The U.S. Department of Commerce study hit like a thunderbolt. In March and April, coinciding with the first eight weeks of the pandemic shutdown, U.S. ecommerce as a percentage of overall retail sales increased more than it had in the previous 10 years. As the chart shows, from 2009 until February, ecommerce rose 10.4 percentage points – and then a dramatic 11 points over the next two months.
But the rise in ecommerce was as a percentage of retail sales – which plunged a record 16.4 percent in April. While there are encouraging signs of a recovery – retail was up 1.9 percent in September, the fifth straight month of growth – the consumer shift to online, digital-first interactions is likely here to stay. In a recent McKinsey survey, 73 percent of US shoppers said that they have tried a new shopping behavior since COVID-19, with roughly 80 percent saying they intend to continue the new behavior. Diving deeper, US customers named groceries and household supplies as the categories most likely to purchased online than before – an approximate 50 percent expected growth.
Hit Hardest, CPG Companies Need a New Approach
What, then, to make of consumer packaged goods (CPG) companies that rely on retail and channel partners to sell their product – which of course includes grocery and household products in great numbers? With brick-and-mortar retail yet to fully recover, that means fewer eyeballs on front-of-store displays and in-store promotions. It also means relinquishing direct online sales to retail partners transitioning to digital-first models – and relinquishing the trove of customer data that goes with it.
One potential avenue for CPG companies to stanch their losses and exposure as consumers transition to online, digital-first experiences is to explore a direct to consumer (DTC) approach and either partially or fully lessen dependence on retail and channel partners for the last mile to the consumer. Heinz, PepsiCo, Nestlé and their vast product portfolios are among the CPG giants who started DTC channels during the pandemic – primarily as pilot programs to test effectiveness and gather customer data rather than a full-scale transition.
Still, one can argue that COVID-19 merely accelerates an existing DTC trend. Even before the retail dip, nationwide store closures put pressure on CPG companies to at least explore the possibility. Further, digital native start-ups such as Harry’s Razor, Dollar Shave Club, Warby Parker and others proved that a DTC model for CPG products could not only succeed, but thrive by in some cases re-inventing entire business models.
DTC and Competing on CX
The imperative to compete on customer experience (CX) is another reason for a DTC acceleration. Beyond a lack of direct customer data, traditional CPG companies don’t really have skin in the game, if you will, when it comes to providing a differentiated CX that has proven to drive revenue growth. As far as the customer is concerned, that’s problematic. Consider a Harris Poll sponsored by Redpoint, where 53 percent of consumers surveyed said they expect a brand to know their buying habits and preferences, and should be able to anticipate their needs.
If there is a lesson to be learned from Harry’s Razor and other DTC start-ups, it’s that customer experience is paramount. These companies correctly intuited that consumers value a relationship with a brand; provided with an innovative experience such as selecting eyeglasses online, trying them on at home and keeping what you like, with no shipping costs for returns (Warby Parker), customers willingly break from retail and channel partners in favor of brand loyalty, convenience and personalization.
It’s a win-win model where success breeds success; by differentiating on CX, DTC companies are rewarded with first-party customer data, which can be used to further improve the experience and strengthen customer relationships. Compiling first-party customer data that was previously controlled by retail partners, DTC companies have the foundation for developing a single view of the customer that is the basis for providing hyper-personalized experiences.
Building Brand Loyalty
A recent partnership between a national retailer and a social media company shows how some traditional CPG companies are exploring innovative DTC options in response to the pandemic and the resulting changing consumer behaviors. Through the social media app, users can virtually access the retail brand’s apparel and dress a personalized digital avatar, trying on different combinations of outfits and making direct purchases within the app. A brand executive said that the inspiration for the partnership was, in part, to drive the brand’s story and engage with a new generation with authenticity.
The disruptive (and innovative) DTC channel also lessens the brand’s reliance on retail partners to accomplish those goals – and provides the company with first-party customer data. Prioritizing brand experience through the telling of a brand’s story is a familiar playbook for some notable CPG companies with some DTC presence. On the Yeti website, for instance, there’s just as much real estate devoted to in-depth adventure stories – like this one about backcountry snowboarding the New Zealand Alps – as there are product pages for coolers.
Delivering Experience Delivers Value
Yeti and other innovative companies are taking a novel approach to building brand affinity and direct relationships with customers that CPG companies have historically struggled with. The approaches help validate the notion that customer experience is king, and part of the experience for a customer is feeling good about the brands one choses to engage with. Going direct to consumer helps traditional CPG companies tell a story – about the company, about the product, and about the customer – intended to strike a chord and deliver meaning, which a customer extrapolates as value. A customer who believes that identifying or associating with a brand says something positive about them will exhibit brand loyalty, which again leads to an exchange of data – and an ongoing cycle of an improved experience, even more customer data and a deepening customer relationship.
Rapidly changing consumer behaviors have made it more difficult for brands to engage with customers with personalized, relevant experiences throughout dynamic, omnichannel journeys. Until now, CPG companies could depend on their channel partners to bridge the last mile to the consumer, but the new reality changes that dynamic. Exploring a DTC approach is one way to counter the online migration and dip in retail, while also providing lasting benefits by establishing strong customer relationships, building brand loyalty, and differentiating on customer experience.
Related Content
DTC Evolution as CPG Companies Branch Out
Cadence of the Customer and the Corner Store Experience
Customer Data Insights and the Single Customer View
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