IBM has warned consumer packaged goods (CPG) companies to embrace e-business – or face the consequences.
The IT giant says that companies must wholeheartedly embrace the new world of e-business, or face severe consequences ranging from take-overs to the forced departure of senior managers.
Go deeper with GlobalData
IBM’s global manager for CPG industries, Giovanni Linzi, says that technology advances mean there are endless ways for CPG manufacturers to connect to retailers and consumers. These connections can significantly improve business efficiency, performance and profit, as well as build stronger relationships with the ultimate buyers of CPG products.
Explaining that the CPG market faces a ‘continual barrage’ of issues, Linzi said growth and shareholder value are the two biggest concerns in the sector. “The CPG sector has not grown as fast as the general market and several of the world’s biggest players, for example, have failed to hit publicly agreed business targets. These failures have forced the replacement of CEOs, and massive restructuring.”
It is these huge growth challenges that are demanding new strategic initiatives. For example, Unilever has said it is to slash its brand portfolio from 1,600 to just 400 ‘power brands’, while there is increasing globalization of business processes across country boundaries to achieve global scale and efficiencies.
Substantial changes lie ahead
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalData“I believe that the CPG market will be substantially different in five years time,” says Linzi. He sees that:
- A number of CEOs will step down due to their inability to drive growth;
- There will be more consolidation in the CPG sector – up to five in 2000 – creating a handful of CPG companies with the necessary product bandwidth to sell effectively on-line. Others will opt for alliances with non-competitive companies;
- CPG loyalty programmes will become more common, and will be just as successful as retailer programmes by linking with non-competitors and retail partners to create ‘super cards’;
- CPG companies will replace older, dying brands with new Internet only brands which could win a chic status with consumers;
- CPG companies and retailers will work together on direct marketing based on loyalty programme data;
- CPG companies will link their web sites to retailer loyalty schemes, so that consumer visits to the web site are rewarded at the check-out; and
- There will be significant outsourcing deals in CPG companies as they focus on their core business.
Looking at potential consolidation in the CPG sector, Linzi comments: “I see three levels in the CPG market – Tier One, Tier Two and Tier Three. The relatively few companies in Tier One are global businesses with $25bn plus annual revenues. They will increasingly run on truly global business processes. Some current CPG businesses in Tier Two will make the leap to Tier One – but many will slip back to the medium size Tier Two – or even to Tier Three, which is inhabited by local or niche players.
“Tier One companies could buy out Tier Two operations to bolster their portfolio and scale. Indeed, the CPG market will be one of extremes – massive at one end, small at the other – and it’s quite possible that current Tier Three companies will become agents for those in Tier One by handling their manufacturing or distribution requirements.”
Outsourcing is likely to rise rapidly up the CPG business agenda as major players decide on how they must focus on their core skills to drive growth and value. “This will be part of a massive focus on growth and cost-cutting,” says Linzi. “Other initiatives will include the launch of Internet-only brands, where there has already been some progress, and CPG companies will also be influential in developing co-operative consumer loyalty card schemes with other non-competing manufacturers and retailers.
“This could be particularly useful for SMB retailers. For instance, a recent study from the financial consultant Stern Stewart & Company in the USA revealed that, on average, companies that outsourced IT outperformed the stock market by about eight per cent for a period after the agreement was reached. CPG companies will wish to take advantage of these factors.
“There will be new, nimbler entrants using e-business, new business processes, and new markets. If CPG companies aim at the ’emerging market’ of small-to-medium retailers, e-business could be vital to achieving new efficiency levels with this fragmented channel.”
No real wonders on the web
IBM also unveiled the results of a survey of nearly 600 web sites run by over 100 CPG manufacturers around the world. Among the findings were:
- One in ten had no web site at all, and a quarter had just one site;
- Most sites were not registered with the main search engines; and
- Less than nine per cent offered on-line shopping.
According to Linzi, the research indicates that only a few CPG companies have carefully thought through their web strategy and implementation: “Today, an attractive interactive presence on the web isn’t a luxury – it’s a fundamental necessity for business success.
