How Consumer Goods Companies Can Gear Up
For the Omnichannel World

By Brian Elliott

Ten years ago, Frank Ahrens of the Washington Post predicted that e-commerce would soon be a must-have channel for consumer goods companies. The prophecy came true. In the past decade, e-commerce sales have grown ten times faster than in-store retail. Today, two thirds of all shopping trips begin online, regardless of the channel in which the purchase takes place. In 2020, e-commerce will account for 20 percent of all retail sales. The future of commerce is not just stores and not just online, but a combination of the two.

In the old days, consumer goods manufacturers used to wage price wars with one another, arm-wrestle with retailers over shelf space, and shake media agencies down for volume discounts on print advertising. It wasn’t always pretty, but the roles of the players and the rules of the game were reasonably well established. Today, those roles and rules are less clear and more quickly evolving which indicates that companies must change to thrive, or even survive.

Consumer goods companies know they need to change and advance their e-commerce approach, but many of them don’t know what to do. According to our own research, almost two thirds of consumer goods executives − such as general managers, sales and marketing executives, and directors of analytics − consider “building e-commerce capabilities” a top priority.

Generally speaking, the term eCategory Management is used to describe all efforts of consumer goods companies to manage the online channel, from strategy setting and assortment management to pricing and digital marketing. It is the key to reaping the benefits of e-commerce and staying in control of your brands, products, and bottom line across all channels.

The expected benefits from these capabilities are manifold: keep up with evolving consumer needs, build a direct channel for interaction with consumers, and strengthen their brands online.

Where to Start?
Where indeed? To answer this, you need a fact-based understanding of online market dynamics by countries, categories, and retailers. This understanding will serve as the basis to define your aspirations and set your strategy. To win on your chosen e-commerce battlegrounds, you need to build eCategory Management capabilities, which may include assortment management, pricing and promotion management, merchandising, and digital marketing.

To make eCategory Management effective, you need the right data. While pure e-commerce players are often very sophisticated when it comes to data-driven processes, many consumer goods companies are still working with spreadsheets that they update manually. Part of stepping up your omnichannel game is the critical task of ensuring no piece of data is an island. All your key data sources should be connected and updated in real-time, ensuring that the source data underpinning your eCategory Management decisions reflects the real world.
Where to Play?
One of the biggest questions consumer goods companies face when it comes to e-commerce is where they should play, or at least which categories they should start with. While data about online market dynamics is scarce and often inconsistent across categories, countries, and platforms, there are various proven methods to make the best of the data that is available.

In our work with some of the world’s leading multichannel players, we observe that the most successful players combine data-driven solutions with expert judgment to pick their online battlegrounds.

For example, a global food manufacturer set out to define investment priorities for their online business. The company used a data-driven approach to conduct an “online readiness” and growth strategy review of their entire portfolio. Given the diversity of the company’s portfolio, they opted for a multi-lens review that combines different types of segmentation – of people (demographic), their choices (behavioral), and their underlying needs – to detect new sources of volume-driven growth. It turned out that most of the company’s products fell into one of three clusters:

  • Those projected to grow primarily through sales on online-only platforms, such as Amazon
  • Those forecasted to grow through local grocery delivery managed by brick-and-mortar supermarkets
  • Products that would see little to no online sales in the mid-term future.

In a second step, the company relied on a combination of existing online data and feedback from an online shopper panel to pinpoint the most promising products.

Based on the consolidated data sources, a team of eCategory Management experts helped the company set up a simple scoring model for each product. Those that achieved the highest scores were selected for e-commerce pilots. The company also decided to partner with existing online platforms, rather than to launch their own online storefront, given that the company does not consider distribution their core capability.

Assortment Strategy
As an e-commerce start-up, you are free to focus on the categories that promise the highest online growth rates – jewellery and watches, furniture, beauty products, you name it. As an incumbent, your principal objective is to protect your market share against such cherry-picking attackers and to make your entire existing assortments deliver value across channels.

Almost all consumer goods companies struggle to assess their online competitiveness at the SKU level. If your products are standardized (think printer cartridges), this is relatively easy. But if your products are less standardized (think furniture or apparel), it gets cumbersome. You could try to build the competitive set manually, but this will take forever and is prone to error. What’s more, the result will become useless as the online competitive landscape evolves.

To solve the problem, state-of-the-art eCategory solutions employ an approach that experts refer to as comparable item matching. This automated approach is based on the insight that products that have a high overlap in product features are considered comparable from a consumer perspective. Comparable item matching allows companies to compute a comparable item set for each of their products. This benchmark, plus intelligence across online ratings and product reviews from consumers, can be used to verify and optimize the consistency of a company’s assortment structure, price positioning, and points of difference in relation to competitors. Comparable item matching also helps companies find white spaces in their assortment structure and, thus, identify opportunities for future growth.

Pricing Strategy
There is almost total transparency for consumers, and many e-tailers use ever lower prices to generate traffic, ignoring the manufacturer-suggested retail price. We observe three principal strategies at our consumer goods clients to counter this trend:

  • De-commoditize your brand. If your products are must-have items, possess lighthouse quality in their category, or offer some other unique selling point, it enhances your negotiation position with e-tailers, and you should consider a Minimum Advertised Price strategy that you enforce.

  • Differentiate your assortment. Many successful players offer only a selection of their assortment online, or create online-only package sizes and bundles. According to our research, consumer goods companies that succeed in e-commerce are 1.4-1.6 times as likely as their peers to develop unique online SKUs and bundles.

  • Launch your own e-commerce channel, either individually or as part of an alliance of like-minded players, to control the entire value chain. While almost two thirds of executives we surveyed said they had considered this option, very few consumer goods companies have been able to execute this at scale.  It is hard to be a retailer.  If you pursue this approach as part of an overall strategy, make sure you maximize the value through mining customer data to make better portfolio choices across all retailers.

While some of these strategies go beyond pricing, they are all about preventing price erosion and protecting value. But before you can go down any of these avenues, you need transparency. That is why leading companies use online price intelligence solutions that continually monitor online shops to analyze the category coverage and online pricing patterns of key competitors.
State-of-the-art solutions have dashboards that cover entry price points, exit price points, average price points, and price point distributions at the product level. These solutions also allow companies to track online prices in real time and flag outliers automatically. This kind of price monitoring helps you figure out who is selling your products at which prices. It enables your e-commerce team to object to undue discounts or adjust your pricing in other channels – be it to defend market share, protect brand equity, or repair relations with offline retail partners.

It’s an Unavoidable Transformation
E-commerce will continue to grow at the expense of other channels. At the same time, online research and mobile apps are changing the way shoppers arrive at purchase decisions, regardless of whether they end up buying online or offline. Consumer goods companies need to employ eCategory Management technology to have competitive assortment and pricing strategies and ready their business for the omnichannel world if they are to compete in any meaningful way.

Brian Elliott is a managing partner at Periscope By McKinsey.

                                                                        Early January 2018