As late as 2013, non-food consumer packaged goods were still selling 97% of their products in bricks and mortar retail stores. But in 2014, the McKinsey Consumer Channel Management Survey cited e-commerce as the second leading driver of change over the next five years. Why?
We think it's because direct-to-consumer brands can remain more relevant with their customers. They tend to develop long-term, ongoing relationships with their customers that provide them with up-to-date consumer feedback that finds its way into packaging, marketing, and product improvements. Because these brands are vertical, they can be nimble.
Conventional bricks and mortar brand builders tend to rely on distributers, brokers, and retailers who may not have a direct link with the customers of their products. As a result, CPG brand builders, who depending on distribution channels, have become isolated and insulated from their own downstream eventual users.
The direct-to-consumer models, like subscriptions, are much more in touch with their consumers. They don't have to rely on 2nd and 3rd party information from middlemen, who don't pass it on anyway.
So, is it any wonder that folks like Dollar Shave Club can take such a big slice out of the razor category! And so quickly! Shave Club imitators will certainly be the driver of change in the future. This puts conventionally distributed CPG brand builders on notice. At least talk to your end-user on a regular basis!
Is this the end of the distribution model? We think not! 97% of the sales is still pretty formidable. And there are practical reasons that favor the distribution model. It really isn't practical to have 100 items per month delivered separately from your direct-to-consumer producers to your door. Even if you are on subscription and don't have to order each one every month, who wants to be on 100 different subscriptions and receive that many packages?
As more and more CPG, direct-to-consumer brands start popping up with more relevant products, your front door begins to get blocked with a mountain of packages and you begin to drown in cardboard and bubble wrap.
And would you really pay $5 to have a $5 item delivered? At some point, it's just plain practical to go to the store. For items you use a lot weighing more than a pound, and costing less than $20, you'll make the drive. And who knows? You may even come home with something new you discovered at the store, something you weren't even shopping for. A notion item. An impulse buy. Now, that's hard to do on line!
There are substantial practical reasons that offset the advantages of direct-to-consumer customer feedback. We think the future will have subscriptions taking more CPG market share, but getting acquired by CPG companies who are big in retail distribution and tend to move their acquired brands into retail for practical reasons. We also think CPG brand builders will improve their relationships with their ultimate consumers as they begin to feel less secure behind their distribution channels. Was the Dollar Shave Club too close of a shave?