“These results support some recent research handled by McKenna for IBM, which found that CPG companies are at an evolutionary stage with the Internet. They’re somewhere between having a static, information-only web site and using the web to increase business process efficiency. There is a non-homogeneous implementation of e-business capabilities, both within the industry and within the departments of an individual company.
“Very few are at the most advanced level of using the web as the basis for new business processes and for out-and-out e-commerce, but everyone is racing to move very quickly.”
He highlighted that CPG companies using the web are doing so either for business-to-business, or business-to-consumer activities. “Either way, the CPG world is being shaken by increasing tremors of uncertainty. There are some big shocks on the way, and one of the biggest is e-business. CPG companies – and it doesn’t matter how big or small they are – must embrace the networked world if they are to be left standing on their own two feet, let alone profitable. Smaller operators are likely to lead the way in terms of total service delivery by e-business, and big operators can’t afford to be left behind.
Professor Merlin Stone, IBM professor of marketing at the Surrey European Management School, added: “This survey shows how much progress CPG companies are making with managing their customers through the Web – but also how far they have to go. I advise every senior marketing manager in these companies to read it.”
Brand promotion – a new era
IBM also believes that the CPG sector faces a dramatic change in the way that brands are promoted. IBM’s European marketing director for CPG Industries, Gordon Scorer, says that brands are the lifeblood of CPG companies, and warns that traditional brand promotion is being fragmented and dissipated by the growth in retailers’ own label products, as well as by growth in new channels such as the Internet:
“The question that the major CPG players have to ask themselves is: ‘how does this affect all that we’ve invested in our brands over many years?’ Bear in mind that the world’s biggest advertiser is a CPG company – Unilever – and that two of the top three US advertisers are also CPG companies. But isn’t it telling that Procter & Gamble has described traditional advertising strategies as blind – ‘who are we talking to?’, ‘deaf – we have no way of listening to our consumers?’, and ‘amnesic – we have no idea what messages our consumers have previously received?’.”
He adds that after 50 years of ground-breaking development of state-of-the-art advertising, from TV to direct mail to billboards, the CPG industry is now at a promotional cross-roads. He highlights the fact that Unilever and Procter & Gamble are now assessing co-operative brand advertising with some Internet service providers – e-marketing their brands. “As traditional promotion methods become ever less cost-effective, CPG companies need new strategies and channels. They spend a massive amount on promotion – some ten per cent of revenue, or $80bn – but now have to find new ways of conveying new messages.”
Scorer estimates that around 20 per cent of a CPG company’s advertising budget could be required for e-marketing and new channels by 2005 – around $20bn of spend. IBM is already working with the CPG industry to develop digital branding strategies because developing relationships with consumers is a tough new task that demands complex technological and branding skills.
E-business, according to Scorer, can correct the diminishing effectiveness of traditional promotion methods by increasing the number of consumer ‘touch ‘ or access points for communication (such as the Internet, on-line kiosks, interactive television, call centres and loyalty cards). “These channels are based on two-way, rather than one-way, traffic and can be very useful for capturing lots of consumer data to start building more rewarding relationships,” says Scorer.
He highlights the view that ten per cent of consumers generate 40 per cent of the profits for a CPG company: the trick is knowing which ten per cent to focus on. “There will be more spent on banner advertising and sponsorships on consumer-focused web sites. The real art is persuading someone to click on these ads to get some reward, possibly through some offer tailored to that visitor. But to do that effectively, you need to know something about them, hence the co-operative work with retailers.”
E-business also impacts positively on supply chain relationships between CPG manufacturers and retailers. With the high number of manufacturers and retailers, there is a massive number of relationships to be managed – and e-business connects them all electronically, enabling the effective use of sales and customer data to make meaningful decisions in near real time.
Says Scorer: “CPG companies tend not to know a lot about consumer behaviour. Retailers do, so e-collaboration is a way forward to reducing inventory and improving customer service. Continuous replenishment and vendor-managed inventory are currently being used by some manufacturers and retailers to smooth the supply chain – but there is still immense opportunity for business and revenue improvement through e-procurement.”
