costly mistake for Amazon that it hasn’t move more quickly to get a piece of the action.” This has seemingly become apparent to Amazon as well, as last year, the company launched an innovative click-and-collect option in very limited number of global markets. More about Amazon’s click-and-collect option can be found here.