Should CPG
manufacturers go
direct to consumer—
and, if so, how?
Consumer Packaged Goods October 2017
Julie Bashkin
Priti Joshi
Megan Pacchia
Kelly Ungerman
Should CPG manufacturers go direct
to consumer—and, if so, how?
The digital world has given manufacturers new ways to engage consumers,
but online direct-to-consumer models are a mixed bag. Which ones
actually work?
E-commerce is here to stay, and it’s affecting every Unilever’s $1 billion acquisition of Dollar Shave
product category. Consumer packaged goods, Club), betting on start-ups (Campbell Soup’s
which were once purchased almost exclusively in $10 million investment in meal-kit company
stores, have moved into the “digital battleground”— Chef’d), or launching their own D2C initiatives.
that is, consumers are increasingly researching and
buying them online. Recent surveys indicate that To be sure, D2C efforts in the CPG sector are
nearly one in four US households already shops for still in their early days, lagging far behind D2C
food and beverages online; our research suggests juggernauts in other categories, such as apparel:
that the number of US consumers buying health Nike, for instance, already generates more
and hygiene products online could more than than $9 billion in D2C sales. And D2C may
double within a year. not make sense at all for certain products. A
CPG manufacturer should carefully study how
Meeting the online consumer demand—and consumers typically shop for its products and
perhaps stoking it, as well—are a rash of new brands, and how its products’ characteristics
pure-play competitors, some flush with cash from would affect online fulfillment. (Products that
venture capitalists and private-equity firms. These melt quickly in room temperature, for example,
new players are giving established manufacturers may be poor candidates for D2C channels.)
and retailers a run for their money. In the snacks
category, for instance, start-ups NatureBox and On the whole, there have been only a handful of
Graze have quickly captured online market share hits and many misses among CPG companies’
and grown into hundred-million-dollar businesses. forays into D2C, while for others the jury is still out.
What sets the hits apart from the misses? We’ve
But large consumer-packaged-goods (CPG) manu- found that success typically rests on four factors:
facturers aren’t standing still. To counter the threat a clear definition of D2C’s role, a hook to attract
of disruptors, and in response to constant margin and retain consumers, a thorough plan for gaining
pressure from retailers, many CPG companies the required capabilities, and a scalable economic
are exploring ways to reach consumers directly model combined with a venture-capital (VC) mind-
through digital channels. And they’re no longer set toward metrics.
content to send out static, one-way marketing
messages, such as emails or banner ads announcing A crucial first step: Defining the role of D2C
a special sale. Instead, they’re looking to engage A CPG manufacturer’s decision to engage directly
consumers in highly personalized, consistent with consumers could, of course, displease its retail
interactions. Some CPG manufacturers are partners. Therefore, a company’s D2C strategy
getting into the direct-to-consumer (D2C) game shouldn’t stand alone; it must be integrated into an
by scooping up fast-growing new entrants (see overarching channel strategy that anticipates—and
2 Should CPG manufacturers go direct to consumer—and, if so, how?
seeks to resolve—channel conflict. We recommend Consumers are encouraged to submit videos,
that CPG companies start by deciding on the role photos, or essays describing their inspiration for it.
their D2C channel will play: What do they really
want their D2C efforts to achieve? The answer A platform for controlling the user experience.
can be one of four options along a spectrum that Companies that choose this option are most
emphasizes consumer insights on one end and sales concerned about owning the communication of
on the other (Exhibit 1). The likelihood of channel the brand story to consumers. They look to D2C as
conflict increases as companies get closer to the a means of sharing information and content (such
sales side of the spectrum. as videos or narratives about product features)
directly with consumers. Through D2C, they
An insight and innovation engine. Some CPG aspire to meet rising customer expectations and
companies want an engagement platform that to provide a positive—perhaps even memorable—
gives consumers incentives to share their opinions brand experience, aiming to be on par with
and preferences. Such a platform can give a CPG companies (such as Disney) that have built a
company a more comprehensive view of consumer reputation for customer experience. Disney.com
behavior at every stage of the consumer decision features media content such as movies, TV shows,
journey. It can serve as a test bed for innovation— and music; promotes the company’s amusement
not just in product development but also for parks; and offers ideas for Disney-themed crafts,
other commercial levers such as pricing or online recipes, and parties.
merchandising. It also provides the foundation
for delivering more personalized experiences over An omnichannel marketing and sales engine.
PoR
time.2017
Frito-Lay, for instance, has conducted its A CPG brand may want the online interactions
Should CPG manufacturers go direct to
“Do us a flavor” contest on dousaflavor.com forconsumer--and, if so, how?
of consumers to begin on its own website but to
Exhibit 1 of 2
several years, offering consumers a chance to end at a retailer’s, where they can then purchase
win $1 million for suggesting a new chip flavor. products. Through this type of D2C play, manu-
Exhibit 1 Direct-to-consumer websites can play different roles for consumer-packaged-goods brands.
