Amazon’s End Game

Are CPG companies giving up too much?

Retail Theatre

By Andrew Elliot

It has long been said retail is theatre. And just as theatre requires the willing suspension of disbelief, so does shopping. We believe we might find something new. We believe a new product might somehow change our lives. The truth is far more banal.

When shopping for the everyday necessities of life, people are creatures of habit. And not just some of the time. Almost all the time. Some industry research has even pegged our shopping habits as consistently boring. Nearly 90% of purchases are the same each and every month. No wonder Amazon’s end game is the creation of a seamless, instant-gratification model of distribution.

If habit already trumps novelty and excitement, Amazon’s expansion of its grocery delivery service, Amazon Fresh will encroach even further into this small space for spurring behavior change. If Amazon can habituate people to repeat purchases through scheduled deliveries, where does that leave retailers or upstart, category-busting brands? Granted, Amazon Fresh is in only three West Coast cities today; but San Francisco, Seattle and Los Angeles could well be Indianapolis, Pittsburg and Duluth tomorrow.

Amazon drone

Our coming drone overlords want to further automate what’s been a mostly fragmented, human-led process for the distribution of everyday goods into our habitual, boring and predictable lives. Of course, I’m being just a wee bit hyperbolic, but only to raise a question: Are consumer package goods companies consciously deciding to align with the logistic powerhouse of the future instead of the distribution giants (brick-and-mortar retailers) of the 20th century?

It’s not so far-fetched. Early signs indicate that’s where we are headed. Despite commanding only 6% of total retail sales at the end of 2012, CPG companies like P&G, Georgia Pacific and Seventh Generation have given Amazon every advantage it needs to cement and automate consumer purchases on a weekly or monthly basis. By inviting the online behemoth into its warehouses, as recently reported, consumer package goods are basically saying to retailers, Sure, you helped me build a billion-dollar brand, but now we are going to help your biggest competitor!

Are CPG companies giving up too much by aligning with Amazon? More importantly, what does this mean for retailers stuck in the middle? In 2014, I think there are three shifts worth watching.

The duality of consumer v. shopper will be dismantled.

The consumer is where you focus to build a brand; the shopper is where you focus to close the sale. Maybe that’s the way it has worked for decades, but not in the future. Those once clear strategic lines are increasingly muddled by the disruptive role mobile plays along the path to purchase. This demands a radically different go-to-market strategy for brands. The psychology around consumption is changing. The path to purchase is no longer linear. The old strategy talk of clear delineations among so-called pre-shop/shop/post-shop phases, no longer apply. Now people live and people shop. All the time. That means “consumer” behavior is being replaced by shopper behavior. This changes the temporality of the so-called “moment of truth.” It’s not just in the store anymore.

The wildcard of Millennial preferences will keep everyone guessing.

For retailers, the enemy is Amazon. For CPG companies the foe is private-label. Or is it? After all, somewhere between these pitched battles is another threat: Millennial apathy toward big, multinational brands. They don’t want them. They want local, small-batch and environmentally responsible. Yet where is the best place to find these brands? If the next generation wants the new, the local and the ethically sourced, why are CPG brands working with Amazon to build a system that caters to the established, the tried-and-true, the blockbuster brand only? For the last century, CPG companies, from P&G to Kimberly-Clark and Unilever, transformed everyday life. They brought innovations to the laundry room and the bathroom alike. Can they still introduce the new without retailers? More importantly, it’s worth asking who is better suited to help CPG companies appease the counterculture tendencies of Millennials – retailers or Amazon?

Retail isn’t theatre anymore, but it could be again.

The biggest threat to retail stores is, of course, Amazon, but also shoppers figuring out how predictable they are. If all those automated purchases budgeted with Smartphone apps handle all the necessities, what happens to the extra money left over? What promised novelty and newness will drive consumers back to stores again? The onus is now on retailers to transform what’s become a predictable warehouse environment into something far more interesting after an era of warehouse-style aesthetics.

Despite the Amazon threat, real opportunity remains for retailers and CPG brands alike. Amazon’s aggressive push into every corner of consumption and consumer culture isn’t inevitable. CPG brands need to consider whether they are ceding too much of the already limited margin they have for changing consumer behavior.

