People
As consumer product (CP) sales shift online at a rapid pace, companies must prioritize opportunities across the e-commerce value chain. Many of these CP companies have traditionally viewed e-commerce in a reactive manner while focusing on traditional channels. However, they must now optimize product lines including differentiation (such as, online exclusive SKUs and price pack architecture modifications) if they are to capitalize on opportunities in the market.
While organizations know how to gear SKUs for brick-and-mortar, they often struggle to find the right product assortment to optimize margins for online channels, particularly where transportation, packaging, and fulfillment costs can quickly erode margins.
As they consider product design and portfolio assortment, CP companies must create or refine comprehensive brand, category, and channel-level strategies with forward-looking financials to help make the right product decisions.
Addressing assortment challenges
Digital growth has been outpacing brick-and-mortar for years, but the pandemic significantly increased the pace of digitization. In 2020, brick-and-mortar sales stayed flat, while online sales grew by 32%. While e-commerce growth fell off in 2021 as consumers returned to stores, it is still forecast to be on an upward trajectory over the next five years. Some of the biggest growth opportunities are expected to be in food and beverage, health, and cosmetic and beauty categories, according to eMarketer and AlixPartners analysis.
Despite the opportunities, many CP companies struggle to make the most of their e-commerce operations. Many have historically let marketing departments and retailers drive their offerings. While this may suffice in the brick-and-mortar environment, it hasn’t always translated well into e-commerce, which has different operational realities, profit margins, and consumer preferences.
There are several key challenges:
- As many CP companies have continually expanded SKU counts to meet the needs of every customer and opportunity, there are now simply too many products online (i.e. the endless aisle).
For example, although a typical home improvement store may benefit from 200 different paint colors and textures on the store shelves, it can be complicated and overwhelming on a website. In e-commerce, the complexity of too many offerings and decisions can turn off consumers and lead to lost sales.
- Another challenge is ensuring that products are optimally designed for sale in online channels. As the size, weight, and dimensions of products are critical in the e-commerce environment, retailers must understand the true profitability of their offerings. The design-to-value concept in e-commerce is about creating things that are more usable for the digital space and better designed for shipping. For example, prominent laundry detergent brands have redesigned their laundry detergent with optimized packaging and less water to make shipping more efficient while also pushing for innovation (e.g. pods). Rethinking products from the ground-up can enable companies to change the entire cost and value equation while also offering opportunities to improve ESG and sustainability. The Tide Eco-Box design uses less packaging, 60% less plastic, and 30% less water than its 150-ounce bottles.
- A third issue is profitability. Companies that don’t track profitability in the e-commerce space may find margins quickly falling into flat or negative territory. This is especially challenging in e-commerce, where margin compression is often tied to higher costs, such as from fulfillment, last mile, and returns. At the very minimum, CP companies need profitability modeling or pro forma analysis built into the company’s DNA. This should include a clear understanding of revenues and end-to-end costs with clear allocations at the product and customer levels. This will help in decisions to market more profitable items while rationalizing the unprofitable portion of the assortment.
Organizations need more than just discipline as they tackle the complex shift to online sales. They need a new approach to transform their e-commerce capabilities and optimize their models for the market. While the pandemic put e-commerce into overdrive, the shift to online channels is expected to continue. Consumer goods companies that want to remain competitive and meet consumers on their preferred channels must act now to transform their online operations.
This is the third in our six-part e-commerce series. Read the introductory macro piece here, our point of view on how to structure the e-commerce operating model here, and stay tuned for upcoming editions, where we will tackle each of the five pillars of the AlixPartners framework.
