Proctor & Gamble: The Amazon of Consumer Product Goods?
“The consumer is moving online for groceries? Just add online as another channel of sales! That should not be very hard, right?” Imagine a supply chain with more than 130 manufacturing sites and more than 200 distribution centers. And then think about transforming them – it really is quite difficult.
Proctor & Gamble (P&G), one of the world’s largest Consumer Packaged Goods (CPG) companies reported $3B sales from the online channel[1], growing by roughly 30% in Fiscal Year 2017. Meanwhile, the overall company’s organic growth was only 2%.
Statistics like these are not only true for P&G but for the entire CPG industry. 9 dollars out of 10 dollars of growth in CPG has come from the online channel the past year. E-commerce for CPG is also slotted to grow at 20-25% for the next five years[2]. With more consumers moving online for daily grocery requirements, this is a channel that the CPG Goliaths can no longer ignore.
“I want this particular product and I want it before I think of it.” – this defines the customer. Servicing this digital consumer stretches the deeply rooted supply chains across different dimensions.
P&G has different options to service the online customer: 1) Pure play i.e. partner with companies that offer online sales like Amazon 2) Click and Collect i.e. brick and mortar retailers allow customers to order online and collect their shopping list from the store and 3) Direct to Consumer i.e. cut out the retailer altogether[3].
P&G is trying their hand at all three but what surprised me the most is their foray into Direct to Consumer. P&G has their own e-store and couple of subscription services as well (Gillette for shaving and Tide Wash Club for detergent pods)[4]. While going direct-to-consumer adds a lot of value to the consumer, it also adds the maximum amount of pressure on the existing supply chain for the company. The biggest challenges are managing the increase in cost due to last mile delivery, managing and packaging small orders and meeting the fast response times of some of the other nimble players in the market.
Demand Planning: By going direct-to-consumer (especially with regards to the e-store), the volatility in demand can be high with practically no barrier on demand geographically. To service the customer, the company will need to forecast demand with better precision. P&G is adding capabilities by adopting a demand-based replacement model based on point of sale information from its retail customers in the offline channel for its manufacturing plants[8]
SKUs and Packaging: As the company moves to a direct to consumer model, P&G will need to adapt their packaging to make it friendlier for last mile delivery. P&G has done that smartly for Crest (their oral hygiene brand), where they have bulk packs for the offline retail stores but also the single cycle pack for digital[5] .
Inventory Management and Transportation: Serviceability is critical to all the stakeholders in any supply chain, be it the distributor, retailer or the final consumer. However, when this chain is longer, the inventory build-up is across the chain. When P&G removes this chain altogether, it needs to maintain a very high level of serviceability while maintaining inventory and transportation costs. P&G has set up distribution mega centers across the US which have the capability to receive and cross-dock products from P&G’s different business units. This has allowed them to satisfy 80% orders within 24 hours irrespective of the size and complexity of the orders[1] .
As one can see, P&G has taken important steps to transform and digitize their supply chain to cater to the digital consumer. However, there is still lots that can be done.
Do more of what you are doing: Planning processes and distribution can be completely automated removing the middle chains altogether while continuing to extract cost and servicing efficiencies. As we enter the world of driverless transportation and drones, logistics will get automated as well. P&G can get a head-start on that.
Do new things: Another avenue for P&G to extract more efficiencies is the procurement of raw materials. P&G can invest in digitizing that side of the supply chain and work its vendors to analyze data and help them get efficient as well[7].
As I think about these steps, I start to wonder. Is P&G turning from a CPG to a retailer? Do we foresee a world where the brands will interact with the consumer directly and hence, will distributors and brick and mortar retailers will cease to exist?
If that is the order of the new world, is P&G doing the right thing by trying to go directly to the consumer, even though Amazon looms much larger than them as far as direct customer reach is concerned?
These are interesting times for CPG companies and I guess time will tell what the winning strategy is. But one thing is for sure – change is the name of the game!
