CPG companies must plan for a digital future or lose market share

Digital technology is looking like a major disruptor in not only retail, but also among consumer packaged goods (CPG) companies according to a recent report from IRI and the Boston Consulting Group on behalf of the Grocery Marketing Association.

The report highlights how important it is for CPG companies to position themselves for growth in the new digital age or risk losing share.

The report outlines a need for many CPG companies to plan for a “1-5-10” market in the United States during the next five years, in which digital’s current 1% penetration will likely expand to 5% and could accelerate to as much as 10% in the near term. Digital penetration of 5% represents nearly one-half of total CPG growth during the next five years, meaning that companies without an effective digital capability risk stagnation, loss of share and even shrinking sales, the report states.

The growth rate of total CPG dollar sales in the U.S. was only 1.5% in 2013, and large CPG companies lost more than 2 points of share to midsize and smaller players from 2009 to 2013.

Researchers said there could be significant advantages for the early movers. Digital penetration rates will vary in different locations and categories but some categories could see digital penetration of 30% or more by 2018.

Patrick Hadlock, a partner at The Boston Consulting Group, notes in the report that the CPG industry is fast approaching a tipping point, driven by a confluence of trends.

“Consumers are embracing technologies, devices, and services that make everyday tasks such as shopping, cooking, and even commuting quicker, easier, more fun, and more efficient. This is fragmenting the purchasing pathway as consumers regularly switch back and forth between digital and physical channels, and they interact digitally both in and outside of stores,” Hadlock said.

The report notes that the impact of digital is felt most acutely at the early stages of the purchasing pathway. Almost 40% of offline shoppers and more than 30% of online shoppers reported that technology's impact is greatest during the discovery phase.

More than 25% of both offline and online shoppers said that digital technology’s biggest impact is in the search phase, while a quarter of in-store shoppers reported online activity as one of the three most influential factors on their purchasing pathway.

The report also noted that the competitive era has never been greater among traditional retailers trying new store formats while large technology companies are building disruptive digital grocery businesses to serve this category and support broader strategic goals. Also heating up competition and blurring the lines are startups that are using technology to build niche positions via product and category subscriptions with digital channels and CPG companies also marketing some of their products online.

Researchers said CPG manufacturers will need to participate in multiple retail models but the winning models have yet to be established, and it is likely that numerous models will prevail.

The report argues that while many companies have established a digital presence — a website and social media sites and some digital advertising — most have yet to fully integrate digital into their operating model, build a big-data analytical capability, pursue a multichannel strategy or tailor their product offerings to the digital or e-commerce marketplace.

“All CPG companies can make a series of low-risk, 'no regret' moves that will better prepare them for a 1-5-10 world,” the report states.

There is a big cost to inaction, too. CPG companies will not only abdicate to retailers the opportunity to shape the evolution of e-commerce in the sector but also risk losing control of their own margins, share, and brand equity in the fast-growing digital channel, the report states.

Researchers warn that companies that do not play in the digital game are likely looking at flat or shrinking sales. The combination of dynamic pricing and consumers’ ability to receive real-time price comparisons and notifications will squeeze margins. Niche brands can take share online through better search rankings. High rankings beget high rankings, which has dire implications for late-moving CPG brands, the report states.
 
The big risk for many CPG players is that their organizations and skills, which have been optimized over many years in the brick-and-mortar marketplace, will be slow to adapt. Researchers said manufacturers need to recast their existing capabilities, including product placement, marketing content development, and supply chain management, for the digital world.