FMCG in the age of Amazon

Stuart Elmes

It’s a truism to say that the digital transformation has changed the way the world does business in dramatic and unpredictable ways. Some industries, however, have been resistant to change and slow to adapt to ecommerce. Today we’ll be looking at one of them: Fast Moving Consumer Goods (FMCGs) [aka Consumer Packaged Goods (CPGs)]. While the grocery industry has been one of the slowest to adapt to online shopping and digital marketing, changes have been made, and we can say with absolute certainty that more disruption is just around the corner.

 

SELF-CHECKOUT, THEN AND TOMORROW

 

One of FMCG’s most visible recent changes is the shift toward self-checkout. This trend has been decidedly unpopular with consumers, with some surveys showing “unfavourable” ratings as high as 93%. While the technology saves retailers money in staffing, a BBC reporter who recently timed staffed vs. self-checkout at 8 major retailers found that staffed tills were faster in every single instance. Analysts also worried that the technology allowed people to steal (sales of “carrots” went through the roof, as shoppers used the cheapest available produce code for more expensive items) and even pushed honest customers to theft when they grew frustrated as items refused to scan. Although the technology is improving in both anti-theft capabilities and convenience, retailers can learn a valuable lesson from the unpopularity of these devices: customers crave convenience!

Market analysts have found that most shoppers looking for FMCGs prioritize saving one of three things: Time, Money or Energy. Customers looking to save time and energy are frustrated by any technology which creates longer waits or more complicated processes. While self-checkout has failed to meet their demands, retailers have begun to use more advanced technology towards the same ends. The way consumers looking to save time and energy for their weekly grocery shop may change drastically in the days to come.

Amazon Go, a store which launched in Seattle this year, uses a combination of AI, machine learning, computer vision and sensor fusion to allow a consumer to scan a code upon entrance, grab whatever items they desire, and walk out with their accounts automatically charged. This technology will allow consumers to completely avoid time wasted lining up, and provide huge savings in labor to the retailer.

 

AMAZON AND THE GROWTH OF ECOMMERCE IN FMCG

Amazon is almost certainly going to drive a further shakeup in the FMCG industry, a fact the world was alerted to this year as the giant purchased the Whole Foods retail chain and launched the Amazon Fresh delivery service. These two developments have convinced industry watchers that the push toward online grocery shopping has begun in earnest.

A Kantar World Panel Study from last year found that South Korea was the world’s leading on-line grocery shopper, with 16.6% of the market currently online, compared to 6.9% currently in the UK, and 1.4% in the US. Close to 100% of South Koreans between the ages of 10 and 40 have experience shopping online, and two of the main reasons cited for the explosive growth of online FMCG sales are free delivery and the range of products available. As Amazon moves into the grocery business, they’ll have the logistic and marketing muscle to ensure that consumers in the US and Europe have access to these enticements to buy their FMCGs online. We can only assume that consumers will respond in numbers.

 

EVERYTHING MUST GO, INCLUDING SALES

One of the main trends we’ve noticed in the marketing of consumer goods has been a shift away from promotions. Companies like Procter & Gamble and Unilever have come to believe that promotions can create only a short-term profit but add, according to Tim Eales, a director at IRI UK, “very little overall value gain.” P&G’s CFO Jon Moeller agrees, and advocates a focus on brand building, claiming that pricing behind innovation, and increasing trial and sampling of superior products will move markets over time, claiming “what doesn’t move markets is leading the march down on promotions spending.”

This shift away from promotions toward brand building can be seen as a response to the changing digital marketplace. Research has shown that online shopping has been very slow in steering buyers toward impulse purchases in FMCG. Research has shown that among British and French online shoppers, 55% continually re-used the same shopping lists from purchase to purchase. In such a market, building brand loyalty will be more important than ever before.

And the nature of brand loyalty is changing. Due to ecommerce and changes in logistics, consumers are more likely than ever to buy products made by smaller, artisanal companies, and small brands have been stealing market share from big brands. Scale used to be essential, but the economics of supply (and Amazon) have taken away the competitive advantages of the traditional FMCG giants. Add to this the fact that social media channels have allowed smaller companies to spread their messages, and, through consumer endorsements, to reach new buyers in a way they never could before. Peet’s Coffee, 5 Hour Energy drinks, and Ballast Point beers are ubiquitous not because they’ve spent hundreds of millions of dollars on advertising, but because our friends, co-workers and neighbors endorse them.

 

THE FUTURE IS AMAZON

What does all of this mean for the future? We must begin with Amazon.

While the launch of Amazon Fresh and Go, and the acquisition of Whole Foods suggest that Amazon is making a dramatic foray into the FMCG market, it would be a mistake not to take into account how these changes will interact with the rest of its business. In addition to an ecommerce business that can compete with retail giants like Wal-Mart, Costco and Tesco, Amazon is also a giant in logistics, with a network that can now rival UPS, and a technology giant specializing in AI. None of these qualities exist in a vacuum. Amazon will doubtless look to expand its market share in FMCG, and Whole Foods gives it a strong, in house brand with which to enter the market. Amazon will most likely use the FMCG business to lure consumers into shopping for groceries online, and then Amazon Prime memberships. In Costco’s most recent fiscal year, the company had a net income of $2.3 billion, while it generated $2.6 billion in membership fees. Wal-Mart’s membership fees accounted for almost 40% of its total profit in 2016. We should assume that Amazon will be using Fresh, Go, and Whole Foods to sell goods at cost, while steering customers to join Prime rather than an existing retail giant, and enjoy the convenience of virtual shopping and free home delivery. It’s estimated that Amazon has between 65-80 million prime members. We would expect that number to grow exponentially in the coming years, as consumers can gain all the benefits of shopping at a traditional big box retailer, while avoiding the hassles of driving to the outskirts of town, parking, and pushing a squeaky cart around a crowded warehouse. It’s easy to imagine a future where consumers purchase Amazon FMCG products through their Amazon smart home devices which are promptly delivered by the Amazon logistics network.  

 

OR IS IT?

But what can retailers and manufacturers who are not Amazon do? As we have seen, with enough brand building, smaller companies can compete against the Goliaths. Creating and maintaining a strong brand identity can attract consumers to your product. But, as we have also seen, consumers in the FMCG market want to save as much time and energy as they can when shopping. By investing in ecommerce and focusing on smart devices, companies can make their products as easy to buy as Amazon will surely make theirs. Ecommerce investment needs to work for consumers, to make shopping, shipping and returning goods as convenient as possible. Making marketing frictionless and allowing the customers who hear your message to buy your goods in a timely, simple and hassle-free way will be the difference between your firm being Netflix or Blockbuster video. The future of marketing will not be shouting a message at consumers, but shepherding them through the shopping process with a minimum of stress and wasted time.