Retailers   //   April 27, 2020

The current crisis has big CPGs rethinking their DTC strategies

The coronavirus pandemic has brought about a lot of issues for CPG brands — especially those that have relied heavily on their wholesale business.

Take Coca Cola, for example, which last week announced that its global volume had sunk 25% at the beginning of this month. Just a few months ago, during its fourth-quarter earnings, Coke said sales grew 16% to $9.07 billion.

Almost half of Coke’s sales come from theaters, vending machines, shows, musical and other events, wrote the Associated Press. And sales from restaurants also represent a significant chunk of the brand’s sales.

Coke isn’t alone. The company’s troubles, while they may only be short-lived, point to, yet again, the need for major brands to have diversified distribution channels, including a strong e-commerce or direct-to-consumer channel. For years, big companies have made grand gestures but few movements when it came to a direct-to-consumer strategy. Most relied on online channels like Amazon and Walmart to dictate digital growth.

Some big companies already have begun making inroads: Clorox has added digitally native brands to its portfolio as well as tried to grow the digital presence of existing ones; P&G relies on its startup studio P&G Ventures to incubate new brands and products, although these operate separately from the CPG behemoth; Unilever has a bunch of well-known digitally native brands to its name, including the subscription snack company Graze. But all of these moves are incremental, and these big CPG companies still have a bunch of legacy products with hardly any tangible digital strategy. As foot traffic plummets and e-commerce grows, these brands being forced to accelerate what they already and increasingly take a page out of the DTC handbook.

The changing perception
Some of this acceleration will be on the marketing side. Packaged goods have generally relied on physical retail and splashing national campaigns to market their items. Now, things are beginning to change. “The idea of large TV campaigns … those concepts have been struggling massively to still have the return they used to as we’ve gone to streaming more and more,” said Don Abraham, a senior partner at Kantar to Marketing Dive. “This is really a huge opportunity for innovation of new ways of marketing that people have not tried before.”

Beyond that, CPG companies — especially those that rely heavily on wholesale — are already being forced to rethink what they sell and how they sell it. With restaurant closures, food items in large quantities are no longer in demand. Soda brands used to sell fountain drinks in large quantities. They’re now retooling to deal with consumer demand shift. Some restaurants are still selling two liter bottles of soda via delivery apps, but the dynamics have changed. “It’s a very different margin and model to do soda from a bar than from the bottles,” said Barb Renner vice chairman of consumer products at Deloitte, “it’s shifting the brands to think about how do they flex in the future.”

“One area I think is very interesting is loyalty,” said Renner. Products that before relied on big purchases from once highly-trafficked places like hotels, may try to better facilitate sales through online loyalty programs, she said. Before, it was the retailer and other businesses that were the frequent choosers of your product; “the loyalty element is going to change because of this,” she said.

For other brands, the shift may mean doubling down on digital channels. Retailers with strong online presences are partnering with brands to better facilitate basket add-ons. Products that are more indulgent are often impromptu splurge purchases; these brands and retailers, said Renner, are “getting creative” with the ways to mimic that online — be it via advertised promotions at checkout, for example.

The DTC shift
The biggest change will be the way brands try to facilitate online sales themselves. For example, SMS-based platform Iris Nova behind the beverage Dirty Lemon is already seeing an influx of interest from big companies hoping to test out new, more direct channels. “We’re speaking with several large strategics right now,” said the company’s founder and CEO Zak Normandin, about taking “some of their core products and bringing them onto the platform.” Coca Cola is one of Iris Nova’s largest outside investors — and is, indeed, considering using Iris Nova’s platform to directly sell certain products to consumers.

What these big CPG players are on the hunt for, said Normandin, is a way to facilitate more direct commerce with customers — as well as something that lets companies more easily collect customer data. Platforms like Amazon, for example, give scant user information beyond the fact that a sale was made. In Normandin’s eyes, this lack of control may bring about the e-commerce giant’s downfall. “We think in the future — specifically in over the next six to twelve months — Amazon is going to be extremely fragmented,” he said.

Other brands have already begun making DTC inroads. Clorox, for example, has acquired a few digitally native brands — like the wellness company Nutranext — as well as built out more digital channels for existing ones like Burt’s Bees. Last October, Clorox told Digiday that 8% of its sales were done online via its website — the company is certainly trying to ramp up those efforts even more now.

For some brands, all these recent changes highlight the need to have a robust omnichannel presence. The seltzer brand Ugly Drinks, for example, has both retail distribution as well as a robust direct online presence. Over the last month, it has seen U.K. DTC sales increase over 400% and in the U.S. that channel went up over 200% month-over-month.

The company has spent the last few years not only trying to increase international distribution, but build out a robust direct-to-consumer presence, allowing customers to buy the products on its website and have them quickly shipped. “We see this as a validation of what we’ve seen for the past two, three years,” said Ugly’s co-founder and CEO Hugh Thomas. “I do believe you need to be omnichannel in 2020 and beyond,” he went on. “When one channel closes, have other things available.”

Moving the Titanic
For smaller drink startups, this nimble approach makes sense — and often fits into their brand ethos. But for large companies, things get more difficult. CPGs, said eMarketer principal analyst Andrew Lipsman, have spent the last few years trying to figure a viable DTC strategy. “I haven’t seen a lot of smart movement in the space,” he said, “there’s no silver bullet for CPGs.”

Still, there is likely going to be a big move over the next few months to try and find the brand loyalists and market and sell to them directly. According to Lipsman, this may not drive huge sales volume, but will provide these companies with important data. “The strategy of having those consumers’ first party data and using it for engagement, ad targeting and lookalike modeling — that’s the smart play,” he said.

What’s most likely to happen is a lot of experimentation. These brands are seeing people change the way they shop, and they have very few ways to respond this behavior shift. For a lot of players in the CPG space, said Lipsman, “they knew there was an imperative around digital transformation, but progress had been slow and incremental.” Now that they’ve witnesses a watershed moment, “this is a moment in time when it would probably be smart to ramp up what they were planning to do.”

According to Renner, what was on the back burner is now being brought to a boil. “There have been a lot of companies that have said CPGs have been getting into digital incrementally,” she said. Those brands, she went on, “are going to see this as transformation phase… Everyone is talking digital.”