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CPG Retail Merge: From Better Margins to Better Relationships
The distance between manufacturers and retailers is closing quickly. Nearly every store sells its own private labels—items manufactured or contracted by the retailer itself—and many product companies are looking to sell directly to consumers. Vertical integration has always been about maximizing margin and creating higher profits. That’s still true today, but there’s a new opportunity in play: Creating higher engagement and deeper loyalty with customers. COVID has only accelerated these changes—the instability of traditional retail channels has everybody scrambling for more direct ways to reach their buyers.
Brands know that consumer affiliation and choice is all about creating a holistic experience, and to create a product worth coming back for, that experience must consider each element from manufacturing, to sale, to use, to service, to disposal. The key to being consistently great across this chain of events? Having a good understanding of what people need every step of the way, and having the control and autonomy to deliver.
Private label brands have emerged as a primary component of the product mix in stores. Kirkland Signature, first introduced to Costco shoppers in 1992, now accounts for more than 30% of their sales. Target for its part is up to 48 “owned brands,” from alcoholic beverages to underwear to kitchen utensils. Far from generic, these brands have ditched the white label and are often indistinguishable from the rest of the shelf.
On the other hand, many items never see a shelf at all. For some brands, direct-to-consumer models provide an opportunity to place a product into the market without the investment of brick-and-mortar storefronts. Lower prices for quality goods are part of the math, but so is speed-to-market. Digital-native brands like Warby Parker or Dollar Shave Club can move quickly, responding to trends in real-time without the need to go through a traditional supply chain. Mattresses, shampoos and sweatpants (all items these authors have ordered sight-unseen in the past three months): If there’s a limit to what can be drop-shipped DTC, we haven’t found it yet.
Success stories in CPG and Retail merge abound. Groups like Nike or Tommy Bahama have thriving first-party stores and partnerships with other retailers that carry their product. Our view: This middle state is enviable but not inevitable. Full control over the entire perception of your brand and the operating levers that make it profitable take more than a clear vision: It will take conviction to break old paradigms and commitment to invest in new capabilities.
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