Must-have capabilities for each role
Consumer insights Sales channel
Insights and Platform to control Omnichannel market- Sales driver
innovation engine user experience ing and sales engine
• Advanced analytics • Brand strategy, with • Digital customer- • User-experience design
to generate consumer online as central acquisition strategies • Advanced analytics
and shopper insights component Advanced analytics
• (to anticipate SKU
• Social listening and • Content development to generate consumer exhaustion, recommend
search scraping and management and shopper insights products, etc)
• Test-and-learn muscle • Predictive analytics • Technology integration • E-commerce operations
for personalization with retailers (eg, SKU-level
• User-experience design replenishment)
Should CPG manufacturers go direct to consumer—and, if so, how? 3
facturers can exert greater influence over how brand equity. That said, some CPG companies that
consumers engage online not just on their own site ventured into D2C as a pure sales channel five or
but also within a broader ecosystem that might more years ago have rethought their approach—in
include retailer sites and social-media networks. part because of shifting consumer purchasing
In this way, they can control the “zero moment habits and the expense of driving traffic to D2C
of truth”—a term coined by Google to refer to the sites—and have gradually changed their websites
online research that consumers undertake before to function more like insights engines.
making a purchase.1 The Honest Company, for
instance, offers subscriptions and sells products Giving consumers a reason to visit again
on Honest.com, but the site also has a “retail and again
locator” helping consumers find stores that carry Having settled on D2C’s role, a company must then
Honest products. determine what D2C model to adopt and what value
the D2C site will offer consumers. Why should they
A sales driver. In choosing this role for a D2C site, visit the site? And after visiting once, why should
a manufacturer is essentially deciding to become a they come back?
retailer. At Keurig.com, for instance, coffee company
Keurig offers a broad assortment of both brewing Companies that choose the same role for their
machines and coffee, a strong loyalty program, D2C plays could opt for different D2C models.
auto-delivery options, and a seamless reordering For instance, two manufacturers may both decide
process. An e-commerce–enabled website can help on a sales-driver role for their D2C sites. One
a manufacturer to reduce its reliance on retailers manufacturer might opt for a subscription-based
and to hedge against disruptions in its retailer model; the other might offer the ability to custom-
relationships. This is especially important in an ize or personalize certain products or brands.
environment where retailers are putting margin We’ve found that the choice of model doesn’t
pressure on suppliers, weaker retailers are going out necessarily determine success or failure. Rather,
of business or being acquired, and all retailers view what matters most is a clear and compelling
their consumer data and insights as competitive consumer value proposition, or hook—a unique
advantages and are therefore unlikely to share them reason for consumers to visit the manufacturer’s
with CPG manufacturers. D2C site rather than their favorite retailer’s website.
As Exhibit 1 shows, each of the roles requires Time and again, CPG companies launch a D2C
different capabilities. Companies need to make play without having first identified an unmet
clear decisions on trade-offs—in which areas do consumer need that the D2C site proposes to fulfill.
we need to be good and in which do we need to These companies inevitably struggle to make the
be great?—to avoid spreading their resources economics work, particularly for e-commerce
too thinly. sites; acquiring customers becomes prohibitively
expensive, and retaining them quickly proves
Typically, CPG manufacturers that choose the difficult. Therefore, setting a high bar on the
insights side don’t have the scale, brand equity, consumer value proposition is paramount.
or financial resources to drive traffic to their own
website. Companies that choose a sales engine tend A broad and unique assortment—for instance,
to be single-brand organizations with very strong one that features exclusives, premium products,
4 Should CPG manufacturers go direct to consumer—and, if so, how?
and personalization—can make for a distinctive in-house capabilities. For example, most large
consumer value proposition. A CPG manufacturer manufacturers don’t have the setup or tools for
can pair assortment strategies with special services “kitting,” or fulfilling individual orders, so they
(such as a subscription service) to distinguish its choose to outsource those parts of the value chain.
D2C site from retailers’ sites, thereby attracting
and retaining customers while also managing To enter the fast-growing meal-kit market, Tyson
channel conflict. Foods partnered with Amazon to sell Tyson
Tastemakers meal kits. Mondelēz has partnered
Pricing, too, is an important element of the with Tmall to sell “giftable” products, such
consumer value proposition. Prices on D2C as Oreo gift packs, that are distinct from the
sites shouldn’t be higher than retail prices; any manufacturer’s other online offerings; selling the
premiums must be justified by some sort of value- products through Tmall also helps Mondelēz better
added element—such as the convenience of a understand Tmall’s customers. In both cases, the
subscription or product personalization. back-end distribution and logistics were managed
by the marketplace e-tailer. Through this option,
Making it happen: Build, partner, or buy? CPG companies can leverage the customer base,
Another hallmark of D2C success is agile execution payments infrastructure, and distribution support
and a mind-set bent on continuous improvement. of an established e-marketplace.
