The accelerated adoption of online shopping has created a complex and fiercely competitive landscape for retailers. Consumer packaged goods (CPG) companies see new challenges to managing profitability and growth in their e-commerce and direct-to-consumer businesses and across other marketplaces and e-commerce sites.

A panel of PwC professionals — Jeff Kunz, marketplace practice lead; Nikki Frazer, e-retail marketplace strategist; and Ed Landry, consumer markets transformation leader — outlined three keys to success for CPG companies: 

1. Create a profitability waterfall:

The cost to serve for e-commerce is different and, in some cases, more complex than brick-and-mortar retail. There are specific dimensions to the “cost to serve” for the e-commerce channel that make it nearly impossible to apply the tactics and economics of brick-and-mortar retail.

A waterfall analysis can pinpoint which costs — labor and shipping, for example — affect profitability. Doing this entails understanding product profitability down to the SKU level. Further complicating the issue, the business model of each e-commerce business partner may affect their margin requirements.

Getting this right is no easy task. However, many companies are already making the effort, often using channel-specific data models to get a holistic view of their product portfolios to level pricing.

Takeaways:

• Know the SKU-level economics of your business and that of your trade partners.
• Understand trade partner margin requirements and how they are calculated.
• Create a profitable price/pack that fits the channel.

2. Obsess over packaging and fulfillment details:

Another drain on CPG company profits comes from business partner chargebacks. Chargebacks may occur because the vendor violated a packaging requirement or process specified by the e-commerce retailer — or because the shipment did not contain the correct quantity or items that were ordered.

An incomplete order often stems from supply chain issues, which can be thorny to resolve. Accurate demand forecasting is critical, especially with today’s channel proliferation. Shipping products quickly and accurately may also require modifying warehouse management systems or processes.

However, a smoothly functioning supply chain is well worth the effort. All major e-commerce players score and measure vendor supply chain performance and use those scores to determine where and how products are located on their websites. Supply chain excellence can lead to higher search rankings, increased order frequency and overall, more favorable funding treatment — and true competitive advantage.

Controlling chargebacks resulting from process violations is another matter that merits scrutiny. Each online retailer publishes its expectations about what makes products retail-ready in packaging and labeling, along with the consequences for violations. CPG companies are well advised to understand these expectations, recognizing that this may require adding staff or upgrading systems for tracking such details and the associated processes.

Particularly helpful: connecting the people responsible for meeting expectations to the process of resolving disputes. Doing so helps fosters accountability, and also allows for rapid response to disputes and continuous process improvement. 

Takeaways for CPG companies:

• Use AI-assisted dynamic forecasting to help reduce supply chain strain.
• Automate warehouse and logistics processes to improve accuracy, reduce labor costs and meet expectations for rapid order turnaround.
• Examine internal systems and processes to better manage ecommerce retailers’ retail-readiness expectations. 

3. Improve trade and marketing spend:

As with other facets of CPG and trade partner relationships, evaluating the return on marketing and advertising spending may not work the same in online retail as it does in brick-and-mortar retail. Some traditional measures, like returns on assets and total advertising cost of sale, for example, are interesting, but too high level to be useful in directing the use and improvements of specific tactics. The more meaningful measures are those that help drive specific behaviors and outcomes.

An opportunity exists to drive true incremental, profitable growth: Apply a blend of SKU and unit economics to understand where to invest. Understand the potential lifetime value of a customer for a particular product, apply a cost of customer acquisition and conversion rate model. And stay the course — continue to invest until the inflection point where customer conversion peaks.

Takeaways for CPG companies:

• Budget for e-commerce by taking a bottom-up approach.
• Lay a data foundation of customer preferences and behavior.
• Dare to be bold: create strategic relationships with e-tailers and be ready to quickly modify these as needed.

Looking ahead

The growth trajectory of ecommerce demands that CPG companies figure out how to effectively compete. Rather than cede control to their channel partners, they can equip themselves with the data and insights to chart a course for success.