In store leaders becoming online laggards

The online grocery channel, while a minor part of FMCG/CPG sales in the U.S. currently, is widely anticipated to be a primary driver of growth for the category in the coming years. And the emergence of this channel can’t happen too soon - total dollar sales for FMCG/CPG products increased just 1.5% last year according to IRI. But change is coming.

A recent report form Brick Meets Click forecasts that online shopping will represent between 11% and 17% of grocery purchases in the majority of U.S. markets within 10 years. Accordingly, the Grocery Manufacturers Association expects that half of all CPG growth will come from online sales over the next five years.

This change, however, may not just be in the form of a new channel of distribution that brings incremental sales. It may also bring with it a significant re-ordering of the CPG landscape. That’s because the traditional advantages that FMCG/CPG leaders have enjoyed in-store and that have helped them solidify and grow their positions, may mean little in the digital realm.

In fact, the online channel may actually present some distinct advantages for nimble start-ups. Take for example the issue of product visibility and availability. The majors have been able to dominate the marketplace in-store because they have used scale and their relationships with the largest retailers to overwhelm the limited shelf space available throughout the U.S. But in an online environment, there is no physical shelf with its four-foot bays dominated at eye-level by big brands to grab the lion’s share of consumer attention.

Major brands online are in fact on the same level when it comes to visibility as every other brand. Consider also the difference between how a consumer engages with products in a physical store and how they do so online. The advantage large brand manufacturers have in terms of resources to develop specific product attributes, shelf-friendly packaging and to work with retailers to plan shelf layouts are irrelevant in online grocery. Here, availability, portfolio or online listings, content, search placement, price, ratings and reviews are much more important attributes.

In-store a consumer can only buy a product if it is available and in-stock – a definite advantage for larger brands. But online, manufacturers, even small brands, can easily track availability and adjust delivery quickly, thereby effectively eliminating their competitive disadvantage.

Therefore, any brand efficient at managing even a smaller portfolio can fare better online. Search is another critical factor that a brand can master without being big and that also represents a levelling of the field for small brands. Our analysis shows that if products don’t appear in the first page of search results, it is highly unlikely that the consumer will ultimately buy them.

More so, a poor search rank in online stores may also have a negative impact on how consumers view a brand. Consumers tend to see search leaders as the most popular brand and therefore the better product. And here a longtime CPG category leader could see a smaller brand with a better search result be perceived as a higher quality option.

Additionally, online, higher quality content is more important than the impact of the packaging that CPG brands have long relied upon.

Effective content and images are essential online to inform the consumer and provide them with the information needed to motivate them to click to buy. Even those brands that perform well in search results are not always top sellers. The reason can often be attributed to little or no content on their pages while other, more savvy brands garner better sales results through descriptive bullet points, images that show ingredients, nutritional facts and directions for use, for example. Ratings and reviews also have an outsized effect on buying patterns online and serve as an additional leveler of the playing field.

And it’s not just the ratings, accessible while a consumer shops, that have an impact. Our research shows the number of total reviews can also influence the buyer.

Finally, price is very fluid online, negating the price advantage produced as a result of scale that a large CPG brand might enjoy in-store. Prices of products can change almost daily, with smaller competitors often offering a better value at a lower price.

So how is all this manifesting itself on the CPG hierarchy online in the early days of ecommerce grocery sales? Consider the Dry Dog Food category. According to IRI the leading Dry Dog Food brands in the US by sales in 2013 were: private label, Pedigree, Purina Dog Chow, Purina One Smartblend and Kibbles ‘n Bits. But a check on Amazon revealed the top sellers for the second week of November were: Taste of the Wild Dry Dog Food, Hi Prairie Canine Formula with Roasted Bison & Venison, 30-Pound Bag. Taste of the Wild Dry Dog Food, Pacific Stream Canine Formula with Smoked Salmon, 30-Pound Bag Greenies Canine Dental Chews, Treats For Dogs Taste of the Wild Dry Dog Food, Wetlands Canine Formula with Roasted Wild Fowl, 30-Pound Bag Wellness CORE Original Formula Dry Dog None of the national top 5 brands appear in the online list. You have to go down to number 7 and 10 before Purina and Pedigree start to make an impact.

As the online channel grows in importance for the FMCG/CPG category, traditional CPG leaders may find that it will take a lot more than brains, heart and courage to succeed in this new “Oz” and that the man behind the curtain better be working on content, search, ratings and reviews if they hope to get home to Kansas.