How CPGs Can Thrive on Amazon
CPG companies and Amazon have a complicated relationship. On the one hand, CPGs accounted for 41 percent of Amazon’s private label sales as recently as the first half of 2017. On the other hand, Amazon’s own private label business is expected to reach $25 billion by 2022. Its in-house clothing and footwear labels are already the fourth most purchased brands on its own platform, trailing only Nike, Under Armour, and Hanes.
Amazon already uses its most valuable weapon — its own internal data — to compete with its own suppliers. It analyzes customer behavior around noted CPG brands, key market sectors, and private-label offerings from brands that sell on its platform to make decisions about where to launch its own private labels.
What can CPGs do to make it a win-win?
Reset the Strategy
CPGs are accustomed to dominating categories like food and drug, driving sales through mass retailers with a proliferation of sub-brands, variants, and SKUs. Yet they are still coming to terms with their e-commerce strategy. A key difference between the Amazon marketplace and that of the mass retailers is that, unlike mass retailers, Amazon works on SKU-level profitability rather than an overall category portfolio.
This means CPG firms must think about their brand portfolio and promotion mix for Amazon as part of the overall revenue growth plan. On a more granular level, CPGs need an SKU strategy designed for Amazon. The Hero SKU for the Amazon channel should be designed to deliver in key areas including value per serve, frequency of use, and cost of delivery while being promoted to establish repeat purchase.
An important element in marketing this strategy is personalization. Because CPGs mostly sell through third-party retailers — whether traditional mass retail partners or Amazon’s e-commerce platform — delivering a personalized, one-to-one customer experience is a challenge. Amazon, of course, doesn’t have this problem, because the customer is browsing and buying on its own platform.
One tool that CPGs can tap to provide that personalized experience is artificial intelligence. AI analysis on first-party customer datasets, for example, can create an “equity drivers evaluation” that lets CPGs identify resonant brand drivers for different customer segments. It also allows for deeper segmentation by using the drivers to create brand “ratings” for each segment. These insights can then inform greater personalization in campaign messaging, product positioning and product innovation.
The Gen Z Challenge
Millennials account for $600 billion in buying power annually in the US, while Gen Z accounts for $44 billion. With millennials and now Gen Z becoming market forces, both demographics are increasingly valuable to CPGs. These groups highlight the urgency around CPGs’ e-commerce strategies. Unlike brick-and-click retail, Amazon offers CPGs opportunities to tap the new Gen Z consumer at the point of market entry and serve as a point of habit change for the brands with which millennials grew up. That opportunity includes the creation of long-term customer habits once the shopping pattern is established.
This opportunity also comes with a challenge, of course. E-commerce brands have succeeded in poaching millennial and Gen Z consumers through their direct customer relationships and the promise of a tailored customer experience — for example, by offering product recommendations.
In addition to personalization, another signature aspect of younger consumers is their belief that brand interactions should be experiential rather than product-driven. According to a Harris Group study, almost 75 percent of millennials prefer to spend more on experiences over material items such as houses, cars and clothing. CPGs are already embracing this experience focus with tactics like pop-up shops and showrooms that create product affinity through hands-on experiences for prospective customers.
Here, too, AI and data science can help CPG brands create digital experiential marketing that is more scalable, cost-effective and far-reaching than a pop-up shop or showroom. Brands are making use of AI-powered technologies like augmented reality to give consumers interactive digital experiences like “trying on” makeup using a smartphone.
Developing a smart, data-informed SKU strategy and leaning into personalized and more experiential marketing techniques are two powerful ways for CPGs to meet the Amazon challenge.
Ambo Bose is Chief Practice Officer, CPG, Retail & Hospitality, at Fractal Analytics.