Web site survey
The far-reaching survey undertaken by IBM of nearly 600 web sites run by over 100 major consumer packaged goods companies reveals that the depth, breadth and sophistication of their ‘dot.com’ presence varies widely – and that one in ten of these companies, which produce some of the world’s most visible consumer brands, have no web site at all. In IBM’s opinion, this wide variance reflects a lack of coherent web strategies that could have a serious impact on the future business prospects of some CPG manufacturers. The survey, completed at the beginning of 1999, is IBM’s second survey of CPG web sites. The first, which took place at the start of 1998, sampled roughly 100 web sites run by 65 CPG companies. The most recent research found that:
- Just over ten per cent (11) of the 106 CPG manufacturers had no web site at all, while nearly a quarter (24 per cent) had just one site. Just over a third (34.6 per cent) had between two and five web sites, 12 per cent had six to nine sites, and 22 per cent had a substantial Internet presence with ten or more web sites;
- The majority of the web sites are not listed across the major search engines (ranging from AltaVista and Yahoo to InfoSeek, Lycos and HotBot). Just two companies were registered with all eight search engines, while 15 were registered with seven engines. Most of the surveyed sites are ranked poorly by the search engines, with only one in six (14 per cent) or less scoring better than 11 hits;
- Less than nine per cent of web sites (50) offered on-line shopping, marginally up on the seven per cent recorded in IBM’s earlier survey;
- Nearly a third of the web sites collected market research data, particularly the personalities of web visitors captured by nearly half of those sites that do collect data), their consumption habits or product preferences (nearly 59 per cent of relevant web sites), and their Internet surfing behaviour (43 per cent of relevant sites);
- In terms of feedback/interaction with visitors, one in four of all the web sites offered e-cards (a virtual postcard via e-mail). Nearly a quarter of the sites (134 or 23 per cent) provided competitions, including computer games with prizes, while promotional materials, such as baseball caps, T shirts and sport bags, were found at just over 12 per cent (74) of sites.
Linzi warns CPG manufacturers that their highly variable Internet presence, on-line facilities and attractions for visitors, and overall presentation could spell disaster for those who lag behind the on-line revolution:
“From the first basic, but vital, step – being registered with the main search engines – through to the finer nuances of attracting and communicating with visitors, only a few CPG companies appear to have carefully thought through their web strategy and implementation. With more and more people accessing the Internet, with all its great potential benefits for supporting corporate and product brands, I’m alarmed that so many of the sample appear to be under-represented – or not visible at all – in the new electronic marketplace.”
Linzi says that a number of CEOs in the CPG sector may even be forced to step down because their businesses have not adapted to today’s digital world, for instance, by launching Internet-only brands, and there will be tremendous pressure from investors for new business models that are dot.com-aligned.
Linzi adds that business and technology trends are likely to see CPG manufacturers and retailers linking together to ensure a strong brand presence and fulfilment service for net surfers: “I think it will lead to some major consolidations in the CPG industry because there are only a handful of companies that have the insight, foresight and courage to look ahead – and do something about it. It’s common knowledge that some of the world’s biggest CPG makers and marketers are under pressure; for example, Unilever recently announced that it was to cut its brand portfolio radically to concentrate on what it calls the power brands.
“At IBM, we see a move towards closer co-operation between retailers and manufacturers as the former demand unique capabilities and services from the latter. Today’s business model for developing and promoting CPG brands could well be near the end of its life as new channels, such as the Internet, create new ways of talking with, and understanding, consumers.”
Web analysis by food category
IBM’s analysis of the web sites also included their characteristics by product category. The following are those relating to the food and drink industry.
Alcoholic Beverages (excluding beer): 11 companies with 49 web sites. Nearly 35 per cent of these sites offered enhanced download facilities for screen savers, wallpaper, audio files and so on, compared to the CPG sector average of 25 per cent. They offered better than average facilities for on-line shopping, with the offer of consumer collectibles eight per cent higher than the average. There was far greater use of games with prizes (ten per cent vs. five per cent average), substantial use of retailer locators (22 per cent vs. 16 per cent average), consumer market research data capture ran at ten per cent above the average, and club membership is offered on 12 per cent of sites (vs. the eight per cent average). This sector is worse than the average when it comes to offering on-line communication facilities (18 per cent don’t vs. the 14 per cent average), and also has a below-average offer of FAQs (14 per cent vs. 23 per cent).
