Thriving on disruption: Competing with the “Amazon effect”

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Whether you’re shopping for a stepladder, clothes, pet food or a pair of shoelaces — anything you can name, really — it’s available for sale online. A quick search, a couple of clicks and a delivery is outside your door within 2 hours to 2 days. Six to eight weeks for delivery? Forget it.

This new consumer expectation has become known by many as the “Amazon effect.” But even if you’re aware of it, the degree to which Amazon and similar companies are driving this shift is still surprising. While online sales represent about 10 percent of all U.S. retail sales, Amazon sales account for an estimated 43 percent — and growing — of U.S. online retail sales.1 What’s more, Amazon is where half of U.S. online consumers begin their product search.2

Even more sobering is the realization that these statistics represent the beginning of the transformation curve, not the end. As evidenced by the growing revenues captured by new entrants, online sales channels are expanding beyond the U.S. market, with established players that include Amazon, Jet and Alibaba. Retailers such as Walmart and Target are catching up, generating growing demand with channels of their own. E-commerce transactions through social media platforms such as Facebook and Twitter are growing in volume as consumers are presented with highly targeted products driven by sophisticated analytics.

The retail fallout from online shopping has been thoroughly documented — millions of square feet of empty retail space serve as evidence of its impact. But the implications for retailers and CPG companies reach well beyond the slick shopping sites and subsidized shipping costs that consumers now expect, extending to the very core of the industry. From product design, marketing and planning to manufacturing, fulfillment and shipping, every component of the CPG value chain is being pulled apart and reassembled to match the shift in consumer preferences and behavior.

The convenience, competitive prices and speed that consumers expect from today’s shopping experience have created a new normal for retailers and consumer packaged goods (CPG) companies. As the industry evolves, it faces stiff challenges to the old ways of doing business even as it pursues new opportunities.

This paper series explores the impact of digital technology and changing consumer expectations on the CPG value chain, from Enterprise Resource Planning (ERP) to freight and logistics, and how those in the industry can adapt to thrive on change and win in this hotly competitive landscape.

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1 “Assessing the Damage of ‘The Amazon Effect,’” Forbes.com, June 19, 2017. https://www.forbes.com/sites/stevendennis/2017/06/19/should-we-care-whether-amazon-is-systematically-destroying-retail/#7af143136b1f

2 “More than 50% of Shoppers Turn First to Amazon in Product Search,” Bloomberg Technology, September 27, 2016. https://www.bloomberg.com/news/articles/2016-09-27/more-than-50-of-shoppers-turn-first-to-amazon-in-product-search

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The industry responds

CPG companies aren’t looking for condolences; they’re looking for answers. One thing is already clear: Customer intimacy matters. But more than just detecting trends and changes in taste, CPG companies need to be able to respond quickly and directly to keep customers interested and connected. New market entrants have built this kind of response mechanism into their DNA.

Frustrated by the high cost of razor blades, entrepreneurs Michael Dubin and Mark Levine launched Dollar Shave Club in 2011, offering consumers a low-cost, direct-ship source for personal grooming products. Never mind the billions spent on marketing to build brands such as Gillette and Schick. Dollar Shave Club’s disruptive innovation — value pricing, quality products and a convenient subscription model — made a rapid impression on the industry and customers. From its membership launch through 2016, the company amassed over 3 million subscribers.3

Established CPG companies aren’t standing still either. They’ve realized that they can’t stay relevant if they remain at arm’s length from consumers. In some cases, the answer is to acquire those nimble startups, as Unilever did, purchasing Dollar Shave Club in 2016 for a reported $1 billion.4

In other cases, the clearer path forward is to adapt and evolve to meet customer demand. Office supply companies are taking this approach, building the capacity to profitably deliver supplies in small quantities to homes and businesses. The same is true of companies selling perishable items and other lower-value, commodity items. No one is standing still.

Getting even closer to the customer

The challenge to CPG companies isn’t creating a channel to serve customers. CPG companies are already connecting to the most prominent demand aggregators, and many have established direct channels, too. The challenge is building closer relationships with customers, creating a deeper level of personal brand loyalty, doing it profitably, and essentially protecting decades of investment in product brand loyalty from emerging purchase and delivery models. Capturing and monetizing such loyalty-inspiring insights requires change that penetrates deep into the enterprise.

Every company has arrived at this new frontier from a different point of origin, which means each is left to seek its own unique path forward. But they do have one thing in common. Every CPG company has many of the solution components it needs to develop direct customer relationships. The companies just don’t know how to effectively transform and integrate the new as well as existing technologies to leverage their strengths.

Typically, CPG companies are organized to serve traditional channels built around enterprise resource planning (ERP) systems that support a traditional retail client business model. The problem is: ERP systems can’t change at the rate the market demands. Each system has a distribution channel, but it’s structured to bill and ship by the pallet, not by the box. Each channel has extensive manufacturing capabilities, but they may not be located where the company needs them or flexible enough to switch from Product A to Product B as quickly as the company may now require.

3 “Dollar Shave Club wins market share and customers with back-to-basics approach,” Financial Times, March 16, 2017. https://www.ft.com/content/9bb5cc54-d368-11e6-b06b-680c49b4b4c0

4 “Dollar Shave Club Sells to Unilever for $1 Billion,” The New York Times, July 20, 2016. https://www.nytimes.com/2016/07/20/business/dealbook/unilever-dollar-shave-club.html

The challenge is building closer relationships with customers, creating a deeper level of personal brand loyalty, doing it profitably, and essentially protecting decades of investment in product brand loyalty from emerging purchase and delivery models.

