THE IMPENDING DEMISE OF BIG CONSUMER BRANDS AND RISE OF DIRECT-TO-CONSUMER ONLINE RETAILAfaq Khan
In this article, I will go over the reasons why big consumer brands are struggling today and how is this the best time to kick off your next private label brand.
If you look around, big brands such as P&G, General Mills, Kellogg’s, Unilever, Kraft, Coca Cola and PepsiCo are all either in low single digit positive or negative revenue growth. Big consumer brands are in trouble for many reasons however if I were to put my finger on a few big ones then those would be supply chain-driven business model, lack of innovation and transparency, price deflation and e-commerce and rise of direct to consumer or DTC private label brands.
Let me unpack each of them for you.
- Supply Chain Driven Business Model No Longer Works
First mover advantage is no longer enough and over-reliance on supply chain to compete is nothing but a train wreck at this point. What am I talking about? Supply chain dominance is no longer equal to market dominance. We live in a world where owning supply side or differentiating based on complicated supply chain is pretty much a liability. You can look around and see what Amazon, Uber, Airbnb and Tesla are doing to their supply chain-oriented dinosaurs. Instead of owning supply, you have to own the demand in this new retail era.
- Lack of Innovation and Transparency are Kiss of Death
Gillet’s business model of adding features and raise prices no longer works. Gillet’s share of the US men’s razor market has gone from 70% to 50% over a span of 6-8 years, thanks to Dollar Shave Club and Harry’s, as they pretty much shaved off about 12% market share on their own. In their struggle to recover, Gillet has dropped prices by about 20% and Unilever, their parent company, purchase Dollar Shave Club for a staggering $1B when they were doing about $200M in annual sales. You can find similar examples in Pet Food with Farmers Dog, in Mattresses, in Grocery, and even Shoes. Direct to Consumer Brands like Allbirds, Jack Erwin and M. Gemi have gained nearly 15% market share in just 5 years whereas Nike is still struggling with DTC sales which are even less than 50% of their total revenues.
Another big one for Consumer Product Groups or CPG brands is their lack of transparency due to complex supply chains and distribution network where product origin visibility is lost as far as consumers are concerned. As Jeff Bezos famously said, “Your brand is what other people say about you when you’re not in the room.” Today, you can’t build your brand image purely on the basis of Ad spend, you have to connect with your customers and join the conversations already happening across various traffic channels primarily social media.
Today, customers are willing to pay more, if they believe the brands they are buying from, is fully committed to their set of moral and ethical values and belief system. Brands now need to be purpose driven and convey their values through engaging content with their customers. You can easily notice that all of the DTC brands that we have talked about have done an amazing job at telling their story. Don’t believe me? Check out Dollar Shave Club epic launch video.
Customer service and support excellence is another by-product of this DTC phenomenon. DTCs are able to directly and deeply connect with their customer base where everything including returns/exchange is a breeze. You can look at Zappos as an example, I bet there is no example to be found in offline retail that matches Zappos customer service and return and exchange policies which helped them turn shoe buying on its head.
- Price Deflation and E-commerce
If you think these are the worse times for CPG brands, let me remind you that ecommerce still represents about 9 to 10% of the total retail business in the US, so 90% of the sales are still happening offline or in physical stores. However, ecommerce represents about 90% of the growth in US retail across almost all categories and Amazon single handedly accounts for about half of US online sales at this point primarily driven by their Prime members.
E-commerce and online businesses can’t take all the credit for the destruction of brick and mortar stores. CPG incumbents have taken their customers for a ride for decades and eventually with the rise of internet giants and their DTC model, it paved the way for changing of guards. It also didn’t happen in 5 or 10 years; CPG incumbents have seen the rise coming for nearly two decades but preferred to not believe it counting on their competitive edge buried inside their supply-side control which is now a liability.
In a big market, as competition heats up, prices fall. Internet companies such as Amazon have provided massive products catalog, free and fast shipping subsidized with Prime membership, and excellent customer service and support to get where they are today. Obviously, internet model doesn’t have margin suckers in the middle since they run direct to consumer business model. Price deflation is highly visible in food market esp. after Amazon purchased Whole Foods.
Now, Amazon is making their foray into healthcare with a partnership with Berkshire Hathaway and JPMC. Now, they have also taken another great step by buying PillPack to fight it off with drug mafia. Rumor has it that Walmart was dragging their feet for months but didn’t make a final offer for PillPack, too late now! You can sure bet that highly inefficient healthcare system and market in the US is now ripe for disruption much like what’s happening in grocery market with Amazon promising to gradually to drop prices to make shopping at Whole Foods more affordable. Allow me to digress but let me share a quote from Walgreens CEO in response to Amazon’s PillPack acquisition. He said:
“Yes, it’s a declaration of intent from Amazon, but the pharmacy world is much more complex than the delivery of a certain packages.” This sounds exactly like “We’ll be fine, it has a lousy digital keyboard” comment that Blackberry CEO said after watching iPhone launch webcast back in 2007. Oh well, we all know what happened next.
Looking forward, I can already see that whatever happened to brick and mortar stores over the last 10 years or so, will now happen to big retail brands such as Proctor and Gamble. All of the incumbents are sitting on piles of cash, so they will try to buy their way out of it with M&As. Yes, internet economy is huge and disruptive and has already claimed many victims in the form of malls shutdown, layoffs and downsizing, but at its core, it is about direct to consumer no-BS style product development, genuine marketing and outreach on the basis of first-party data coupled with excellent customer service and support.
There are many other reasons why big brands are in trouble such as their struggles in the face of increasing regulations, ease and reach of information sharing enabled by social media, and their age-old reliance on one-way media ads.
Proctor and Gamble and the World of Private Label (source: cbinsights)
Product based, and supply-side differentiation is long dead and new retail world, online or offline, is about seeking genuine conversations with your customers, building a community based on shared purpose and values, and investing in your customer recognizing the fact that your customer is the new power broker. These are the same tenants that you can use to build an awesome private label brand and launch both on Amazon and sell using your own website, a tall order in the era of Amazon.
Last but not least, I invite you to come and join me on Private Label Mastery Blog where I teach these principles and practices including topics related to Amazon FBA, Kindle publishing and building your own private label brand, so you can realize your financial dream and begin to live the Life on your own terms.
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