The Retail Option for CPG Players
Outside In explores the opportunities for pursuing ‘owned’ organized retailing by CPG players and helps cultivate a high-level POV on why it must be pursued with vigour and even suggests a few options that are available today. The idea behind this post really comes from the widespread industry conversation around the necessity of CPG players to pursue D2C initiatives of their own – an idea that we agree with, in principle. However, considering that most D2C conversations tend to revolve around ‘digital (channels)’ only, I thought it made sense to at least outline possibilities for ‘owned’ retail (offline/physical channels) formats that exist already for all CPG players… Here goes…
(The reference to Retail in this article refers to ‘Owned – Organized Retail/Modern Trade’ Only)
Context
First-up, as always, let’s set the context of where CPG players stand today and why the retail option could be a viable option for their growth plans – by looking at consumer & industry trends:
Consumers are looking for Experience: CPG makers have become aware that consumers – especially Millennials and those from Generation Z – are interested in experiences more than actual products. Therefore, industry players are looking to create experiences around their products – with their partners – and encourage building a consumer community
Multichannel Approach by CPG Players: Hit hard by pandemic, CPG industry’s future will depend on adopting a multi-channel approach. Phygital retail or omnichannel distribution seems promising when online & offline channels are competing. CPG & retail leaders will be known by their agility to adopt new technology, creativity and smart technology investment
Organized Retail (Modern Trade) Sales contribution continues to rise for CPG Players: Since 2020, organized retail/modern trade now accounts for roughly 25% of FMCG/CPG sales in the India’s metros, according to an analysis by Nielsen
Benefits of the Retail Option
Many CPG companies have already moved into the retail arena for enhancing consumer shopping experience and improving brand visibility. Key benefits of deploying retail models by CPG players are:
Many CPG companies finance part of their retail initiatives through re-allocation of their advertising budget. As the advertising landscape becomes more fragmented, traditional brand marketing spend is providing less value. By focusing advertising money on point of purchase, CPG companies can guide consumer decisions at the moment of truth
Retail Format Options
Noted below is simple list of retail format options that are available (and proven) for CPG players, over the years:
Entering retail is never cheap, what with fixtures, marketing, staff and any number of capital costs included. Here are the key considerations to evaluate each option –
1) Retail Chain
When expanding with a full blown retail chain, capital expenditure requirements are huge, and still, the share of the total channel sales might be limited for quite some time
Visibility is often significantly more important than the direct financial impact
Typically, profitable retail occurs in high margin businesses, most often in fashion & electronics
2) Franchise Model
Using a franchise model can help reduce the required CAPEX and increase the scale of mono-branded retail outlets
But franchise partners will also need a comprehensive support network to ensure a consistent shopping experience in the branded stores
3) Factory Outlets
Factory outlets provide access to the more price-sensitive consumer segments and help to reduce excess inventory
Careful consideration must be given to ensure that sufficient assortment is available throughout the year and to make sure that price image of the company is not too heavily compromised
4) Flagship Stores
Flagships are expensive; because they pay a premium for desirable high street locations. They will often have difficulty covering costs and should be seen partly as a marketing investment to show full product and service range and create a premium product testing experience
However, if paired up with an online channel, own retail can reach significant volumes
Flagships can also serve an important function in training staff from other retail channels and showcasing new products
5) Shop-in-Shop (SIS)
Shop-in-Shops (SIS) provide scalability and are most often the easiest way to enter into retail. CPG players are constantly battling for shelf space & with solid SIS they can beat competition
Selecting the right retailers to work with and developing the right support and compliancy monitoring model are key to success with the SIS model
Many CPG companies should consider SIS as a retail alternative; as an opportunity to increase brand visibility in stores, improve shopping experience and especially, “educate” consumers
6) Online
Being present on leading Marketplaces is more or less the order of the day and is considered as a hygiene practice. To truly establish a differentiator, CPG players can explore cultivating dedicated brand propositions on these online channels in the form of sponsored communities, virtual brand web-store within the marketplace, influencer-led live commerce and so on
And, obviously explore the hottest trend in the industry today – Owned D2C Initiatives
(We will cover this option in greater detail in the next edition of Outside In… Set your alert already!)
In Conclusion
While we have made a persuasive case of CPG players to push their retail agenda, expanding in retail is neither cheap nor easy. It is necessary to have a holistic business case in place that includes all the major cost elements, top-line benefits and cross-channel effects
References and Sources:
CPG Trends for the 2020s: https://www.the-future-of-commerce.com/2020/12/30/2021-cpg-retail-trends-that-will-define-the-industry-in-2021/
Capgemini Paper – Retail Entry Transformation
Organized Retail Sales for CPG Players: https://www.livemint.com/industry/retail/organized-retail-now-account-for-30-of-fmcg-sales-in-metro-cities-nielsen-11588256571543.html
FMCG Trends – Experience: https://www.stratx-exl.com/industry-insights/fmcg-trends
FMCG Multichannel Approach: https://www.indianretailer.com/article/whats-hot/retail-trends/expectations-of-fmcg-industry-for-2022-major-trends-expected-in-post-covid-new-normal.a7632/