By Peter Fedchenkov, Founder INS Ecosystem
Arguably the most traditional consumer industry in existence, grocery stores have remained largely unchanged since Carrefour invented hypermarket, the superstore combining a supermarket and a department store, in 1963. While online retail has certainly moved forward, that drive comes from tech companies like Amazon, Ocado, and Instacart rather than retailers or consumer packaged goods companies. Yet the upside of innovation in the space is immense, with grocery stores making up the world’s second-largest consumer market and expected to reach $8.5 trillion globally by 2020.
The proxy fight at Procter & Gamble has proved that consumption patterns are changing, and even the most established players in the industry are not immune to disruption. Consumer marketing specialists across virtually any industry are well aware that younger generations behave and consume differently.
Why is this then a surprise to multibillion-dollar grocery manufacturers? Why do retailers still stock their shelves the same way they did over 20 years ago? Why is it that autonomous driving Tesla’s can take owners to their local Whole Foods yet those shoppers still have to push grocery carts through a maze of shelves and waste hours of their time week on week?
Professor Clayton M. Christensen of Harvard Business School addresses this in detail in his theory of “disruptive innovation,” first introduced in his book, ‘The Innovator’s Dilemma’. As Christensen argues, and as the history of Kodak, U.S. Steel, Western Union, and many others shows, disruption always comes unspotted before it is too late. New business models do not emerge by themselves - they follow megatrends and shifting consumer behavior and mindsets, trends that remain starkly apparent in the world’s second-largest consumer market.
Consumer mindsets have indeed shifted, back in the second half of the 20th century, buying Hellman’s mayonnaise or Hershey’s chocolate was an aspirational indicator of one’s status as a middle-class family. Today’s consumers are focused on experience and discovery, not just consumption. Millennials, who will be the backbone of consumer spending for decades to come, want to go small, local, and organic, supporting farmers and artisanal producers. Paired with the fact that millennials live with the real-time and instant gratification of the Facebook and Instagram era, it’s clear that tomorrow’s consumers want a two-way street type of relationship with immediate access to brands they love instead of seeing their selections limited at brick-and-mortar stores.
While supermarkets are trying to introduce innovative in-store experiences ranging from situation-based marketing and data-driven individual offers to aesthetic overhauls in an effort to meet these changing needs, manufacturers are lagging behind. Such a lag arises, as any manufacturing representative who has sat in a stuffy negotiations room in Walmart’s Bentonville headquarters knows, because grocery retailers have very successfully capitalized on their relationships with everyday shoppers and locked down the space between consumers and manufacturers.
Despite this there is light at the end of the tunnel - a bright hope for manufacturers in the challenging environment - direct-to-consumer sales.
Such a light was seen after the collapse of the USSR. My grandfather was one of the first direct-to-consumer manufacturers in Russia when the retail industry was virtually nonexistent. Manufacturers went to market stalls across the country to sell packaged rice, flour, and cereals directly to their consumers. They controlled pricing and margin, knew their customers intimately and even personalized their marketing based on the individual customer. They advertised in newspapers and customers from as far as Siberia could order by phone and get the items mailed directly to them.
Today, the direct-to-consumer movement is on the agenda of FMCG companies globally, but for very different reasons: falling traffic in brick-and-mortar stores, the growing importance of consumer data, direct pressure on margins, new consumption patterns, and changes in the supply chain, to name a few. It’s not just the small manufacturers selling rice in market stalls feeling the pinch anymore, as the likes of Johnson & Johnson, Kellogg, Unilever, and Coca-Cola now have the objective to sell directly to consumers as the priority on management's’ agenda.
The longer direct-to-consumer takes to conquer, online giants such as Amazon will continue to grow and widen the gap. Not only that, but manufacturers are directly assisting in the Amazon coup by generating valuable insights for Amazon when it comes to consumer shopping data. These insights are allowing Amazon to make their private label goods more and more competitive, ultimately dismantling current manufacturer powerhouses altogether. Yet manufacturers should not be victimized by Amazon’s online dominance. They can dominate the market themselves and have the right to own relationships with consumers and use their data responsibly.
With the advent of new technologies like blockchain, internet of things, artificial intelligence, and e-commerce, consumer packaged goods companies and brands can be just as effective as retailers. If implemented properly, they could enable manufacturers to sell directly to consumers, understand and serve them better, increase ROI on marketing, grow consumer data to further improve their supply chain.
The results of direct-to-consumer or other retail innovations will not come overnight. Shareholders will have to wait before reaping the benefits. What could happen overnight is the opposite - the status quo approach has already led to eroding margins in the consumer packaged goods industry, falling returns and, as the result, more Nelson Peltz’s on the boards of public multinational fast moving consumer goods behemoths.
About the author
Peter Fedchenkov is the founder of INS Ecosystem, a global distributed online platform that enables consumers to purchase groceries directly from manufacturers without the intermediation of retailers. Peter is an experienced entrepreneur with deep expertise in consumer retail and technology. He co-founded Instamart, the largest venture-backed online grocery delivery operator in Russia.
Peter was formerly a private equity professional with the Internet & Technology and Retail practices of Baring Vostok Capital Partners, the leading private equity fund in Eastern Europe. Previously, he was an investment banker with Credit Suisse and Goldman Sachs. Peter holds an MBA from Harvard Business School and is a frequent speaker at conferences organized by Harvard Business Review. He is a published author with the Keldysh Institute of Applied Mathematics under the Russian Academy of Sciences.