Indeed, the most successful D2C players to date—
such as Dollar Shave Club and NatureBox—operate For CPG companies that want to operate their own
more like technology companies than traditional websites but prefer to stay out of D2C fulfillment
CPG manufacturers. They take a rapid test-and- and delivery, last-mile partnerships are an option.
learn approach and are willing to “fail fast.” They Companies such as Boxed and Postmates can
make big investments in advanced analytics and handle picking, packing, and delivery; start-ups
use the results not just to personalize their offers like the UK-based Doddle and Happy Returns can
but also to predict consumer needs. And they manage returns.
make careful decisions about whether to build D2C
capabilities in-house, partner with one or more To buy capabilities, CPG manufacturers can either
third parties, or make an acquisition (Exhibit 2). acquire a company outright—as Unilever did with
Dollar Shave Club—or “acquihire” talent, buying
Companies that opt to build capabilities typically part or all of a company for its talent rather than for
create their own online store. Others go further and its products. To fill capability gaps in innovation
establish an omnichannel presence that includes and R&D, for example, NatureBox acquihired the
branded brick-and-mortar stores, as Nestlé has Dean & Deluca product-development team.
done with Nespresso.
Measuring D2C performance: Lessons from
CPG companies that play mostly in low- or venture capital
medium-volume categories often choose to Without a sustainable economic model, a D2C play
partner, allowing them to test the D2C waters will fail. We’ve found that CPG companies that
in a capital-light way. Decisions about which successfully scaled up their D2C efforts were able
parts of the value chain to control and which to do so in part because they adopted a VC mind-set
to outsource should be informed by current toward metrics. Some metrics just don’t matter that
Should CPG manufacturers go direct to consumer—and, if so, how? 5
PoR 2017
Should CPG manufacturers go direct to consumer--and, if so, how?
Exhibit 2 of 2
Exhibit 2 Manufacturers can choose to build their own direct-to-consumer site, form partnerships,
or acquire the requisite capabilities.
Customer Assortment/ Online Brick-and- Fulfill- Delivery Customer
acquisi- vendor store mortar ment engage-
tion management store ment
Model Description (B&M)
Build
Independent CPG-owned and
Consumer-packaged-goods
e-commerce -operated site, competes
brand store with retail partner (CPG) company
Independent CPG-owned brand.com
omnichannel and B&M store
store
Partner
Marketplace CPG sells via e-tailer,
(individual e-tailer owns back end 3rd party
products)
Marketplace CPG owns branded
(brand store) storefront via e-tailer;
e-tailer owns back end
Omnichannel CPG runs brand.com and Both CPG company Either CPG company
brand store has "pop-up shops" at
and 3rd party or 3rd party
retailers' stores
Last-mile CPG drives sales through
partnerships brand.com, partners for
delivery/last mile
Buy
“Acquihire” Mass-hire talent from
successful direct-to- Acquired team
consumer (D2C) players
Acquisition Buy successful D2C
player
much in D2C—the number of impressions or the the benefits of a D2C play. CPG companies do best
level of brand awareness, for instance—and CPG when they prioritize margins over revenues, and
manufacturers shouldn’t waste time and resources have a clear understanding of the factors affecting
on them. gross margins (for example, foods that require
refrigeration will lower both gross margins and
Especially in categories that tend to be impulse customer lifetime value). Companies that pursue
driven or where the average basket size is small, CPG omnichannel—rather than online-only—D2C plays
manufacturers must weigh the costs of customer tend to perform better. Managed well, one channel
acquisition, web hosting, and fulfillment against can complement and strengthen the other.
6 Should CPG manufacturers go direct to consumer—and, if so, how?
In evaluating D2C plays, CPG manufacturers can keeping customer-acquisition costs low, one way
learn from VC firms, which pay close attention to do so is to ensure that at least 10 percent of new
to three types of metrics in early-stage D2C customers come through word of mouth.
companies: general business indicators,
drivers of high lifetime value (LTV), and low
customer-acquisition costs.
Consumers will continue to demand convenience
General business indicators are common financial and personalization, and digital channels will
measures such as revenues, margins, internal rates continue to advance—which means the D2C arena
of return, and cash flow. VC firms generally hold will only become more crowded and competitive.
D2C companies to the following standards: But not every CPG manufacturer should jump in;
a company should first decide whether and where
Gross margin per customer should be at least to play. Companies that choose to embark on a
six times the cost of acquisition. D2C journey should embed D2C into their broader
channel strategy, beginning with defining the role
Year-over-year growth rate should be at least of D2C and developing a compelling consumer
50 percent. value proposition. Then, with agile execution and
stringent metrics, they will be well on their way to
Capital investment should break even in four D2C success.
years or less.
1 Zero moment of truth, Google, thinkwithgoogle.com.
Cash flow should be consistent regardless of
seasonal spikes in the business.
Priti Joshi is a consultant in McKinsey’s Dallas office,
To achieve a high LTV, the average basket size where Kelly Ungerman is a partner. Megan Pacchia is
an associate partner in the Boston office. Julie Bashkin
should more than cover the associated cost of goods
is a senior external adviser to McKinsey.
sold. A D2C site should either encourage frequent
repeat purchases or require lengthy customer
The authors would like to thank Tanya Sivaeva for her
commitments (such as memberships of at least contributions to this article.
six months) and have low customer churn. As for
Should CPG manufacturers go direct to consumer—and, if so, how? 7
Contact for distribution: Megan Pacchia
Phone: 1 617 753 2259
Email: Megan_Lesko_Pacchia@McKinsey.com
October 2017
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