The consumer packaged goods (CPG) space has historically been dominated by some of the most powerful brands in the world. But that doesn’t mean the market, which generates more than $600 billion annually, is immune to disruption.
It’s clear that if CPG brands want to survive and thrive, they need to embrace ecommerce. Here’s why:
1. Online CPG sales are growing very fast
According to analytics provider 1010data, online CPG sales surpassed the $10 billion mark in the U.S. last year for the first time ever, up from $7.6 billion in 2015. Four product categories—health supplements, pet care, cosmetics and facial care—are now generating more than a billion dollars in online sales annually.
Smaller categories are also growing rapidly. Cleaning products and detergents are two of the smallest product categories 1010data tracks. Still, they’re two of the three fastest-growing categories, delivering 60% or higher annual sales growth.
Online CPG sales are growing twice as fast as online sales in general, thanks in part to reduced shipping fees. Free shipping is even commonplace now.
Additionally, online retailers have developed purchasing models that are ideally-suited to CPG products. Subscription offerings like Amazon Subscribe & Save and pantry box services like Amazon Pantry have made it much more convenient for individuals to order and reorder CPG staples.
2. Start-ups are creating digitally-focused CPG brands.
CPG brands like Unilever and Procter & Gamble are some of the biggest in the world. Not surprisingly, they are also some of the globe’s most prolific advertisers.
But thanks to the internet, the barriers of building a new CPG brand have decreased significantly in recent years. With far less capital, CPG brands are getting offer the ground thanks to digital savvy, celebrity endorsers and founders, a niche focus, and socially-conscious missions.
The Honest Company, which sells eco-friendly products such as diapers and cleaning supplies, is a great example. Since it was co-founded in 2011 by actress Jessica Alba, the company has reportedly grown annual revenues to more than $300 million. CPG giant Unilever was reportedly considering buying the business.
More recently, The Honest Company has come under fire for reportedly using non-eco-friendly products. Still, a start-up with digital-only distribution rising so quickly is evidence that CPG giants can’t take their dominance for granted.
Similarly, Dollar Shave Club, a subscription service for razors and personal grooming products, also launched in 2011 and grew quickly. Last year, Unilever purchased the company for a reported $1 billion.
Companies like The Honest Company and Dollar Shave club won’t be the last newcomers to challenge CPG incumbents. And since the incumbents can’t buy all of the start-ups that gain traction, they can defend their turf by embracing ecommerce.
3. Making friends (or frenemies) with Amazon and Walmart
It’s impossible to discuss ecommerce and CPG brands without mentioning ecommerce’s 800 pound gorilla, Amazon, as well as Walmart, which owns Jet. With a growth rate of 381%, Jet is the fastest-growing seller of CPG products online.
While it will be hard for CPG brands to shun Amazon and Walmart completely—even Nike relented and agreed to sell directly through Amazon—CPG brands’ can still be their frenemies.
The biggest reason for that: those retailers are increasingly investing in creating their own private label brands, which target CPG categories. Analysts project that Amazon’s dozens of private label brands will generate $20 billion in sales by 2022.
CPG brands are already responding to the threat. Procter & Gamble has launched its own direct-to-consumer subscription services, allowing the brand to own the customer relationship.
While CPG brands will realistically still have to work with these players, despite being competitors, the private label threat offers a powerful incentive to develop their own ecommerce strategies.