Industry Insights

e-commerce, we need to talk about e-commerce

E-Commerce, Ecommerce, eCommerce, e-commerce… we don’t even know how to spell it yet, but there is little doubt that there is a digital transformation of shopping and the experience well underway.  Just 9 years after the first smartphone, we’ve already added m-commerce (or should it be mCommerce) to the vocabulary as one example.  With cognitive technologies entering the shopping experience at companies such as North Face, we are about to see another jump forward.

However, much of what is discussed is from the perspective of the e-tailer (think amazon) or major retailers, but I want to look ahead for CPG.  How far will the lines blur?  Will  DTC (Direct-to-Consumer) become a dominant force?

vincent talks about e-commerce

vincent talks about e-commerce

Vincent Le Noble is the Consumer Product Leader for IBM consulting in Benelux, and someone who keeps well ahead of the curve on developments in CPG and Retail:

“e-commerce should be high on the agenda for every CPG company.  Certainly in developed economies there is a sense of urgency to secure share of the channel.  There is much movement in the positions of the players in the CPG-Retail value chain caused by backward and forward integration; in this environment it is essential for brands to maintain close contact with the consumer and e-commerce is the link.”

I suggest that e-commerce remains a contested term in CPG and therefore still needs to consider the possibility that multiple strategies are in play for CPG and the winner is yet to be confirmed.  For example, brand-led DTC (DTC for short) can mean owning the channel or collaborating with the channel owner.  Given the existing and growing digital footprint of retailers this unlikely to be the sole determining success factor for a CPG company; the level and quality of collaboration between a CPG company and retailers will be a major factor.

 

The e-commerce outlook

By most estimates e-commerce accounts for less than 10% of all consumer spend in the developed economies (with some categories much higher, but many everyday items very low).  EU studies set the expectation that e-commerce in Europe will represent 50% of all sales transactions by 2050, rising from a figure of around about 7% today.

For brand owners it is important to appreciate the role of Gen Z and Millennials, two generations whose shopping expectations are set by companies like amazon and Netflix.  From our own IBV (Institute for Business Value) research we see how technologically savvy they are and that they instinctively know how to benefit from the convenience and enrichment that e-commerce can bring.  And remember, their purchasing power is growing.

Simon Glass on e-commerceLet’s hear from Simon Glass, Global Retail Lead for IBM Institute for Business Value, on the future of retail more generally:

 “The retail industry is undergoing a significant period of change driven by evolving customer expectations and disruptive forces from all directions. Traditional business methods have been superseded by new bricks & clicks retail models where physical stores are digitally linked with online and mobile channels to provide customers with a seamless, omnichannel shopping experience. Stores still represent more than 90% of revenue for bricks & clicks retailers, but the purpose of the physical store is changing to help differentiate retailers from their competitors. Store concepts are being redesigned to support specific purposes; as showrooms, brand-marketing tools, warehouses or a graded combination of each. Additionally, whereas in the past stores have been static, they’re changing to become more fluid, with pop-ups, mobile stores and other short duration formats becoming an important part of the store portfolio mix.

 Stores are also being bolstered by sophisticated, value add technologies that improve the shopping experience for customers, as well as empowering associates with mobile access to data and improving operations to drive out costs. For example, beacons embedded in shelves and digital signage can track shoppers’ mobile devices and generate location-tracking data, which retailers can leverage to gain insights on shopper traffic patterns. This can lead to enhanced shop floor layouts for a better customer experience. Innovation is advancing rapidly with some retailers now experimenting with robotics to enhance the novelty of a customer’s experience or to perform more basic tasks, allowing associates more time to focus on customer interaction. Those retailers that continue digital integration between channels will more likely prosper and the store of the future will remain a vital touchpoint between retailers and their customers.”

 

e-commerce as channel collaboration

In contrast to retailers, CPG companies have only started to place e-commerce at the top of their strategic agenda.  For most this will mean a new stage in the relationship with major trade customers as it is the major retailers that are providing the online storefronts and channel technology.  The role of the CPG company therefore needs to focus on product information, engaging content and learning how to optimize (maximize?) shopping outcomes in their favour.

In practical terms this means:

  • Identifying how consumers get to the retailer sites (the journey) – mobile, social, search? This includes making sure that you ALWAYS have a “buy now” button on brand sites, Facebook pages etc
  • Working with the retailer to ensure that personalization works effectively
  • How to make certain that it is your brand they get to on their journey without being waylaid by promotions and offers from other companies
  • Understanding how site search works for each retailer, and using tags and metadata (data about data) to get your brands at the top of the list
  • Perfecting product information management to ensure that the best and latest pack shots and copy gets onto the retailer site. In turn this means working with specialists such as io (an IBM company) to exploit the power of CMS (Content Management Systems) from the likes of Adobe, Sitecore and SAP Hybris to name but three.
  • Adopting dynamic approaches to pricing and promotions (could we see the equivalent of Uber surge pricing do you think?)
  • Working with reviews and reviewers to build engagement with influencers
  • Using predictive and prescriptive analytics to anticipate and drive consumer actions based on behavioural data from the retailer site.

