Amazon‘s consumer packaged goods (CPG) opportunity is valued at around US$222bn annually in the US, according to analysts at Sanford C Bernstein, and the company is targeting this opportunity aggressively. But with a distinct audience and a very different approach to selling goods, how can CPG firms make the Amazon channel work for them? Hannah Abdulla explores.
When it comes to consumer packaged goods, online is viewed by many industry commentators as the future.
Sanford C Bernstein’s Ali Dibadj believes purchase patterns will see a growth in online sales as consumers increasingly migrate their CPG spend online.
“Physical retail will continue to lose share to e-commerce,” he predicts. “Migration is already happening in some categories; 25% of overall CPG could be online. Interestingly Procter & Gamble is saying 20% in the next five years [will be online] in the US so this is very much a reflection point of CPG online,” he adds.
Certainly, Amazon hopes so. The company is investing in the CPG opportunity through the development of its Amazon Fresh concept, which offers same-day and early morning delivery of perishable goods.
Due to its scale, the logistical challenge means the project has remained in its trial stages for the past six years. But some analysts are convinced that when this is fine tuned, Amazon will be a force to be reckoned within the online food space.
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But, like with many things, it’s not as straightforward as sticking Wal-Mart or Kroger’s top-selling product online and guaranteeing its success.
According to Bernstein, organic firm Annie’s was one of the top three performers in the ready meals category on Amazon alongside relatively small-time player Nongshim. In comparison, the top three in the same category in Wal-Mart were Kraft, Nestle and ConAgra.
Bill Bishop, chief architect of Brick Meets Click, says these findings demonstrate CPG firms with a lack of visibility in offline channels stand to gain more online.
“They’re not necessarily in store – they are items that are more accessible online because they aren’t widely available in retail.”
Industry heavyweights could also do more to promote their offering through online channels, Neil Stern, senior partner at McMillan Doolittle, suggests.
“CPG’s do need to be more aggressive in thinking about the channel. Some of the better selling brands understand the specialty nature of the channel,” Stern tells just-food.
Dibadj concurs that the successful players online “know how to attack this very different channel”.
One of the biggest challenges from a CPG manufacturer point of view is how sales on Amazon are based on an algorithm system – finding the cheapest price and matching it. This is a very different model than that adopted by traditional retailers who negotiate on prices.
“This is very volatile; it wreaks havoc on the distribution system of a CPG because of the volume differences associated with these pricings,” says Dibadj.
It also means is the popularity of the product rises based on the number of clicks it gets.
“If you are in the top three you are clicked on 64% of the time. On the first page it’s 81% of the time. Not a lot of people will get to the second page. It’s very difficult to dislodge someone from the top three,” he says, adding that where the traditional shopper might seek out a particular brand in the cereal aisle of a traditional supermarket – on Amazon they might simply search ‘cereal’. “As a CPG it’s very important that the ranking works for you.”
The ranking system becomes even more significant when you consider the food sector has the highest market fragmentation through e-commerce channels.
It also has one of the lowest online penetration levels in the US – so there is still room for food manufacturers to expand this opportunity.
Snack bars and sweet and savoury snacks have a higher online penetration than other categories. Dibadj suggests that if you aren’t already leading the category, the search rankings mean it will be a tough nut to crack.
At the other end of the spectrum stand breakfast cereals, cookies and biscuits, confectionery, sauces, dressings and condiments with the lowest online penetration. For companies acting early enough, there is the potential to “gain a huge first-mover advantage”, grow the category and “stake their online claim,” Dibadj explains.
This is not to say that the boat has sailed for CPG majors who have yet to fully get to grips with the Amazon model.
Amazon, or more broadly e-commerce, is currently only making ripples rather than waves, Stern points out. It presently holds a market share of less than 1% in the US and one could therefore argue there is still time for CPGs to consider whether the channel could work for them. But there’s not a lot of time.
The algorithm game can determine your fate as a CPG and there are a number of factors which can write your success or failure. One of those is to get in early, Stern insists.
“The algorithm game is dangerous because it demonstrates that loyalty begets loyalty – you want to be there early and establish dominance – both in search and in the customer’s mind.”