The Largest Players Take Share

In CPG, ecommerce penetration has lagged at 11%[1]. Grocery has long been a category that avoided digitization, despite a number of factors that have pushed grocery online since the fall of Webvan – city density, contract delivery labor, Amazon’s purchase of Whole Foods, etc.

COVID-19 certainly changed things. US CPG sales are up 91% y/y today, with 35% more people having shopped online for CPG compared to a typical week, and one quarter of all shoppers expected to shop online more frequently or for the first time.[2]
This move has been led by grocery; in 2019 online grocery shopping only saw 4% ecommerce penetration. Today, both delivery and buy-online-pay-in-store are up 110%[3].

Expect the trend to continue. Before this coronavirus, millennials had broken from prior generations by spending more money and time eating out than on groceries or dining at home. This virus will change that. Consider the dynamic we cited in an earlier post, that many restaurants will fail and that those that remain will struggle with profitability and likely drive up prices. In a difficult window financially, consumers are likely to stick with ordering in.

The benefits of that shift are already clearly falling to the usual suspects – Walmart’s grocery app surged 3x in March, followed by enormous gains for Amazon, Instacart, and Target. While traditional retailers struggle, ecommerce aggregators are growing, and they’ll define a massive category of purchasing in the future. If China is an indicator for the US, it was the 2003 SARS crisis that propelled Alibaba and JD.com to their spots as two of the largest companies in the world. Amazon is clearly eyeing that future, funneling $4bn of profit from Q1 into infrastructure upgrades.

Other grocers, and other general merchandise retailers, were poorly equipped for an ecommerce reality. Margins in ecommerce are thinner, especially as physical browsing lends itself to more impulse purchases and more purchases for immediate consumption. Assuming consumers continue to shift to weekly delivered grocery purchases, expect many less prepared, smaller operations to fold as traffic surges to Walmart and Amazon. Others may pop up as ghost grocers like Ocado out of the UK, built to deliver groceries without a site open to the public. The remainder are probably thinking seriously about fulfillment solutions and automation that can help them compete.

CPG Brands Have to Evolve

The shift to online drastically changes the dynamic for CPG brands. Historically their focus has been on share of shelf, and distribution has been through their retail partners. Marketing, pricing and promotion was all tethered to winning in a customer’s physical path to purchase.

But now I expect many grocers and general merchandise players will fold; so most major brands will simply grow their reliance on Amazon. And I do mean Amazon specifically; even with the pressure Amazon put on FBA sellers during the crisis by prioritizing essential products, competing platforms didn’t see much of a lift. As of April, Walmart’s marketplace had only seen a subtle lift, and eBay, Target and Google saw no material seller growth at all.[4]

With retail partners that survive, the brands and retailers are likely more of a team than ever against those online behemoths – sharing data and strategizing advertising and promotion spend together. There should be more data to leverage – a reduction in cash transactions means more traceable activity, and maybe a driver for more adoption of loyalty programs as well. Nordstrom has already shifted their stores to cashless transactions upon reopening. This is a huge shift – before COVID, about 30% of transactions were in cash.

As in apparel, many CPG players will also think more carefully about DTC strategy. Pre-COVID these attempts were focused on unique SKU’s outside of the inventory that moved through retail relationships, but perhaps in the next few years CPG brands build out the infrastructure necessary to go direct to the end customer with a majority of their inventory, hedging the risk of having many of their eggs in Amazon baskets.

Private Label Presents a Major Threat

The online players grabbing market share in this environment all have strong private label brands. Before COVID private label brands already represented 20% of the consumables market[5],
and that number is probably an enormous understatement, given it relies on Nielson data that does not include TJ’s, Aldi’s, or Amazon. Private label already represented anywhere from 20-30% of revenues for big box players, and as those companies grow share and consumers gravitate toward value, expect that figure to grow. Already in March, consumption of private label foods increased 10% y/y.[6]

In a universe in which a quarter to a third of consumers are grocery shopping weekly online from Amazon / Walmart / Target, promotion and trust in retailers should drive purchases of private label products and squeeze CPG brands.

