Packaged Goods Brands Need to Get Smart About Tech

Data is fundamentally changing the nature of our relationships.  The use of social media is now underpinning the way in which we talk to each other, whilst e-commerce and advertising platforms are changing the way we communicate with brands.  At times, however, the consumer packaged goods (CPG) market appears hesitant about fully engaging with the emerging data economy.  Whilst some such as Coca-Cola may have embraced social media, the number of CPG brands where customer relationships are primarily mediated by data rather than via a retailer appears limited.

Data now feels so central to business success that without an ongoing, data-mediated relationship with their customer base, we may be looking at an environment where data-poor brands will struggle to compete effectively.  This is a structural challenge that many manufacturers face in a variety of sectors – the intrinsic nature of a product based customer relationship is that very little data is typically generated by the manufacturer.  The retailer of the product will usually own the relationship and therefore the customer data.

This is one of the reasons why the creation of services rather than products appears so attractive.  For brands offering a service, there are much more opportunities for relationships with consumers and all the data capture that brings.  It is of little surprise, therefore, that in some categories we can see that products are rapidly becoming overtaken by the development of services.  This is largely driven by technology creating new capabilities but the opportunities promised by data capture are starting to be a driver in themselves.  There are other reasons to develop services – they are typically associated with a range of positive attributes such as higher margins, stable revenue streams and greater ability to flexibly respond to customer needs.  But customer data is now rapidly becoming a driver for brands to launch new services.

We are seeing the ‘servitisation’ of products all around us, notably in consumer categories such as music (iTunes and Spotify) and books (Amazon Kindle) but also in business services with companies such as Xerox moving from photocopiers to document services and IBM moving from hardware and software goods to business solutions.

But there is one sector that has appeared to be more resistant to the move from products to services – CPG.  Historically, CPG brands’ relationship with their consumers has been mediated via retailers who hold huge amounts of customer data.  Of course, this is shared with brands (anonymised and at a price) but the CPG companies’ relationship with consumers is still largely mediated via retailers.  This is changing with companies like Kimberley-Clark building their own database so they can track the behaviour of their customers.  They are using this to explore the way in which people redeem digital offers but also how widely they share them and through which channels.  But given that these sorts of databases are generated through marketing activities such as competitions and social media or bought in via database marketing companies, it can be hard for any brand to maintain that relationship. Indeed, there is an argument that these work more in favour of the consumer rather than the brand as active participants are generally brand loyalists who would probably continue to purchase the product anyway.

Surely there are bigger opportunities available for CPGs by creating services from their highly successful products.  This is an opportunity that has not escaped the notice of some new competitors that CPG brands should be worried about.  Dollar Shave Club is one such example.  For a monthly subscription, this US-based company deliver razors and other personal grooming products by mail. They now have more than 700,000 subscribers since launching in 2012.

Another well-known example is, of course, Nespresso  (which is Nestle brand), the coffee machine and capsule brand.  Their coffee makers can be purchased across a variety of bricks and mortar and online channels but to purchase the coffee capsules you have to sign up to Nespresso Club thus participating in an ongoing service relationship.

And an interesting variation is US company, Blue Apron.  They deliver “meal kits”–consisting of pre-measured ingredients with recipes in chilled boxes.  Members subscribe to the service for about $60 a week. For which typical customers get 3 meals for two per week.  Naturally, there is a choice of recipes which change each week and the company emphasise the freshness and provenance of their ingredients.

An interesting UK example is Graze.  They offer subscriptions to boxes containing healthy snacks that are delivered weekly.  There is a wide selection of snacks to choose from and there is a strong social media element where customers can let Graze know, amongst other things, what new snacks they would like to see offered.

Although these are small fry in comparison to the dominant CPG brands, they nevertheless turn existing business models on their heads in an extremely interesting way.  And this has the potential to be a real threat.  Because as a category moves into a digital environment, the rules of the game change completely.  Consumer decision making becomes much more opinion-led via social media, potentially mitigating the brand equity carefully nurtured via expensive advertising.  Niche brands can quickly gain market share via smart maneuvering with search rankings, rather than making a heavy investment in shelf space.  The barriers to entry are also much lower with new competitors bringing in novel product and marketing thinking, making life hard for established brands used to bricks-and-mortar marketing strategies.

There clearly are challenges for CPG brands in this space, not least because some of these service propositions could get dangerously close to alternative channels to market rather than representing new revenue streams.  When Proctor & Gamble collaborated with Amazon’s ‘Amazon Mom’ nappy subscription service in the US, the Wall Street Journal reported that major US retailer, Target, retaliated by downgrading their positioning within their store.  It’s a delicate balancing act for CPG brands as their revenues are heavily dependent on relationships with retailers who may see experimentation with these sorts of service propositions as a threat.

One thing is clear, the idea of CPG as a service has potential to disrupt the entire category.  This is a real opportunity for brands as data-mediated services offer a means of generating growth through deep customer relationships.  But there is also a serious threat to CPG brands that do not move quickly enough as the traditional rules of the category look set to change beyond recognition.

This post first appeared on Wired Insight Innovation blog

By Colin Strong