CPG retailers are at a crossroads as a new threat rises
Once upon a time, consumer products like soap, sugar and soft goods were found in bins and shelves in general stores, measured out in small quantities by amenable shopkeepers. Those days are gone.
Shopping for household goods evolved steadily from ye olde shopkeeper days, but it changed dramatically in the mid-20th century as multi-brand companies like Procter & Gamble, Unilever and General Foods emphasized branding and marketing — think Mad Men — and introduced visceral, emotional reasons to buy. Along with real advancements in the products (like enzymes to break down stains and formulas that worked in washing machines), CPG companies began appealing to consumers (usually women) with slogans that made ample use of exclamation points. "Get out of the kitchen sooner!" read a mid-century Lux liquid dishwashing detergent ad, also stating, "and it’s Lux-mild on your hands."
While early on that advertising juggernaut was centered on newspapers, magazines and television, these days it’s swiftly moved to the internet and social media, though CPG advertising has lagged on those newer platforms, according to Deloitte. In any case, with the extra marketing and extra cachet, products became more expensive, bulking up margins for manufacturers and retailers alike. To appeal to price-conscious consumers more inured to advertising, "generic" store brands emerged, too, a circling back, in a way, to the bulk bins of old.
Today, however, consumer product retail is at another crossroads. In an era when just about everything — apparel, household items, electronics and even furniture — has become commoditized, brands face new competition and price pressures. Disruptors, not least Amazon, are entering the space and upending previous sales models and channels.
For all that, CPG brands, the companies that make them and the retailers that sell them do continue to enjoy a huge level of trust, according to Steven Barr, PwC’s U.S. retail and consumer sector leader. "The consumer products companies have built world-class products that are highly effective," Barr told Retail Dive. "Let’s not forget that many of the brands have created tremendous trust and loyalty with their overall brand and identity so many consumers have come to trust particular brands."
Still, younger shoppers, particularly the millennials who came of age during the Great Recession, are less brand-loyal than their parents and grandparents. That’s provided fertile ground for retailers with high-quality private label brands. The number of heads of households shopping at dollar stores under 35 years-old earning more than $100,000 a year increased 7.1% between 2012 and 2015, compared to 3.6% at all retail stores, according to Nielsen research. Some 29% of millennial dollar store consumers earn over $100,000 annually and accounted for about 25% of sales at those stores, much of it no-name brands of common household items, according to market research firm NPD's Checkout Tracking.
Subscription and replenishment services like Amazon’s Subscribe and Save and Dash buttons have many shoppers ditching their usual shopping trips for online orders. And startups like Harry’s have challenged the "razors-and-blades" pricing model (sell one cheap razor, continue selling many expensive blades).
Unilever went the if-you-can’t-beat-em-join-em route last year and bought startup Dollar Shave Club for roughly $1 billion. And Target similarly sought some of Harry’s magic, through a deal to sell its products in stores, though presumably many of those customers will end up as Harry’s subscribers, potentially making Target an enabler of its own demise in that space. Gillette, meanwhile, has slashed the prices of its blades in the face of the new wave of competition.
"[CPG companies are] clearly seeing pressure from subscriptions, like The Dollar Shaving Club, and private label. But it depends — across the board, there are brand-conscious shoppers and price-conscious shoppers. As people get more price sensitive, they start to move to private label, and that will happen more in any economic downturn."
Co-founder and chief commercial officer at Ugam
Amazon has tackled the CPG space from many angles. These days, along with its subscription and Dash efforts (aided in no small part by its formidable Prime membership), the e-commerce giant has a new sidekick in these efforts — the artificial intelligence-powered voice assistant Alexa. The bot is primed to shake up CPG orders: Alexa remembers what detergent Prime members tend to order, but fills in the Amazon private label version in a pinch. That might be a point of contention for consumer products companies dealing with Amazon, according to Matt Sargent, senior vice president of retail at consulting firm Frank N. Magid Associates. "I was surprised there isn’t more of [an outcry] about that," Sargent told Retail Dive earlier this year. "If you look at Alexa and how it does ordering — if you haven’t set ‘I always want Tide,’ it’ll make a selection for you. That’s a hugely terrifying proposition for manufacturers."
That outcry is just beginning and for every brand that decides to sell on Amazon, questions arise about whether the company will in turn displace those brand selections with an owned brand or develop a private label version to do so in the near future.
