P&G selling direct over the web – is this ecommerce 2.0?

By May 20, 2010Uncategorized

My dad used to work for Unilever and I remember him telling me how they used to have their own brand supermarkets but were forced to close them by Sainsbury and Tesco who didn’t want competition from their suppliers. Back then all the power lay with the retailer because they owned the consumer relationship. That situation hasn’t changed much in the last 30 years. For sure the players have changed, and some new web based companies have emerged of which Amazon is of course the most notable, but the structure of the value chain and balance of power between manufacturer and retailer hasn’t shifted.

As you might have seen, P&G have been making noises about going direct to consumers over the web for a while, and now they have announced they will be selling in the US via their own ‘eStore’. If you read the news reports you can see they are still nervous about upsetting their retail partners, but this move tells us they think they can use the web to radically reshape their industry, presumably with the aim of taking the retailers’ margin for themselves.

This raises the question of how much value multi-brand retailers add and whether they might be disintermediated. It seems to me that from a consumer point of view retailers have brought two things to the table – validation and aggregation. I know that in a single trip to Waitrose I can get all my household shopping done, and that if an item is on sale there it is probably good quality.

From a manufacturer point of view retailers are a cost effective outsourced sales function. For all but the largest suppliers it is too expensive to establish a physical retail infrastructure with sufficient scale to reach a large number of customers.

The web radically changes the first and third of these value add points. Consumers can quickly research products themselves now and don’t need retailers to validate for them, and as we all know it is not expensive for manufacturers to set up a website that can reach pretty much everyone who might want to buy from them.

The third piece – aggregation – is a little more difficult. Without innovation in logistics and delivery to aggregate purchases from multiple brands delivery costs will make it prohibitively expensive to make small purchases direct from manufacturers.

The ratio of shipping costs to purchase price will make it easier or more difficult for different manufacturers to sell direct over the web and hence the ability of retailers to protect their position. Tesco’s position is pretty strong because their customers can spread their £5 delivery charge over a large number of purchases in a £100-200 shop.

So what does all this mean?

Firstly, we can expect to see more manufacturers going direct via the web, particularly those that sell higher value items. Etailers who sell only third party brands might find their positions challenged.

Secondly – there will be more innovation in delivery and logistics. This isn’t an area that has seen a lot of venture activity so far, but the need for innovation could become pressing.

Finally – I expect to see a rise in manufacturing startups adopting a 100% direct to consumer model. The margin and information benefits that come with controlling the value chain end to end are enabling innovative new business and product models.

– Posted using BlogPress from my iPhone

  • Pete Dowdell

    > Consumers can quickly research products themselves now and don’t need retailers to validate for them

    I am not sure I buy that completely. Over the years, I feel the ability of the web to inform my consumer choices has varied greatly. It seems each time a route to genuine consumer opinion and recommendation opens up, it's only a short time before the corporations and their agents show up, clouding the available information with astro-turf campaigns, sock puppetry and other tricks. The issue of where to find trustworthy product review and recommendations is still wide open and lacking a viable, long-term solution.

  • I agree that reviews are far from perfect, but Then nor are retailers.
    I increasingly use reviews to inform my purchases. In my experience
    they don't get gamed that often.

    Additionally reviews allow you to distinguish between rival brands in
    a way that retailers do not.

  • As someone who has been both a retailer and a brand marketeer, let me make a few comments:
    i) for a long time, there has been increasing tension between retailers and manufacturers. retailers say they are the “buying agent” for the consumer; manufacturers say that retailers are the “distribution channel” for the manufacturer. You can already see some important differences based on this language.
    ii) Some retailers have complained about the “brand tax” imposed on consumers by manufacturers. Why do I need to buy the P&G version of washing powder when the Tesco or Sainsbury's own label works perfectly well. Hence, the rise of own-label products especially outside of North America (Canada excluded).
    iii)Based on the above, there is probably more opportunity for retailers to use the web to actually squeeze out manufacturers. For example, Tesco decides to only carry P&G products on the web and not in their shops, or vice-versa, but ensures ubiquity for their own products? The retailers has the customer detail and the retailer has the choice of channels. For the retailer it's a matter of maximising return on investment and of course consumer choice.
    iv) The web opens up more options for manufacturers because it gives them a direct to consumer channel that might make marginal products more viable. Selling a product via a mass retailer is an expensive proposition. Economies of scale come into play. In the “'old days”” if a major retailer decided not to carry a product you were dead. Now, that is no longer an issue. So, the manufacturer can introduce more niche products; a manufacturer can use the web to sell cross border; and the manufacturer can even “build to order” rather than build to warehouse to store. There are already products that exist that are sold only by “Direct Mail” or in “Club” format–in reality not much different than using the web as a channel.

    What is clear is that the economics of FMCG and retailing are surely set to change and perhaps even the balance of power.

  • Interesting comment, thanks. I think you are right that in some cases the retailer will prevail at the expense of the manufacturer.

  • Nick, this is a great call and a trend we can see a number of start ups trying to go after, or example inspirational stores and ecommera and trying to help brands go direct, and there are countless comparables in the US. The big challenge is the cost of customer acquisition, which if you are buying a customer for just one purchase, will by definition, be higher than if you are offering a range where a customer can fill their basket with multiple items at visit one and then keep on coming back. This is why Amazon are so keen to offer, first and foremost a wide RANGE, as they want to be the first place a customer comes.
    This point of generating return / repeat is at the centre of many ecommerce company's efforts at getting into media. look at rapha.cc ; more like a magazine than a shop, but they are growing like topsy. And also consider ASOS: they have the second highest circulating fashion weekly in the US: all in a bid to foster higher return/ repeat.

  • Thanks Paul, range of offer will definitely help with conversion and basket size, and hence ability to pay for customers.

  • This is based on a focus group of one, but the value of aggregation when it comes to hardline grocery items like soap, cleaners, food….I just want to make one purchase not several, especially since I replenish these items frequently 1-3x/month. I think your commerce 2.0 point fits better for less frequent purchases – cars, consumer electronics – where I make a one-time (or less frequent) purchase and probably want to do a lot of online research on a camera versus soap.

  • Agreed – unless someone smart can aggregat supplies from multiple providers during the delivery process

  • mbt

    Some retailers have complained about the “brand tax” imposed on consumers by manufacturers. Why do I need to buy the P&G version of washing powder when the Tesco or Sainsbury's own label works perfectly well.

  • This is symptomatic of the battle for margin between retailers and brand owners. It is worth remembering that retailers spend a lot of money promoting their own brands as well though.