Written by Founding Partner, Ben Yoskovitz.
Large CPG and FMCG companies have two major challenges when it comes to generating significant growth opportunities:
- Going direct-to-consumer (DTC)
- Providing more value add on top of the physical products they sell
Why is going DTC so difficult?
All big CPG and FMCG companies scaled through retail, and retail remains the key channel for their success. Some of that retail has gone online (i.e. Amazon), but most of it is still focused on physical stores and customers shopping offline. And even online retail, is still retail–the CPG or FMCG company makes the product, “sells” it to companies in the middle (i.e. Walmart, Costco, Home Depot, CVS, etc.), who then sell the products to consumers.
Every CPG and FMCG wants to go direct to the consumer. They don’t want to eliminate retail completely, but they do want more insight into and control over their end buyers. That control ideally means having a direct relationship with consumers, higher margins and more data. A direct relationship and more data hypothetically would result in building better brand affinity, being able to up-sell more and ultimately keep customers longer.
But DTC is extremely difficult for large CPG and FMCG companies, primarily because of the channel conflict it creates with retailers. Today, retailers maintain a ton of control; they decide what goes on a shelf, where it’s positioned on a shelf (people don’t like bending down to buy things), promotions and more. Any CPG or FMCG that goes “all in” on DTC may find less-than-accommodating retail partners, and that’ll have a massive impact on sales.
In our experience at Highline Beta, we’ve seen a few tactics that can help large CPG or FMCG companies leverage DTC.
One option is to create new brands and use DTC as a testing ground for validation. Retailers don’t rush to sell new brands (just ask all the startups trying to get attention!), so big CPG or FMCG companies can use DTC for experimentation without drawing significant ire. The skill sets, capabilities and infrastructure needed to succeed in DTC are very different from what these big companies are doing through their retail partnerships–so consider DTC (for now) as an experiment; learn and iterate, develop experience and ideally, expertise, and then figure out what to do from there.
Oftentimes, small brands that are successful online shift to retail anyway. Once you’ve proven a new product online, you have more leverage for going through the more traditional distribution channels, which will motivate your salespeople and your retail customers.
Another option is to provide more value “on top of” your products. Let’s dig into that next.
How do you provide more value on top of your products?
CPG and FMCG companies make physical products and sell them. That’s a simplification, but it’s essentially what they do. Two things to remember:
- Those physical products solve problems that are faced by users and create value (otherwise consumers wouldn’t buy them!)
- Those physical products are used in some context; the occasion matters.
Think of several obvious examples:
- You brush your teeth twice a day (hopefully!) while in the bathroom. Often it’s accompanied by a morning or nighttime routine.
- You drink beer with friends at social gatherings (typically in the afternoon or night), or to unwind at home while watching a game on TV. (There are other occasions, but you get the point.)
In both of these cases–brushing your teeth or drinking a beer–the products are point solutions to specific problems, but the occasion or context is much broader.
When brushing your teeth you’re likely doing a host of other things too; flossing, washing your face, using the toilet, etc. If it’s the morning, you’re probably thinking about the clothes you have to put on, and the long to-do list you have to accomplish before 9am.
When drinking a beer to relax, you’re likely hanging out with friends. Perhaps there’s food involved. Most likely there’s conversation. There’s stuff happening all around and the beer is one part of a bigger activity.
Large CPG and FCMG companies are very well-positioned to provide “value add” around their point solution products. Some do it by providing more products, but I think the more interesting opportunity is in services.
In this context, think of digital or online services. For example, a company that sells electronics might want to provide installation services (i.e. GeekSquad by Best Buy). Or a company that sells pharmaceutical and health products might want to offer a telehealth service (i.e. Virtual Care by CVS.)
Not only do these services represent new business models and a way to generate new revenue streams, they also connect back to the core business, by providing a direct channel to consumers. And this brings us back to how big CPG and FMCG companies can go direct to consumers without launching flagship online stores (and risking the wrath of retailers.) Adjacent online or digital services/capabilities that provide value add to consumers are a great way to reach users directly, enhance your brand, and connect with customers before they’d normally buy your products.