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CPG companies have sophisticated marketing capabilities with insights into brand loyalty and consumer behaviors. Often, though, those insights are based on market segmentation that can tell you what the average 30- to 45-year-old female would buy, or what the 18- to 24-year-old college male would buy. What they lack is the individual consumer intelligence that can predict what Susan or Brandon specifically will buy.

Creating an ecosystem

Issues like these have existed in these companies for a long time, but the pressure now building from market shifts is bringing them to the forefront. Revising well-honed models and building processes and systems (Figure 1) in a way that addresses these challenges affordably is new — especially when everything is owned and managed by the CPG companies themselves.

Only the largest CPG companies can afford to do this themselves. The flexible warehousing, distributed manufacturing, fleets of trucks and planes, and everything else that’s needed to respond to changing markets adds up to an expense that’s impractical for most CPG companies to consider.

The alternative is to develop an ecosystem of partners that excel in each of these areas. While partners have also existed for decades, a certain level of transactional friction has always added costs and complexity to this strategy. But that’s changing. Today, with the right approach and the right partners, it’s possible to develop a cost-effective web of relationships and capabilities that can give any CPG company the capacity to embrace change and prosper.

Figure 1. CPG value chain: Old vs. new

Old style Transformation drivers New style

Static planning Near-real-time inputs drive process decision-making

Dynamic planning

Customer segmentation and demand-driven marketing

360-degree customer omnichannel analysis

Individual customer-centric marketing

Conversational commerce

Retailer- or distributor-focused order management processes

Higher proportion of small quantity/low-unit-cost orders

EDI/social media and direct consumer purchases

Omnichannel order management

Manufacture to order Increased use of centralized/ company-owned lines

Distributed capacity, assembly and customization

Manufacture on demand

Planned distribution to supply chain

Shift from bulk, retailer-driven distribution to predictive analytics

Distribute to predicted warehouses

Retailer-managed sales and returns

Last mile delivery direct to consumer Direct customer delivery and returns

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How to get started

CPG companies must focus on four key areas to build the ecosystem they’ll need for success (Figure 2). These four areas represent the next installments in this white paper series:

1. Agility and interconnectedness. First, you’ll need a strategy for how you handle the ERP itself and how to make the systems you build up around it more agile and effectively interconnected with other solutions. We’ll discuss how your strategy can move your enterprise from a commerce orientation to a focus on consumer intimacy, and how you move all of this closer to the consumer.

2. Demand-driven supply chain. Next comes understanding, and acting on, the impact on manufacturing and the importance of having an agile supply chain. Demand forecasting must be managed in a new way. In addition to determining how much product to make, you’re also deciding where and when to build it to optimize inventory so you have it when and where you need it.

3. Analytics. The third installment will discuss analytics. Considering that a growing share of today’s decisions are analytics driven, this is an especially important topic. We’ll discuss how you can use analytics to make predictive insights and get the kind of actionable intelligence that allows you to be as agile as you need to be. The paper will also discuss how to develop the insights about the consumer that enable you to go beyond brand loyalty and develop a better view of demand.

4. Rapid-delivery freight and logistics. Finally, we will explore the implications of this new era on freight and logistics. We’ll discuss the issues and questions companies have as they reconfigure this last leg of the product to the customer for same-day, next-day or 2-day delivery. We’ll consider the strategies you can employ to move products from distributed manufacturing or shared warehouse facilities to the consumer’s front door quickly and cost-effectively.

Figure 2. The ultimate supply chain solution integrates four elements.

Agility and interconnectedness

Demand-driven supply chain

Rapid-delivery freight and logisticsAnalytics

Learn more at www.dxc.technology/consumer_packaged_goods

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About DXC Technology

DXC Technology (DXC: NYSE) is the world’s leading independent, end-to-end IT services company, helping clients harness the power of innovation to thrive on change. Created by the merger of CSC and the Enterprise Services business of Hewlett Packard Enterprise, DXC Technology serves nearly 6,000 private and public sector clients across 70 countries. The company’s technology independence, global talent and extensive partner network combine to deliver powerful next-generation IT services and solutions. DXC Technology is recognized among the best corporate citizens globally. For more information, visit www.dxc.technology.

© 2018 DXC Technology Company. All rights reserved. MD_7416a-18. February 2018www.dxc.technology

How DXC Technology can help

Understanding the changing consumers and how to meet their needs will require more than the individual efforts of CPG companies. To gain an intimate understanding of customers and fulfill their orders in a compressed time frame, CPG companies must create a streamlined ecosystem of partners that includes retailers, warehouse and logistics firms, e-commerce providers, CPG brand companies and the CPG raw material suppliers.

As the world’s leading independent, end-to-end IT services company, we understand these challenges well. DXC Technology has developed solutions for clients in every segment of the CPG industry. And because our DNA is built on partnering and integration, we understand how to assemble, automate and optimize the kinds of complex ecosystems CPG companies and retailers need to thrive in today’s rapidly evolving marketplace.

Managing this ecosystem will require companies to re-examine and redevelop processes and systems that have existed for decades. It will require them to reimagine their role in the CPG value chain. A scalable and efficient framework will be a foundational component in enabling this new capability.