CPG Retail Merge
From Better Margins to Better Relationships
The distance between manufacturers and retailers is closing quickly. Nearly every store sells its own private labels—items manufactured or contracted by the retailer itself—and many product companies are looking to sell directly to consumers. Vertical integration has always been about maximizing margin and creating higher profits. That’s still true today, but there’s a new opportunity in play: Creating higher engagement and deeper loyalty with customers. COVID has only accelerated these changes—the instability of traditional retail channels has everybody scrambling for more direct ways to reach their buyers.
Brands know that consumer affiliation and choice is all about creating a holistic experience, and to create a product worth coming back for, that experience must consider each element from manufacturing, to sale, to use, to service, to disposal. The key to being consistently great across this chain of events? Having a good understanding of what people need every step of the way, and having the control and autonomy to deliver.
Private label brands have emerged as a primary component of the product mix in stores. Kirkland Signature, first introduced to Costco shoppers in 1992, now accounts for more than 30% of their sales. Target for its part is up to 48 “owned brands,” from alcoholic beverages to underwear to kitchen utensils. Far from generic, these brands have ditched the white label and are often indistinguishable from the rest of the shelf.
On the other hand, many items never see a shelf at all. For some brands, direct-to-consumer models provide an opportunity to place a product into the market without the investment of brick-and-mortar storefronts. Lower prices for quality goods are part of the math, but so is speed-to-market. Digital-native brands like Warby Parker or Dollar Shave Club can move quickly, responding to trends in real-time without the need to go through a traditional supply chain. Mattresses, shampoos, sweatpants (all items these authors have ordered sight-unseen in the past three months): If there’s a limit to what can be drop-shipped DTC, we haven’t found it yet.
Success stories in CPG + Retail merge abound. Groups like Nike or Tommy Bahama have thriving first-party stores and partnerships with other retailers that carry their product. Our view: This middle state is enviable but not inevitable, full control over the entire perception of your brand and the operating levers that make it profitable take more than a clear vision: It will take conviction to break old paradigms and commitment to invest in new capabilities.
Look Both Ways When Merging
So should all product manufacturers just open a store? Should all retailers create their own product? The answer is: No. It requires a level of maturity and sophistication. This type of vertical integration might be part of your long-term growth strategy, but there are technical, cultural, and brand implications to get sorted first to enable this transformation. Many companies are doing this well–one example from our own work is New Era, the signature hats and apparel brand who has found new growth by selling and customizing their products online, in addition to sports stores and stadiums. Here are the basics when it comes to managing CPG+Retail Merge:
1. Apply a Holistic View
Every company wants more information about their customer, but it must be done with purpose. Making sense of preferences and behaviors is important but getting that information into the hands of the people who can take action on it is more critical still. Instead of only creating a holistic view of your customer, consider a holistic application of those insights. For the deepest possible understanding, apply a mix of quantitative (the what and the how) alongside qualitative (the why).
2. Up-Skill End-to-End
Complete immersion in product experiences is less about the intensity of your product and more about the consistency. Brands like AWAY and Apple deliver consistent polish and messaging from employee training programs to technical support to packaging material. Owning every part of the experience means having the ability to quickly create change at any point in the process, without the need to renegotiate contracts or onboard new talent. Media and content creation in particular is important as social and commerce channels combine–brands that can tell their story control their story.
3. Storied Supply Chains
Your logistics strategy plays as critical a role as your brand strategy. The ability to trace components, take inventory, and forecast demand–all in real time–unlocks superpowers for your employees and customers. It confers on you the power to personalize product, to pivot marketing, to redistribute staff. Along the way, traceability allows for real transparency about the provenance and processes by which your stuff is made.
4. Responsible Data
Customers have increasingly high expectations about personal details: If they give you information about their preferences, they want you to use it to improve their own outcomes, not yours. Misusing customer data can cause real damage, and push customers to move on. Your cost to acquire that data is high. For customers looking to find a commodity product, switching costs are low.
Stories, Stores, and Stuff
Your product is no longer just an object to be sold; it’s the story of how it moves through your supply chain, and how it treats the people and places along the way. That it works well and looks good doing it comes with the territory. Where to start? Every retailer should have a product strategy, and every product company should have a marketplace. As for data? That requires some investment: Collect it, connect it, and keep it secure. Turn information into insights apply them to make better experiences. The relationship will follow.
Ben Burke and Buck Sleeper work at the intersection of humans and technologies, bringing together breakthrough thinking and a global team of experts to transform businesses. Looking to understand what CPG+Retail Merge means for you? Reach out at [email protected].