GeekSquad leverages existing Best Buy customers, but not every digital service has to work that way. Some might reach users earlier in their journey, or provide them with new ways of interacting with you, and then become lead generation to physical product sales.
Moving up the value chain is the key to driving growth innovation
If you understand a user’s journey to purchasing your products, including what triggered them to buy, their experience with the product, and their experience/what use of the product leads them to after, you can figure out how to solve a broader set of pain points for them.
Through digital services and capabilities you can reach users before the typical purchase point (i.e. walk into a store, go down an aisle, see your product amongst dozens of others, and pick yours), create value for them, increase brand loyalty and then up-sell them into products (including, potentially, subscriptions–which many CPGs/FMCGs consider the ‘holy grail’.) This is “going up the value chain” and it gives big CPGs/FMCGs an opportunity to have everything they want from DTC without necessarily pushing hard into traditional DTC online shopping.
The Quick Evaluation Guide for Identifying Potential Service Offerings
As you think about what you might offer consumers beyond the physical products you sell primarily through retail, we’ve put together a quick evaluation guide to help.
- Pick 1 product in your portfolio and complete the questionnaire below
- Use the answers jumping off points to explore how you could add services in these spaces
- Looking at some of the potential services you could pursue, which do you think will connect back to your products and encourage sales?
Click here to download a PDF copy.
Nike is known for investing heavily into mobile apps and social networks, all designed to encourage the types of healthy activities that it believes are important. Nike+ is a suite of mobile apps designed to engage Nike enthusiasts in more ways than buying shoes and clothing.
For example, the Nike Run App has been downloaded 50M+ times and has an extremely active community. The company also has a Training Club app which is designed to help people achieve their fitness goals. Both of these apps can be used by individuals, but also in social groups, further enhancing Nike’s brand.
Through Nike Run App and Nike Training Club, the company becomes synonymous with fitness and running, reinforcing brand credibility and building a channel to users outside of retail.
Looking at the Q&A Guide provided, you can imagine the team at Nike asking exploring the customer journey before and after buying shoes:
More recently, Nike released SNKRS, a mobile app and website for sneaker enthusiasts. Companies like Stock X have grown massively over the years as sneakerheads buy and sell sneakers online. SNKRS circumvents retail for the most diehard sneaker fans by offering exclusive products & drops (including special releases & collaborations), which aren’t available in-store.
Here are a few other examples of big CPG/FMCG companies diversifying into “service” offerings. One common thread through many of these is an attempt at building community. Community can be an extremely strong value add for big companies, because it can drive incredible engagement and “fan” support. But it’s also extremely difficult to do well. Companies often put their brand front and center too quickly, or attempt to turn engagement into transactions. True community requires much more than that, but if you can build a loyal, engaged community, it can be an incredibly valuable asset.
- Under Armour acquired MyFitnessPal in 2015, only to sell it in 2020. The goal was to build a social community (and MyFitnessPal boasted ~80M users at the time), but the brand connection may have been off. While MyFitnessPal is focused on a less sophisticated health enthusiast, Under Armour’s brand is positioned towards the more serious athlete.
- L’Oreal launched the Makeup Genius app in China in order to allow people to test makeup virtually before purchasing
- L’Oreal launched a UV patch + app which measures UV exposure. The app offers recommendations on what lifestyle changes users can make as well as what L’Oreal products they can purchase that will help them protect their skin.
- AB InBev launched Ze Delivery in Brazil to provide direct-to-consumer delivery for beer and snacks. In 2020, Ze Delivery had 27M+ orders. Ze Delivery provides AB InBev with a direct link to its customers.
- P&G launched the Pampers Rewards App, and has a host of other parenting tools including childbirth education classes, baby name generation and more.
- P&G helped found and launch NineSigma, a global consulting firm that helps connect scientists, technologists and others to challenges faced by P&G and other similar companies
- Eli Lilly helped co-found and start YourEncore, a consulting firm that specialize in connecting retired or experienced subject matter experts with clients in the life sciences, consumer products and chemical industries. YourEncore was acquired by Advarra in 2021.
Download a quick evaluation guide here to help you think about what you might offer consumers beyond the physical products you sell primarily through retail to expand your offering.