Serving customers through e-commerce channels isn’t optional any longer for consumer products (CP) companies. The pandemic has accelerated what had been a gradual channel shift and converted even long-time online skeptics in the process. By 2026, 35% of CP revenue for the 10 largest consumer categories -- or $1.43 trillion -- is expected to come via online shopping. This means more than $670 billion in revenue will likely shift to e-commerce over the next three years.
While most CP companies have some experience with e-commerce, they often face a wide range of challenges to truly unlock its potential and avoid margin erosion. These can include determining which online channels are suitable to invest in, finding ways to grow profitably in today’s hypercompetitive environment, aligning organizational structures to utilize every channel effectively, creating superior customer experiences, and dealing with channel friction. Channel friction, which is essentially the added cost of doing business in the channel, often causes significant margin erosion – in the range of 7 to 14 percentage points. This is mostly driven by digital marketing expenses and higher distribution and logistics costs, including fulfillment, shipping, packaging, and returns.
It is imperative, then, that CP companies take a step back and strategically think through exactly where to play and how they can win.
CP companies can transact online with consumers through two paths: 1) their own direct-to-consumer e-commerce presence, also known as brand.com; or 2) a partnership with e-commerce marketplaces, omnichannel retailers, and/or delivery-focused aggregators. Most companies will end up with some combination of the two – however, every company must decide what its right mix is based on its goals and after considering the challenges and opportunities of each option. Each pathway should be understood in the context of the company’s brand strength, strategic ambitions, and brick-and-mortar presence.
Advantages of the direct-to-consumer (DTC) route:
- If done efficiently, DTC can lead to better margins than other channels
- Offers the company a unique and unprecedented ability to own the entire customer journey and engage directly to turn consumers into loyal brand advocates
- Provides direct access to customer data that can be translated into insights for product development and marketing messaging, especially when combined with pilots or tests
Challenges that can come with DTC, especially for nondigital natives:
- Expanding core capabilities from being a B2B-centric business to also include digital B2C competencies can be difficult. For example, you need to invest in digital marketing capabilities in the absence of being able to rely on retailer or marketplace search-engine discovery algorithms
- If the brand is not well-known, customer acquisition costs can get very high very quickly
- Selling through multiple sales channels always carries the risk of channel conflicts, for example with regard to pricing and availability
- Consumer expectation of two-day delivery for many product categories presents a new logistics challenge. For example, distribution center operations need a different configuration to accommodate the change from pallets to individual picks
- Returns are increasingly an expensive problem that hurt margins
- The other option is to feature on online marketplaces such as Amazon, Walmart.com, eBay, Alibaba, Target+; rely on omnichannel retailers; or work with aggregators like Drizly and Instacart, which are mostly home delivery services that make assortments of brick-and-mortar retailers shoppable online.
Advantages of selling on e-commerce marketplaces, omnichannel retailers, or aggregators:
- Algorithms used by these platforms will pick up on clicks and positive customer reviews, creating virtuous cycles and feeding new customers toward popular products
- These marketplaces and retailers typically have a huge reach and a customer base with practiced online purchase patterns
- They offer the ability to run A/B tests with targeted promotions, unique SKUs, and configure tests
Challenges that can come with selling on e-commerce marketplaces, omnichannel retailers, or aggregators:
- Many retailers are finding their e-commerce operations to be margin decretive, so they are passing this channel friction down to CP companies
- They often have strict service-level agreements that are enforced via onerous fines and penalties
- Genuine products often compete on the same platform against grey market products and resellers
- They can include specific packaging requirements that differ from traditional retail packaging. In addition, integrating warehousing, distribution, and picking capabilities with existing systems can be challenging
- CP companies must learn and respond to new demand patterns
As they determine their optimal channel mix, CP companies must simultaneously invest in the right capabilities for that model. Consumers expect a seamless end-to-end customer journey, which can be hard to deliver consistently at scale. However, there are ways to get it right:
- Adjust your assortment to achieve profitable price-pack architectures and reduce shipping costs where possible, while differentiating DTC offerings from what is sold through channel partners
- Develop a memorable consumer experience, including user interface, quality of offerings, and service before and after purchase
- Optimize the supply chain for efficiency is a way that is appropriate for the level of DTC growth
- Step up digital marketing prowess and determine how to optimally split marketing spend between digital and traditional marketing channels
- Adjust your operating model and hardwire through changes in the organizational structure
- Take a clean-sheet approach to e-commerce-specific processes, metrics, and incentives to ensure success and not base these on the legacy brick-and-mortar operating model
- Start slow until you have learned enough to scale the setup and infrastructure
While it is undeniable that every consumer products company needs some kind of presence online, the right solution will differ by the kind, size, and specific business goals of the organization. The current environment is too competitive and the risk to brand too high to get this wrong. Every e-commerce transformation demands purposeful focus.