Beer: 13 companies hosting 43 web sites. A third of these web sites offer chat rooms or message boards but have a below average use of Internet communication facilities (21 per cent of sites had no facility vs. the 14 per cent average). They also have fewer sites offering FAQs – frequently asked questions – (12 per cent vs. the average of 23 per cent). Screen savers and other downloads are offered by 37 per cent of sites (average is 25 per cent), and they offer more promotional merchandise than non-beer alcoholic beverage sites (30 per cent have shops). They offer more sophisticated games (the number of ‘shocked’ {Shockwave} web sites is 12 per cent higher than the average), but have a below average collection of market data (14 per cent vs. 29 per cent average).
Bread, cakes and biscuits: 12 companies with 23 sites. Bread and cake producers make good use of collecting market data (39 per cent against 29 per cent average), but visitor guides and information follow-up facilities are below average (13 per cent of sites vs. 26 per cent average), while FAQ sections, found on 17 per cent of sites, trail the average of 23 per cent. They have more limited search facilities for web sites (13 per cent against a 20 per cent average), but search facilities for retailers outstrip the average (nine per cent vs. three per cent). Over half these sites offer shocked games.
Canned fruit and vegetables: three companies with six web sites. All offered on-line communication tools, and half offered prizes, downloads or promotions. Only one site offered shocked games, while search facilities are set up on half the sites. Two sites collected data and offered FAQs, but just one site offered a visitor guide, chat facilities and a shop.
Cereals, flours and flakes: four companies with eight web sites. Seven sites offered on-line communication, while half the sites offered user instructions and other promotions. Customer service tools were very limited – one company offered a visitor guide, another a FAQ section. Only one company provided entry to a competition, two sites linked visitors to retail shops stocking the products, and half the sites collected market data.
Chocolate products: six companies with 30 web sites. These show strong youth-orientation with a third of sites offering games or entertainment, compared to an average of 29 per cent. This sector had the lowest use of visitor guides (seven per cent vs. 23 per cent average), while user instructions and FAQs are notably below average (just ten per cent offer them). Search facilities are also uncommon, with just ten per cent vs. an average of 24 per cent. On-line communication is available on two thirds of these sites but 23 per cent have no consumer feedback function (average is 14 per cent). Promotions (excluding competitions, downloads and shops) feature on far fewer sites (13 per cent, against an average of 25 per cent) but they have an above average number of home shops (ten per cent vs. eight per cent average).
Coffee and tea: nine companies with 23 web sites. This segment has a significant e-commerce presence with one third of all sites selling on-line. Retail locators are also offered on 30 per cent of sites, significantly above the average. Around four per cent of sites did not offer on-line communication facilities, and they also tended to offer more search facilities (four per cent against the three per cent average). Far fewer coffee and tea sites used promotional items – four per cent against an average of 13 per cent. However, competitions and clubs are widely used (30 per cent of sites against the average of 23 per cent for competitions, and 13 per cent vs. the average of eight per cent for clubs) – but games use is below average. There was variation in customer service facilities: 17 per cent of sites offered visitor guides, against an average of 23 per cent, but user instructions and recipes are very popular (offered by 43 per cent).
Edible oils and fats: three companies and nine web sites. Nearly half the sites collected market data, while seven provided usage instructions on their sites. Search facilities are common, with four sites hosting FAQs or search facilities. Three sites offered promotions, additional information and site maps, but communications facilities are limited and few sites have on-line/feedback options. Fewer of these sites offer entertainment and games (22 per cent vs. average of 28 per cent) and fewer downloads (11 per cent vs. 25 per cent average).