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References:
[1] P&G Investor Call Transcript: https://seekingalpha.com/article/4104963-procter-and-gamble-pg-presents-barclays-global-consumer-staples-conference-transcript?part=single
[2] E-commerce strategy is no longer optional for CPG brands: https://retail.emarketer.com/article/ecommerce-strategy-no-longer-optional-cpg-sector/5952e2ceebd4000b2ceae08c
[3] As Grocery goes digital how should CPG Supply Chains adapt?: https://www.bcg.com/publications/2017/consumer-products-supply-chain-management-grocery-digital-cpg-supply-chains-adapt.aspx
[4] Procter and Gamble launches Direct-to-consumer subscription business: http://www.businessinsider.com/procter-and-gamble-launches-direct-to-consumer-subscription-business-2016-7
[5] The Digital Future of Consumer Packaged Goods companies: https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/the-digital-future-of-consumer-packaged-goods-companies
[6] Digitization and Advanced Planning in CPG: https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/digitization-and-advanced-planning-in-cpg
[7] Supply Chain 4.0 in Consumer Goods: https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/supply-chain-4-0-in-consumer-goods
[8] What does it take to be a supply chain leader?: http://www.supplychain247.com/article/what_does_it_take_to_remain_a_supply_chain_leader
Great post! As you alluded to above, it is unclear if they are becoming a retailer – and unclear if they should. To me, there is still a lot of complexity for the consumer in ordering direct from CPG companies and convenience is the key to winning online. It seems that Amazon is giving CPG companies the hard sell on direct to consumer through their marketplace platform [1]. To me, this seems to be a better value proposition to the customer and will be far easier than trying to set up their own distribution network. There is the obvious fear of becoming increasingly dependent on Amazon but, as long as people want P&G goods, they should be able to negotiate favorable terms with Amazon.
[1] https://www.forbes.com/sites/retailwire/2017/04/07/why-amazon-is-trying-to-convince-cpg-giants-to-go-consumer-direct/#47636c2b4607
Great article! While I agree with the comment above that it is unclear if P&G is becoming a retailer, I definitely believe that they should. In the short term it is easy to argue that it is not their core competency, so they should avoid a potentially inefficient and unprofitable venture into an arena saturated with ultra-low cost retail/distribution companies (or rather, one company). However, I believe that as Amazon continues to grow its own ability to produce goods it will eventually compete head to head with companies like P&G. Thus, P&G must learn to distribute its own goods. Better to develop that expertise now than later…
I like the thought that CPG companies like P&G can potentially become retailers. In the traditional CPG business models, there are multiple layers between the CPG companies and customers, and each layer will take out a certain portion out of the business. However, these middlemen conduct value-added service to the business, such as distribution, inventory management, and sales. I can imagine that if CPG takes out these middlemen, the business might become more profitable, or the price will be lower in favor of customers. On the other hand, I would argue if the CPG companies have the capabilities to handle the logistics part by themselves. If P&G establish a direct-sale team, how much will it cost? How much capital investment does it require? Does P&G have the capability to manage that in terms of talent and infrastructure?
LoveforBrands,
I always find it fascinating to discuss whether behemoth corporations like P&G should change what they are doing to stay successful given changing times, or whether they should weather the storm and keep doing what they do best given that’s how they became one of the most renowned CPG companies today. Although on a surface level I agree P&G should become a retailer to more effectively compete in the direct-to-consumer environment, I believe this is totally unfeasible. This isn’t a matter of simply changing business strategies – it is fundamentally changing what P&G is as a company, and the time and financial cost of implementing the processes necessary to become a retailer would not be worth it. First of all, to own the last-mile delivery service and redesign their distribution and warehousing network to have the proper flow of inventory requires significant capital investment and operational change. Yet, even after implementing this change, they are essentially trying to become another Amazon – which we all know by now is probably a bad idea. Instead, P&G should consider acquiring companies that specialize in the Direct-to-Consumer business (similar to Unilever acquiring Dollar Shave Club) given it has significant assets on its balance sheet to be able to absorb these acquisitions and the processes are already in place to succeed and they can maintain their core business operations.