COVID-19 has also accelerated an adoption of shopping by voice, a long anticipated move that had languished for years. This is another shift that encourages consumers to repeat purchases of known commodities, subscribing and saving and limiting the amount of new product experimentation they do.

How do today’s CPG brands respond? Does substantial spend shift from TV and out-of-home advertising to promotion on Amazon and Walmart, or on sites like Instacart? Since a digital path to purchase creates fewer opportunities for sampling (and I don’t think in-store free samples are coming back for a while), new product launches will have to be different. Do CPG brands open zero inventory physical locations to promote new products to replace store displays and endcaps? Some CPG players may build out new distribution and compete as DTC; others will use DTC as a marketing channel.

Marketing and advertising will of course have to adapt- you need tremendous brand equity to drive customers to proactively search for your products vs. casually come across them and choose to buy them in store. Does this mean more bottom of funnel, direct response marketing efforts? Or bigger brand pushes across digital video / OTT / TV?

Regardless of the way marketing changes, expect brands and retailers to be looking to squeeze profit out of their supply chain where possible.

More Demand for Warehousing

In grocery and retail generally, this crisis has reversed decades of progress that targeted an efficient supply chain and low inventory levels. Major food sellers are moving through three months of supply in 10 days, with little in additional inventory.[7]
Coming out of this, grocers and essential food retailers are likely going to want to remain prepared, perhaps with demand planning that factors in more anomalous events, and likely by optimizing supply chain generally (i.e. reducing risk from single-source global partners). But they will also want to reverse some “just-in-time” policies to keep higher levels of safety stock handy.

Brands approaching DTC for the first time will definitely be looking for space, and many brands and retailers may be rethinking their warehousing as they explore opening stores they can leverage for microfulfillment. Expect a lot of enthusiasm for warehouse space on the horizon. In food alone, over the next five years an additional 75 million to 100 million square feet of industrial freezer and cooler space will be needed to meet demand generated by online grocery sales.[8]

Taking a step further, for smarter/faster shipping and to reduce risk, large centralized warehouses are not likely to cut it. And it is likely the demand will actually be for flexible warehouse space vs. making enormous fixed cost investments to store inventory throughout the year.

We should expect a stronger push for robotics to drive warehouse efficiencies. Great inventory optimization and demand planning can fall apart in manual fulfillment, which should be riddled with costs and leaves lots of room for human error. Warehouse automation can bridge strong data and intelligent planning with cost-effective execution and happy customers. But today, there are only 3,200 robot enabled fulfilment centers[9]
worldwide. To contextualize that, there are more than 400K warehouses just in the US. Don’t expect fully autonomous sorting and packing, but solutions for smarter warehouse management, automatic data capture, robotic material handling, etc should all make gains.

How do you expect CPG to react, and how has this environment changed your consumption in grocery? Send us your thoughts, and check back next week as we discuss how this crisis could mean the end of independent movie theaters and the emergence of new audio and sports formats.

To see previous posts on education, cities and apparel, or the intro to this series and our other research, please go to https://jumpcap.com/blog.

[1]
“How Ecommerce is Changing the CPG Market.” Digital Commerce 360.

[2]
Nielson. “Tracking the Unprecedented Impact of COVID-19 on U.S. CPG Shopping Behavior.”

[3]
Adobe Analytics data, April 2020.

[4]
“Sellers Are Not Diversifying as Amazon Struggles.” Marketplace Pulse, April 2020.

[5]
Winkler, Nick. “What is the Future of Ecommerce? 10 Insights on the Evolution of an Industry.” Shopify, January 2020.

[6]
“Food for Thought.” William Blair, March 2020.

[7] Gasparro et al. “Grocers Stopped Stockpiling Food. Then Came Coronavirus.” Wall Street Journal, March 2020.

[8]
Smith, Jennifer. “Real-Estate Firms Expect Coronavirus-Driven Shifts Will Spur Warehouse Demand.” Wall Street Journal, April 2020.

[9]
Winkler, Nick. “What is the Future of Ecommerce? 10 Insights on the Evolution of an Industry.” Shopify, January 2020.