Frozen and convenience food: seven companies and 13 web sites. These rely heavily on recipes and promotions (61 per cent of sites offer recipes vs. an average of 39 per cent), while 46 per cent provide promotions against an average of 25 per cent. They have a higher than average penetration of shops (15 per cent vs. eight per cent average), while the number of sites collecting consumer data is high (38 per cent vs. an average of 29 per cent). Visitor guides are under-used (15 per cent vs. an average of 23 per cent), as are FAQs (15 per cent vs. the average of 23 per cent) and on-line communication tools (69 per cent vs. 79 per cent average). No retail locators were found and games with prizes are a feature (15 per cent vs. an average of five per cent).
Health foods: four companies and 16 web sites. Extensive availability of on-line communication gives visitors access to personal consultation. Additional information provided by 62 per cent of sites (average 23 per cent), while search tools for health information are provided by 37 per cent of sites, vs. an average of 23 per cent. This segment is below average with on-line product offers and retail locators (six per cent vs. an average of 14 per cent). Just one site offered promotional merchandise, and the segment was below average with games (22 per cent vs. 28 per cent average) and competitions (12 per cent vs. 23 per cent average). Not one site had a ‘chat ‘ facility.
Ice cream: five companies and nine web sites. These are sophisticated and feature-rich sites with on-line communication facilities. Half the sites had product-specific information, six published retail locators and two offered retail store search tools. Entertainment is popular, with nearly half the sites providing games or competitions as well as promotional merchandise. One site offered a restricted ice cream delivery service, and one third of sites used Shockwave technology.
Lemonades and spa water: 11 companies and 46 web sites. These companies make below average use of market data collection (22 per cent vs. 29 per cent average), but provision of chat facilities is slightly higher (17 per cent vs. 11 per cent). Customer service aspects, especially user instructions, are also below average (11 per cent vs. 38 per cent average), as are on-line communications (65 per cent vs. 79 per cent average), search facilities (six per cent vs. 24 per cent) and retail locators (four per cent vs. 14 per cent).
Cooked meats: six companies and 14 web sites. Entertainment dominates over information or communication. Unilever’s Pepperami site has no product information, while on-line communication is available at only half of the sites. However, this segment has more on-line shops (29 per cent vs. 21 per cent) and retail locators are found on 21 per cent of sites. Collectibles shops are popular (21 per cent vs. 13 per cent average), while collecting market data is a priority (36 per cent of sites vs. average 29 per cent). Games offering prizes are also well used, as are competitions (36 per cent vs. average 27 per cent), downloads (36 per cent vs. 25 per cent) and on-line clubs (14 per cent vs. the average of seven per cent). Understandably, recipes are strongly used (43 per cent vs. an average of 25 per cent).
Dairy products: four companies and four web sites. All offered on-line communications, but none had an on-line shop or offered downloads, chat facilities, FAQs, games or clubs. Half the sites offered visitor guides, user instructions, additional information, competitions and other promotions.
Pasta products: two companies and seven web sites. Half the sites provided on-line communications, but there were no FAQs, chat forums, message boards, games with prizes, on-line shops, web search facilities, retail locators or clubs, Recipes are very common (57 per cent vs. an average of 38 per cent), but gathering consumer data is not that common with just 14 per cent of sites doing so.
Sugar confectionery: ten companies with 19 web sites. Entertainment dominates these sites which means that service-related functions, such as user instructions, extra information and on-line communication, were below average. Notable features were the prevalence of ‘shocked’ games without prizes (42 per cent vs. 22 per cent average), competitions (47 per cent vs. average of 23 per cent), and promotional shops (21 per cent vs. 13 per cent average). Web site search facilities were rare and no retail locators were found on any sites. They also showed below average collection of consumer data (16 per cent vs. average of 29 per cent).
Sugar: four companies and five web sites. None of the surveyed web sites offered chat facilities, games, downloads, on-line shops or clubs. They typically offer information about the company, via FAQs, and direct communication is available.
Vinegar and sauces: three companies and four web sites. Entertainment features strongly, with chat facilities available on half the sites. Recipes are published on all the web sites, with additional information offered by three out of the four. Half also offer search facilities, and half also visibly capture consumer data. No home shops were noted, but on two sites, visitors can order promotional merchandise.
Details of reports from Food Industry News click here