Andrew Elliot
Andrew Elliot
Vice President, CPG
WD Partners
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Comments

  • Amazon.com and Jeff Bezos continually amaze us as their strategy unfolds. I won’t believe for a moment that Amazon will own the consumables marketplace with their own variety of private label. Amazon is the best strategies of Costco, Apple, Microsoft,UPS, FedEx, USPS, P&G and Brand You in one handy place to BUY. They’re creating the customer bonds to keep us all coming back and deferring all the risks of business by riding the established CPG and logistics companies to the top where they will bury them if they want to. He does.

  • The theater model of retail has nothing to do with the boring, miserable chore known as grocery shopping. Amazon doesn’t need to offer private label brands, merely to do what it does well and take the pain out of routine shopping. The losers will be not just the supermarkets but the restaurants people use to postpone grocery shopping.

  • Consider the number of items in the grocery store that are everyday purchases that are sold premixed rather than concentrated. Now think about selling all those detergents, and other household maintenance items in concentrated forms. The savings in packaging cost and cube would be tremendous. Also the savings to manufacturers by going direct to consumer would be substantial as retailer kickbacks for shelf space and promotions would be eliminated. Bezos is putting a model in place that will drive a great deal of cost out of the current grocery delivery system and pass most of it on to the consumer. This is partially insured by the fact that if Amazon takes too much profit it will allow competition to arise. Think about it – it’s a brave new world! Are you ready?

  • Traditional grocers really need to get a move on in terms of the customer experience, esp on the sales associate side. As someone above said, “the retail theater model has nothing to do with grocery shopping” — and therein lies the gap for Amazon. If that changed, as it has with some, like Whole Foods or Trader Joe’s, the tsunami known as Amazon wouldn’t matter as much. But until that time, online retailers will Pac-Man the center store business (and more) from grocers all day, every day.

  • As noted in one of the above comments, Amazon’s opportunity is to make the routine chore of the grocery experience a thing of the past. Drop shipped (or drone shipped) brown boxes arriving at your door step exactly when you need them. But in there lies the challenge for both CPG and Grocers. CPG companies are ceding control of their ecommerce and distribution services to Amazon. In the short term, the ROI of this partnership is easy to justify. But over time as sales accelerate, not only will Amazon gain significant negotiating leverage in this partnership, but one must fear that product innovation will be stifled as more focus is placed on the “billion dollar brands”. Grocers will lose trips, basket ring and all the incidental high margin purchases that come throughout the path to purchase in store. Who wins? Only Amazon in the long term. Sound familiar?

  • Very nice article. This treads on the ecommerce trend catching up in the CPG industry. Its a most discussed topic on whether the brick and mortar will survive given the advent of ecommerce in CPG and CPG spreading their wings with Amazon. My view has been that as far as consumers want experience of shopping, touch and feel their purchases brick and mortar model would stay. The repeatable / regular usage products and products with good online deals will catch up the ecommerce trend. Large value based transactions will still continue to be with the retailers. While I say this I also wonder if a scenario as follows may emerge way in the future – With eCommerce and the likes of Amazon providing a platform for repeatable sales, to keep consumer engagement and experience, would they expand into their own stores model – just to create brand engagements with consumers, garner consumer insights etc? Is that a foreseeable trend?

  • Aarthi, I have had many similar conversations regarding the future of Brick & Mortar stores and if Amazon sees an opportunity to open their own stores. I agree with you that B&M stores will never totally disappear but retailers will experience significant challenges with the current model that they execute. As more repeatable purchases move online through Amazon, and other ecommerce sites, retailers will have to react. The easiest way for them to win is to make their stores more experiential for the consumer. Thus differentiating the shopping experience from the sterile online experience as it exists today. They will need to reinvent store layouts, associate interaction, product experiences and even potentially shrink store footprints to operationally match the new shopping norm with financial models that will shift total consumer spend in B&M.
    In regards to Amazon opening their own stores, I think this is inevitable. What format that store will be, and what products it will carry are the bigger questions? There have been rumors regarding a concept called the “Pantry” that would be a Costco/Sams type format. But they will also continue to expand their Kiosk business as well. Kindle stores also seem like a prime option for them. But while B&M Amazon stors are inevitable, it will never be the cornerstone of their business plan. Retailers today should not be focused on what Amazon might do in the future. But rather what they as a retailer should be doing now to evolve their consumer value proposition.

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