The Amazon Effect on Multi-Channel CPG

Posted on October 12, 2018 by Caitlin Orosz under Foodservice 101

The grocery channel share of all packaged-goods sales is forecast to drop from about 45% to about 37% in 2025. The market change could be a result of digital disruptions in CPGs like eCommerce, meal kit delivery services and restaurant ordering apps.

Plus, Amazon’s 2017 acquisition of Whole Foods muddied the waters – as the tech giant expanded its CPG footprint and bought the retailer for $13.7 billion.

Grocery channel sales

“Amazon is placing its bet on the future of the food industry,” says Errol Schweizer, a former Whole Foods executive.

Retailers Change Strategy to Compete

Costco, a warehouse-club chain, is asking suppliers to lower prices, to keep customers away from rivals. “You’re seeing significant savings – in some cases, a small amount from us – but more from our suppliers because it drives more sales,” says CFO Richard Galanti. He continues that “brands need to come down in price because they’re losing market share.”

Besides cutting prices, big retailers are investing in delivery services as an attempt to stay competitive.

  • Walmart acquired Flipkart – Flipkart is India’s largest eCommerce marketplace with a registered customer base of over 100 million. Walmart hopes this acquisition along with the addition of home delivery options will rival Amazon’s global expansion.
  • Target bought Shipt and Kroger is investing in Ocado – both retailers hope that by offering home-delivery, consumers will opt to purchase products there.

 

And, retailers like Target, Walmart and Costco have agreed to new advertising opportunities with Google. In exchange for Google listings, the retailer will pay Google a piece of each purchase, which is different from traditional Google advertising.

How to Leverage Amazon for Retail

CPG companies using Amazon to reach consumers have to embrace a new mindset that supports Amazon’s goal “to gain the greatest share of household spending.” Manufacturers may need to optimize product design or create new pack sizes, take a more active role in inventory management, decrease pricing for this channel, and address required supply chain management changes.

Amazon has become more interested when it comes to pushing its private label products. A 2018 article on Forbes states, “Cadent Consulting Group predicts that private labels will ‘steal’ as much as $64 billion from the nationally advertised brands in the next ten years, rising from 17.7% of the CPG/food market in 2017 to 25.7% in 2027. The group further predicts that Amazon, including its Whole Foods 365 Everyday Value brand, with an estimated $2 billion in sales added to Amazon’s $2 billion grocery private label sales in 2017, will grow to $20 billion by 2027.”

With more people using Amazon as their primary search engine for products, manufacturers have to evaluate how Amazon fits into their sales and marketing strategies.

 

PROS

CONS

  • Access to more shoppers via Amazon platform
  • Amazon can spot purchase trends to help them develop private label products that may have a negative impact on manufacturer sales
  • Customers can buy through a familiar and trusted platform
  • Amazon can target a manufacturer’s customer segment based on their buying habits with its own private label products

 

Does Amazon extract trade from vendors?

There is no clear indication at the time of this post’s publication whether Amazon captures trade spend from vendors. Morgan Stanley’s Brian Nowak concluded that Amazon has a particularly good opportunity to capture trade spend.

Where’s Amazon’s Opportunity in Foodservice?

It’s likely that Amazon will hone in on independent operators. They buy larger volume, demand bigger product sizes, and are extremely repetitive with what they buy. With Amazon, street operators gain a digital experience and price transparency, plus the ability to customize offers based on their own ordering habits, says JPMorgan analysts.

According to JPMorgan, the street operator market in the US is a roughly $256 billion market opportunity and represents more than 300,000 outlets. Street operator sales are predicted to grow about 5% through 2020, outpacing the 3% forecast for larger, chain restaurants.

Before the acquisition, Amazon’s main barrier to entering the grocery space was distribution. After all, shipping consumables is different than shipping non-perishables. Now Amazon has almost 500 stores to leverage as distribution for online orders.

Today, there’s palpable friction between Whole Foods and some of its suppliers. Whole Foods now limits how products are sold and asked suppliers to help pay for those changes. Instead of allowing suppliers to oversee their own product, Whole Foods requires suppliers to work with SAS Retail Services to schedule in-store tastings, check inventory on shelves and create displays.

“It feels like that local, personal touch is going away,” says Valerie Gray of Italian Heart’s Gourmet Foods. Gray began to sell her pasta sauce in the Reno, Nevada Whole Foods location and has seen sales drop 75% as shelf space was cleared for national brands. As of July 2018, suppliers still aren’t happy – they’re being charged higher rates to sell their products in stores. Some are even refusing to sign new contracts.

Amazon’s CFO Brian Olsavsky said, “We are honing the businesses that we’re in and making them as efficient, as profitable as possible, while also investing very pointedly and very wisely, we believe, in things that will enhance customer experience and create lasting businesses for us down the line.”

“The risk has increased that Amazon becomes a disruptor to foodservice distribution models,” said JPMorgan analyst John Ivankoe in a research note.

Amazon Disrupt

Amazon may have the opportunity – and an advantage – when it comes to targeting independent restaurant operators. Independents and small chains are always looking for options when it comes to purchasing. Many foodservice distributors charge higher prices to independent operators and pass lower prices to larger customers. Foodservice distributors need to be prepared to provide options for independents if they want to stay competitive.

Focus what you can control: Download this case study to discuss what actions you can take today.

 

Operators Using eCommerce

According to the Hale Group’s FOODSERVICE 2025: DIGITALIZED, DEMOCRATIZED & DISRUPTED publication, Cleveland Research found that approximately 50% of operators are already using e-commerce to purchase some of their products.

By 2025, they expect 70% of operators to use e-commerce purchasing solutions. 13% of operators already use eCommerce sites for purchasing and Amazon is one of the sites being used.

70%

The study indicated distributors and manufacturers are well behind the operator when it comes to the acceptance of eCommerce. Those who ignore the shift in purchasing will be left behind.

To be competitive against Amazon, manufacturers must expand offerings via e-commerce avenues. Whether they partner with Amazon, promote their own direct-to-consumer website, or another route… the bottom line is customers want convenience. And convenience is found via e-commerce.

Changes to Expect if Amazon Enters Foodservice Distribution

 

For the Distributor
  • Expect an increase in operators looking for eCommerce purchasing options. Many operators are already bypassing the broadline distributors and purchase through online channels and partners.
  • According to Technomic, 68% of operators would purchase through a third-party website if there was access to better pricing than offered by their current distributor.

 

For the Manufacturer
  • Offer a better experience when selling to independent and small chain operators.
  • Amazon offers an easy route to eCommerce. With Amazon, manufacturers can have a direct-to-consumer model.
  • Be aware that Amazon will have the advantage to spot buying trends and leverage that information when it comes to their private label initiatives.
  • eCommerce will be more of a consideration for manufacturers as Amazon is pushing to get food manufacturers on board to bypass brick-and-mortar stores. Amazon is trying to convince companies to focus more on online ordering and delivery as opposed to developing products for retail store shelves.