Retailers and CPG companies have had a symbiotic partnership for decades, teaming up to offer customers more choice in convenient in-person and ecommerce storefronts. This relationship is evolving in the wake of the pandemic as changes in consumer behavior and demand become permanent, putting new pressures on front- and back-office systems.
As both industries take on each other’s challenges, retailers and CPG companies must learn from each other’s processes and best practices to sustain these new revenue streams in the long term.
An Evolving Business Dynamic
CPGs have historically spent as much as 20% of revenue on retail promotions for product positioning, providing a crucial revenue stream to retailers while pressuring their profit margins. Around 2010, CPGs started experimenting with DTC and channel strategies, weighing the benefits of buying, building or partnering to get closer to the customer. When the pandemic hit, the trend accelerated as consumers flocked to ecommerce, creating new opportunities for brands to cut out the middleman.
Retailers quickly pivoted to store pickup and home delivery, increasing their reliance on solution providers. At the same time, high inflation strained consumer spending, driving more demand for cheaper private-label goods. Though retailers have been white labeling for a long time, consumers who switched to save money during the pandemic say they’ll keep buying them even as the economy settles.
Getting It Right
Retailers and CPG companies have had to adapt quickly to these shifts, often cobbling together solutions to address the resulting operational complexities. While most have been able to make it work, there’s certainly room for improvement. A few companies have shown it’s possible to effectively take on these new challenges.
On the CPG side, Nike has long been the shining example of taking advantage of a strong brand presence to create an end-to-end customer experience, which then influences consumer purchasing decisions. Nike, fully omnichannel, reaches customers through its own digital channels, stores and major retailers like Foot Locker.
On the retailer side, Costco’s Kirkland Signature private label brand has become a huge success, bringing in as much as a quarter of the company’s revenue in 2021. Costco invested in developing higher-quality goods, keeping packaging costs down while offering prices as much as 20% below name brands. Kirkland goods are now available at competing retailers like Walmart and Amazon, extending its reach beyond Costco stores.
Understanding Unexpected Challenges
As CPGs and retailers adopt elements of each other’s strategies, they’ve also taken on each other’s operational headaches. Both are grappling with an explosion of complexity, with customer loyalty on the line.
CPG companies are dealing with smaller orders than usual, driving more backend complexity. They have to manage very different logistics required for packing and shipping a single box, vs. pallets sent to a retailer. Handling DTC returns has also further complicated the process for receiving, restocking and reselling merchandise. If a company’s internal systems and processes are not set up to support both large and small orders and returns, this causes customer delays, making them less likely to order directly from a brand again.
For retailers, customers have been conditioned to expect convenient pandemic-driven delivery options like BOPIS and home delivery to continue permanently. They also look for the instant gratification and convenience that Amazon pioneered through same-day and one-day shipping options. Retailers used ad hoc systems to quickly make these options available out of immediate necessity. But now that the consumer trend is here to stay, they have to create more sustainable processes to support them.
On the private label front, most retailers leverage manufacturers to create the products before making a significant investment themselves. This arrangement puts them at the mercy of suppliers, which can cause downstream impacts from a supply chain and ESG perspective. It can also be challenging for a private label product to drive the same kind of customer loyalty name brands enjoy.
Overcoming New Logistical Hurdles
To avoid losing millions on wasted spend and unhappy customers, companies in both industries need a comprehensive view of their business’ processes. They also need the guidance to find value opportunities hidden within these new complexities. Thankfully, technology can help plug in various data sources to visualize interconnected processes, using machine learning to identify patterns and surface suggested actions.
For CPGs, this kind of information helps C-suite leaders understand the current state of their often-sprawling operations, and identify process gaps to address when standing up a DTC model. One leading CPG company identified $59 million in revenue leakage due to stock-outs after analyzing their systems. It then used data insights to address the problem by recommending substitutes to customers when their original orders were out of stock.
Getting a broader and deeper view of pickup and delivery systems can help retailers open up new value opportunities. When IKEA needed to improve its omnichannel strategy, the company used process mining technology to identify the root cause of high click-to-collect order cancellations at the company’s UK stores. After analyzing the issue, IKEA found that long pickup windows were a major factor in cancellations. The company shrunk its pickup windows, and for every hour reduced, saw a 7% drop in cancellations.
Other value opportunities could include retailers adopting a micro-fulfillment center (MFC) model, bringing commonly ordered items to a back room for faster store picking. However, many stores are not designed appropriately for this; some struggling to find enough physical space. A deeper understanding of these inefficiencies helps retailers make better decisions about store layouts and processes going forward.
A Comprehensive View of the Bottom Line
As consumer behavior continues to shift, both retailers and CPG companies will need to continue adapting their strategies to meet demand. Without a full 360-degree view of how their businesses operate, they’ll struggle to optimize systems to match.
Companies that invest in comprehensive supply chain analysis and take action to drive efficiencies across their operations will have an advantage as the industries converge. Customers may never see the complexity that goes into creating a seamless purchase experience, but companies at the forefront will feel the difference in the bottom line.
Lindsey Peters is the retail and consumer goods industry lead at Celonis