In turn this implies a more consultative trade relationship (business and technology) and ultimately changes to pricing and trade investment strategies.  In my view this is the true Digital Transformation at the heart of e-commerce for the majority of CPG companies.

The results can be powerful.  L’Oreal achieved 37.9% online channel growth in one year by making e-commerce a strategic priority and helping their retail partners to streamline their e-commerce processes (in favour of L’Oreal brands of course!).

 What do I mean by “consultative” in this context?  Currently retailers provide the technical platform, access, policies and procedures.  After all, they made the investment, and it is their business.  This places constraints on brands in terms of placement and presentation of product images, delivery pricing, promotions and all of the supporting copy.  Working within these constraints to maximum effect requires an alignment of interests.  In turn this requires CPG companies to establish digital roles within their Category teams and to invest time with the retailer to understand how they have put their e-commerce strategy into action.  Yes, there is technology involved (product information management, content management etc), but changes to business practices are key here.

It is worth remembering that there is a lot at stake for CPG and retail here.  Recently, online pure-play retailers are already offering convenient subscription models (e.g. Birchbox, The Honest Company).  They have exploited their lack of legacy, access to hot capital and better understanding of the digital world to challenge iconic brands and retailers.  Just look at how well some have trumped established players in SEO (search engine optimization).  As more of these new entrants enter the market, exploiting technology to offer more personalized products and services for digital natives, the old guard will need to make a real effort to keep their place at the top of the search algorithm results.  And this requires a deeper level of collaboration and consultation between manufacturers and retailers.

 

The challenge and opportunity of DTC

When people talk about e-commerce and CPG companies, they usually dive right away into brand owner DTC (i.e. where the CPG company effectively competes with established retail channels).

What about DTC from a retail specialist’s point of view?  Here is Simon again:

 “E-commerce (mobile & online) is growing faster than any other channel – it’s the best way for a brand to establish a ‘retail’ operation without incurring the costs of physical stores. They can create a powerful foundation on which to build by leveraging the traditional brand relationship strengths of CPG organizations and integrating consumer insight into a personalized shopping experience.”

What does Vincent say:

 “Should brands compete with retailers by setting direct to consumer e-commerce? Well omnichannel thinking certainly applies here, but for DTC there should be a clear value-add or rationale for the consumer to shop directly.  The examples I would offer are customized Nikes (NikeID) or convenience razors at your doorstep from Gillette Shave Club.”

I argue that it is still hotly debated what form of DTC will work best (subscriptions, a retail style presence, social selling?), and how retailers (especially the modern trade) will react.  There is even an argument that says a large-scale manufacturer vertically integrating right the way through to full scale retail operations could attract unwelcome attention from antitrust and monopolies regulators.

Then there are the supply chain implications.  CPG companies are not set-up, for example, to handle returns from consumers and the associated logistics.  The demand and supply matching for e-commerce is different to the world of weekly or monthly orders from a Category Buyer.  Segmentation of the supply network becomes more complex.

This is not to say that DTC doesn’t have a role.  Rather the opposite: it is vital as the shopper journey include many moments of truth that brands cannot ignore.  My point is, DTC isn’t one thing and it should be part of a channel mix that recognizes that established retailers aren’t going anywhere soon.

What does Simon think about DTC versus a focus on major retailer?

“Ideally brands should do both. With competition being so rife, brands will need to be ready to adjust their business strategies quickly, confidently – and often. Brands need to consider flexible partnerships and to be comfortable with blurred business boundaries. Successful brands will enter into long term, short term tactical etc. working arrangements with consumers, retail partners and even competitors. Ecosystems are being developed to support this revolutionary way of conducting business to help experimentation with innovation…for example taking calculated risks with new technology that might be too big for one partner on it’s own.”

DTC approaches that seem promising for CPG:

IBM like to say “the customer is the channel’ and nowhere is this more accurate than for a brand offering DTC e-commerce.

 

The importance of media

CPG companies need to ensure that their brands are discoverable, top listed and top reviewed.  They need to ensure that in a digital world they do not lose consumers as they move from brand-site or Facebook advertisement to the shopping transactions.

The effective use of media in the digital world is important here and, in my view, there is a long way to go (how many times do I have to remove inappropriate advertisements from my Facebook feed, for example).  Ad blocking software poses a significant threat, but it wouldn’t exist if the ad targeting was effective.

In the context of e-commerce, personalized, timely and relevant advertising, promotions and engagement is a top priority.  This idea has already begun to be a reality: The world’s biggest advertisers and media owners have united for the first time to form what is described as a ‘coalition for better ads’ at a time when skepticism over the efficacy of digital media is rife.   Procter & Gamble, Unilever, Google and Facebook are among the group’s founding members, alongside trade bodies such as the World Federation of Advertisers, IAB Europe and the American Association of Advertising Agencies.  This is a major step forward.

