The accelerated adoption of online shopping has created a complex and highly competitive landscape for retailers. Consumer Packaged Goods (CPG) companies are facing new challenges in managing profitability and growth in their e-commerce and direct-to-consumer stores, as well as other marketplaces and e-commerce sites.
A panel of PwC experts – Jeff Kunz, Head of Market Practice; Nikki Frazer, e-retail marketplace strategist; and Ed Landry, Head of Consumer Markets Transformation – outlined three keys to success for CPG companies:
- Create a profitability waterfall:
E-commerce service costs are different and in some cases more complex than brick-and-mortar retail. There are specific dimensions of the “cost of service” for the e-commerce channel that make it nearly impossible to apply brick-and-mortar retail tactics and economics.
A waterfall analysis can pinpoint which costs—such as labor and shipping—are affecting profitability. To do this, you need to understand product profitability down to the SKU level. To make matters worse, the business model of each e-commerce business partner can impact their margin requirements.
Getting this right is no easy task. However, many companies are already making efforts, often using channel-specific data models, to get a holistic view of their product portfolios and level prices.
Snack:
- Know the economics of your business and trading partners at the SKU level.
- Understand trading partner margin requirements and how they are calculated.
- Create a profitable price/package that fits the channel.
- Obsessed with packaging and fulfillment details:
Another drain on CPG companies’ profits is chargebacks from business partners. Chargebacks can occur because the seller violated a packaging rule or process set out by the e-commerce retailer — or because the shipment did not contain the correct quantity or items that were ordered.
An incomplete order is often due to supply chain issues that can be difficult to resolve. Accurate demand forecasting is critical, especially with today’s channel proliferation. Shipping products quickly and accurately may also require a change in warehouse management systems or processes.
However, a smoothly functioning supply chain is worth it. All major e-commerce players evaluate and measure supplier supply chain performance and use these evaluations to determine where and how products are located on their websites. Supply chain excellence can result in higher search rankings, increased order frequency and overall more favorable financing treatment – and real competitive advantages.
Controlling chargebacks due to process violations is another matter that requires close scrutiny. Every online retailer publishes their expectations of what makes products retail-ready in packaging and labeling, and the consequences of non-compliance. CPG companies would do well to understand these expectations and recognize that doing so may require adding staff or upgrading systems to track such details and associated processes.
Particularly helpful: involving those responsible for expectation in the dispute resolution process. This helps promote accountability and also allows for quick response to disputes and continuous process improvement.
Takeaways for CPG companies:
- Use AI-powered dynamic forecasting to reduce supply chain stress.
- Automate warehousing and logistics processes to improve accuracy, reduce labor costs, and meet fast turnaround expectations.
- Examine internal systems and processes to better meet e-commerce merchants’ retail maturity expectations.
- Improve trade and marketing spend:
As with other facets of CPG and merchant partner relationships, evaluating the return on marketing and advertising spend may not work as well in online retail as it does in brick-and-mortar retail. Some traditional metrics, such as return on investment and total cost of sale of advertising, are interesting but too high to be useful for using and improving certain tactics. The more meaningful actions are those that help drive specific behaviors and outcomes.
There is an opportunity to drive true incremental, profitable growth: apply a mix of SKU and unit economics to understand where to invest. Understand a customer’s potential lifetime value for a given product, apply a customer acquisition cost and conversion rate model. And stay the course – keep investing to the tipping point where customer conversion peaks.
Takeaways for CPG companies:
- Ecommerce budget through a bottom-up approach.
- Build a data foundation for customer preferences and behavior.
- Dare to be bold: Build strategic relationships with e-tailers and be ready to change them quickly if needed.
looking ahead
The growth trajectory of e-commerce requires CPG companies to figure out how to compete effectively. Rather than handing control over to their channel partners, they can arm themselves with the data and insights to chart a path to success.