Despite its growth in the space, Amazon has struggled to make much headway with consumer goods sales, though — just 10% of shoppers turn there for grocery and household items, compared to more than half (51%) buying consumer electronics and small appliances there, and 25% for health and beauty items, Magid found. Amazon has also grappled with positioning its Prime Pantry program, by changing its pricing structure many times, and Subscribe and Save customers have found that Amazon’s prices aren’t always consistent or the best deal.
Amazon's private label brands are a different story. Its lines of detergent, baby wipes and batteries, to name a few, are experiencing runaway growth in several categories, according to research from 1010data and One Click Retail. That can make deciding whether or not to sell through Amazon a tough decision for a brand. On the one hand, you can control much of your marketing and branding; on the other, Amazon knows what and how much you’re selling and might develop a competing item based on your best-selling product.
"If I were a CPG maker or retailer, I would definitely have to figure out what should I do now," Mihir Kittur, co-founder and chief commercial officer at e-commerce customer engagement firm Ugam, told Retail Dive. "They’re clearly seeing pressure from subscriptions, like The Dollar Shaving Club, and private label. But it depends — across the board, there are brand-conscious shoppers and price-conscious shoppers. As people get more price sensitive, they start to move to private label, and that will happen more in any economic downturn."
The coup de grace for some of those retailers and CPG makers may be the pending partnership between Amazon and Whole Foods. The deal garners Amazon, in one swoop, a national chain of physical grocery stores, points out Wendy Wallner, executive vice president of consulting for the retail industry at market and consumer information research firm GfK.
"Amazon couldn’t have found another retailer with equities that made as much sense," Wallner told Retail Dive. "There aren’t that many national grocery chains, right? So finding one that they could leverage across the country means they now they can do click and collect, they can do meal delivery or meal kit delivery. They chose wisely."
GfK found that nearly a quarter of American shoppers favor the merger, but hope that Whole Foods' prices come down. But, could you buy, say, Tide at Whole Foods, as you can at Amazon? That's not clear.
"We really believe that today’s customer wants endless assortment, but I think there’s going to be a backlash."
Senior VP of retail at Frank N. Magid Associates
“The rumors of lower prices post-merger will probably come more from operating efficiencies and a willingness to subsidize Whole Foods pricing in the short-term," Keith Anderson, vice president of strategy and insights at retail intelligence firm Profitero, told Retail Dive in an email. "I do think odds are good that the combined Amazon and Whole Foods supply chains would enable Whole Foods to offer more mainstream products in some capacity, but I don't think Whole Foods will make major changes to its assortment overnight."
What you might see is a mainstreamed private label that, thanks to a combined online-brick-and-mortar play, would allow Amazon to reach the kind of "selling motion" that Costco has with its Kirkland brand. "In some ways, Costco has been a 'frenemy' of CPG in the same way Amazon has been a 'frenemy' of CPG," Sargent said. "Costco has done this well. They’ve taken the Kirkland brand and made it part of a selling motion, stock-up purchases plus impulse purchases are with the Kirkland brand. The quality and price of stock-up things like Kirkland batteries or socks lead to purchases of Kirkland nuts, even though you may have always preferred Planters.”
The endless aisle … backlash?
The gentle jangle of a customer entering a small dry goods store in the middle of town is the sound of simpler times in retail. In the age of big boxes and supermarkets, analytics and artificial intelligence, swift delivery modes and a blur of online and offline — all producing massive assortments — consumers may be rebelling. Especially considering an enduring wage gap that keeps them fixated on price.
That may explain the success of no-frills grocery companies hailing from Germany — fast-growing Aldi, Trader Joe’s and U.S. newcomer Lidl — which have found success with limited merchandising and bottom-barrel prices, an approach that defies the common notion that the U.S. consumer wants choice. For example, you may only find one type of peanut butter in their stores, a private label offered in just one size, at as much as one-third lower in price.
It’s the same idea behind Brandless, a new online all-private label consumer goods retailer that opened last month, with items from soap to kitchen essentials selling for $3 apiece. Brandless is taking a few pages from legacy CPG retail: Its $3-across-the-board price tag on every item recalls dollar stores’ origins, a slimmed down assortment follows the no-frills German model, and the spare labeling signals a simplicity in assortment, price and value that many consumers may be craving.
"We really believe that today’s customer wants endless assortment, but I think there’s going to be a backlash," Sargent told Retail Dive. "Costco has actually done this for a really long time and done it successfully. I think [Brandless is] on to a trend. How they execute it, I’m not really sure, but I’m really intrigued by their approach of curating an assortment. As we’ve seen from Trader Joe’s and Costco, it can be successful, but the question is: Is there a space for it online? Could this be a way to deliver cost efficiencies that even an Amazon can’t match with its brand?"
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