“Better ads” also requires a deeper understanding of how to use new and emerging media technologies well.  AR (augmented reality) is giving brands new ways to drive people to products online and make online purchases even more convenient (take a look at Blippar – a media agency that harnesses image recognition, augmented reality and computer vision technology to bring the physical world to life through smart devices).

Better ads require better data to identify consumer actions before they consciously formulate a desire. It would appear obvious that consumers could benefit from better media and shopping experiences if brands, retailers and media companies shared more data with each other, but there are profound legal and ethical issues that no-one has simple solutions for.  As some companies have found out, there can also be unpredictable and nasty consequences.

 

Technology trends for e-commerce

I asked Vincent to give me a view on what disruptive technologies will drive e-commerce in the future?

“e-commerce will be disrupted by sensors and new kinds of  intelligence from various internal  and external sources.  For CPG companies I expect to see new platforms emerging linking retailers and consumers so that more holistic insights can be obtained.”

We do live in exciting times, don’t we?  Just some of the technologies that can give CPG companies (rather than retailers) a competitive advantage in the e-commerce world are:

  • One-click payment worldwide. CPG companies like to promote their brands consistently everywhere in the world.  If you control the brand site this is straightforward, but this has been a challenge for e-commerce even when the site are owned.  But change is coming.  The World Wide Web Consortium has called in Google, Facebook, Apple and others to create a one-click payment option that can be applied worldwide
  • Connected products and smart packaging (using the Internet of Things) being used at home and out of home to deliver improve highly personalized ad targeting for brands and to improve the ecommerce experience (e.g. by exposing consumers to offers, new products and samplers)
  • Digital printing opening up even more new forms of interaction between consumers and physical products with unique identifies tied back to marketing databases. If this is based on a well-qualified dataset, this technology can be very effective in building engagement as well as driving trial and repeat purchase.  Perhaps the most striking recent example is from Coca-Cola and the ‘It’s Mine’ campaign where they used digital print to create millions of unique labels for their iconic bottle.
  • AR and VR (Virtual Reality) enables brands to grab attention at many points in the consumer journey by being more exciting and creative. For example, Rimmel launched “Get the look” app which lets you steal the look from a friend combining sophisticated image recognition and virtual reality
  • Thinking machines putting brand advocates at every point on the digital journey. Cognitive computing (such as IBM Watson) is opening up new opportunities for brands to automate personalization of offers and improve engagement during discovery, purchase (and repeat purchase).  The same technologies can transform care lines and allow them to offer 1:1 advice for billions of consumers. Robots are coming too.  Sounds too futuristic? Pepper is a human-shaped robot able to interact with humans in a natural way using cognitive software, recognizing emotions and different character traits
  • In the supply chain, unattended vehicles offering imagination-capturing solutions for the final mile (kilometer) in DTC. Arial drones and driverless trucks are serious mid-term technologies that offer brands a means for personalized fulfilment, even in hard to reach areas of the world

Simon offers a retailer view on e-commerce technology trends:

“Mobile continues to be  the device of choice for customers, particularly those from the younger generations, so developing apps to enable easier access to data and to speed safe transactions will be ‘table stakes’ for e-commerce providers in the future.  With so much data to harvest, analyse and distribute around the organisation, cloud computing will be a vital technology to allow brands to compete more effectively in the future and this means that state of the art security measures are needed to protect personal data.“

 

Beware the disrupters

“Exciting times” implies both, opportunity and threat.  Setting up a beautiful e-commerce site with a powerful back-end can be done in a matter of seconds. Technologies such as IBM Commerce on Cloud and SAP Hybris have dramatically simplified the business of establishing an omnichannel presence.

With social media virally spreading cool things, virtually no paid-media investments need to be made to scale a business in the e-commerce world.  Disruptive entrants are waiting in the wings to threaten manufacturers and retailers by being a better blend of the two from day one, and there seems no shortage of private-label manufacturers and co-packers out there.  No venture capital?  Well, companies such as woocommerce  allow you to start a store for free, has a subscriptions extension, and takes automatic payments through 20+ supported gateways. It even has extensions build in such as ShipStation to streamline the process of printing labels and generating tracking numbers. In no time, a startup can go from “someone with an idea” to “someone with an enticing and professional e-commerce store”.

Could a CPG start-up use e-commerce to seriously threaten an established giant?  Want to wait and find out as it entices your Gen Z and Millennial consumers into a frenzy of clicking and collecting from their smartphones?

Here’s a final word from Simon:

“Putting the customer at the heart of everything should be the #1 priority for any e-commerce operation.  Know what your customers REALLY want and anticipate what they’re going to need in the future. The next priority is to get the basics right – availability (make sure the system is reliable), functionality (effective search, comparison, help) and a great user experience (intuitive look & feel and ease of use with the fewest possible steps for every transaction).”

 

IBM, Distinguished Engineer

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