Pre-pandemic, e-commerce in grocery accounted for a mere 3-4% of the market and significantly lagged behind sectors such as fashion, beauty, and electronics, all of which had penetration rates of 10-20% or higher.
Today, grocery sales online account for a rising 12% of the sector, following what we saw as 6 years’ worth of change in about 6 months.
E-commerce is impossible to ignore, and for revenue managers in consumer goods businesses it’s important to understand the key pitfalls to avoid and how to support your business, online retailers and consumers to drive profitability.
Why does profitability matter?
Ultimately, top line growth and bottom-line profitability dictates how retailers treat you. It’s key to ensuring successful long-term partnerships because even if you’re growing huge amounts with a retailer, but profitability or cash margin is low, you’re not going to receive the same level of care and attention you need to maintain growth. So, you need to make sure that you have considered:
- Product relevance – Those that drive growth & margin
- Scaling – Bringing new products in to your portfolio
- Item level profitability – Ensuring highest visibility of the most profitable products
- Supply chain capability
Why is profitability a challenge?
There are 8 real-time drivers of e-commerce unprofitability:
- Fulfilment costs
- The exponential growth of e-commerce, and logistical challenges associated with it
- Amazon’s 3p marketplace
- Value chain profitability
- Price transparency
Here’s how revenue growth managers can create favourable conditions for profitability, with key steps to take early on in the e-commerce journey:
Avoid price matching
Online retailers use dynamic pricing systems to match the best prices in the market. So, it’s important that manufacturers have an automated plan in place too. In order to avoid becoming victim of price matching, have a differentiated portfolio for online. This could be placing different SKUs online vs supermarkets, the same products but packed in a slightly different way, with different sizes or in different bundles. Another work around is clearly defining your channel strategy (deciding which SKU goes where). You can’t always rely on NPD to launch in different channels so it’s important to create ‘hero’ SKUs for each according to which products work for each channel. Here, you’re avoiding price matching but also showing that you’re working with retailers to build a portfolio that works best for them. Also consider what purpose your product is there to serve: is it hitting price points, consumer needs (larger pack sizes), market trends, or matching competitors?
Reduce supply chain costs
It’s important to be as efficient as possible. Remember, the more it costs retailers to store and ship your products, the greater the impact on your margins. Seek solutions that solve your problems for you, the retailer, and the consumer, and leverage product design and packaging. Furthermore, damages and returns with online grocers are a significant area of loss for them, and if you create efficiencies here then you can agree a profitable solution for you and the retailer. Product design and packaging optimisation sits across the value chain as the common denominator, so look to see how this benefits you, the retailer, and the consumer. Examples of how consumers have changed their packaging to meet online needs includes bigger value packs, large refill packs or different shapes to fit better logistically for transport.
Understand the relationship with retailers
With online retailers such as Amazon, early on in the growth journey manufacturers drive a huge amount of volume for the first year. Here, they price match in the market and aren’t looking for margin just yet. The issue for manufacturers comes in the 2nd or 3rd year, where Amazon come looking to repair that profit margin cut into your cash. This can cause problems as manufacturers become reliant on volume here, and risk Amazon removing products off the shelves if they don’t think they will be profitable in the long term. The key is to build a long lasting relationship that works for both moving from building scale in the short term towards profitability in the long term. It is important to understand what’s driving profitability for online retailers and where to negotiate.
Work together for long term strategic partnership
More beneficial than just understanding the ways that e-commerce retailers work is working to support profitability for online retailers. Creating a win-win strategy is best for the long term, and can be achieved in a number of ways:
- Marketing: You can invest with retailers to feature and prioritise your products, and together build specific online JBPs and budget agreements.
- Data: You can pay to access website analytics and online performance data. This is really important, as its crucial to have the understanding about customer behaviour to support your decision making.
- Delivery fees: You can support with delivery fees, invest in subscribe and save models, and offer free delivery for consumers.
Summary
- Your ability to drive top line sales and bottom-line profitability will define your relationship with retailers – we need to understand your profitability vs retailer profitability. If we’re driving promotions on non-profitable long-term products, it’s going to come back to bite you later on in the relationship. Conduct frequent financial exercises
- Analyse your investment levels and buckets of profitability
- Always seek for efficiencies through your supply chain
- Enable your organisation to configure a differentiated portfolio that ensures a clean channel strategy
- Look to fund retailers and ensure you’re supporting them from a P&L point of view for long term strategic partnership.
