Does P&G Need Retailers Anymore?

The Real Meaning of P&G’s Supply Chain Overhaul

By Andrew Elliot

Procter & Gamble’s $89 million distribution center near Dayton brings jobs to the region, but as part of a supply-chain overhaul, it also represents the inevitable – and potentially dramatic – transformation of the retail landscape.

The distribution center would “dramatically innovate the way we supply our customers,” Global Products Supply Officer Yannis Skoufalos said when the news was announced, allowing P&G to “respond to customers and our consumers in a way we have never done before.”

That language might sound vague and coded at first blush, but it couldn’t be clearer: P&G is scaling up its direct-to-consumer capabilities. The distribution center merely represents a cold, hard capital fact, the culmination of less capital-intensive strategic moves in recent years by the consumer products behemoth. Seeking to grow sales in all areas, P&G has been taking an “all of the above” approach in the battle of brick-and-mortar versus point and click.

Consider the following:

  • P&G has allowed e-commerce giant Amazon access to its warehouses since 2010, according to a recent report in the Wall Street Journal, putting P&G in an awkward position with its retail partners. Target, for instance, retaliated by temporarily removing P&G products from endcaps and working with P&G’s competitors to offer discounts.
  • In recent years, P&G executives have called for a customer-centric redesign of its North American and Western European supply chain. In September 2013, CEO A.G. Lafley told investors that P&G has “taken a ‘blank sheet of paper’ look at supply chains, designing from the shopper and customer back.”
  • This year, P&G revealed plans to put distribution centers within one day of 80% of US consumers. P&G wants to rival Amazon’s formidable network of fulfillment centers even as it cooperates with Amazon in their own warehouses. For now this includes teaming up with Amazon, but P&G is also expanding its own direct-to-consumer activities.

Nothing new here exactly; it’s rather a question of scale. P&G has invested in direct-to-consumer strategies in the past, launching The Essentials as its first online sales lab in 2008 and in 2010, the P&G eStore, the next generation of online DTC offerings. The unprecedented scale of P&G’s investments is a response to the unprecedented shift in the way people find and buy the goods they want.

Consumers expect time-saving conveniences, and are even willing to pay a premium for it. Case in point: Amazon Prime raised its annual subscription rate to $99 from $79 in March. With two-day shipping at their fingertips, Prime members will expand online purchases to include items previously bought in stores – including many P&G items, from laundry detergent (Tide) to diapers (Pampers) and paper towels (Bounty).

Amazon smartly encourages this behavior with its habit-forming “subscribe and save” program on household goods. This discount – albeit one that has shrunk since the program’s 2007 debut – rewards consumers for committing to regular purchases. Target offers similar savings with its “subscriptions” program, which has increased its product offerings ten-fold from its 150-product debut last year. On Amazon, a 77 pack of Tide Pods goes for a $19.22 one-time price, or just $18.26 with a subscription. Target offers a similar 5 percent subscription discount. This price war between Target and Amazon increases savings for consumers, but eats away at margins for manufacturers like P&G.

It’s time for P&G to stop conceding these losses and launch a similar program. At the P&G eStore, that same 77 pack of Tide Pods costs $19.99 – or 77 cents more than Amazon’s one-time purchase price. What happens if the P&G eStore adds a subscription service? As the maker of the most popular household brands offered by Amazon, Target and others, why wouldn’t P&G co-opt what it’s retailers have found so successful within its own direct-to-consumer push?

After all, online Consumer Goods sales have been growing 20 percent annually, and will account for about 5 percent of total Consumer Goods sales next year, according to Neilsen estimates. Yet the biggest innovation of the P&G eStore isn’t pricing or shipping, but bringing top P&G brands together in one place under a single banner that’s not a retail store brand, but the P&G “store” brand.

Granted, the vast majority of P&G’s revenue still comes from physical stores, but there is good reason for Consumer Goods manufacturers to be looking to the web as a place to build brand loyalty. Customers are increasingly comfortable with online purchases and increasingly uncomfortable setting foot in stores. In a recent quantitative study of 1,500 shoppers, 94% of respondents purchased products from Amazon, with over two-thirds making at least one purchase every month. Even at its current early stage of development, 94% of respondents reported being familiar with Buy Online Pickup In Store, or BOPIS; with 86% highly satisfied the experience, rating it at 8 or above on a 10-point scale. But the most compelling finding of the study for Consumer Goods manufacturers considering pursuing DTC strategies is that the two BOPIS concepts rated highest by respondents – drive-thru and curbside pickup – don’t involve shoppers setting foot inside a store.

A power shift is underway. Retailers once held almost all of the power, but could shifting consumer sentiment give manufacturers the upper hand with their retail partners?

One thing is true: The moment of truth is moving from shelf-side to screen-side. Shoppers preferred method of fulfillment is changing as well. Even customers who make their purchases inside stores are increasingly deciding what to buy beforehand using online reviews. Winning over the few customers who are “in play” for everyday necessities like diapers, paper towels, and shaving cream means reaching consumers where they spend their time: online.

Win wherever people shop, that’s what Alex Tosolini, P&G’s Senior VP of Global eBusiness, told eMarketer recently. “Our job is not to change consumer behavior,” Tosoloni also said. “Our job is to follow consumers’ behavior and be present with our brands.”

Have the stars finally aligned for a successful direct-to-consumer push by P&G? Consumers who are increasingly pressed for time and dissatisfied with stores have embraced online shopping. Amazon wants a distribution arms race and won’t stop short of air-dominance with a fleet of drones buzzing around its fulfillment centers, but P&G’s redesigned supply chain has put it closer to consumers than ever before. Consumers want it. The technology is there.

Who will move first?

Andrew Elliot
Andrew Elliot
Vice President, CPG
WD Partners
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Comments

  • Andrew, how does P&G overcome the scale advantage of Amazon and other retailers who are consolidating products from multiple manufacturers? Additionally, how does P&G offer the “one-stop-shopping” advantage that Amazon and other retailers provide?

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