“E-commerce” and FMCG: threat or opportunity?
Gilles Dallest
The pandemic from which we don’t seem to be emerging has had an unexpected accelerating effect on the entire field of the digitalization of society with important consequences in our daily lives.
We would not consider today traveling 800km for a 1h business meeting unless it is for a formal act requiring a physical presence. Teams, Skype, Zoom, have become the essential allies of a world where physical contacts are now a luxury. In both personal and professional spheres, it is said that we have gained up to 5 years of digital evolution during the first semester of confinement.
In the conference organized by AECOC in December 2021 “FMCG Perspectives 2022” the data presented by Nielsen IQ, demonstrated a consolidation of e-commerce for the sector in 2021, after the surge of 2020. Spain, with a market share of 3%, is at the level of the surrounding countries, such as Italy (4%), Portugal (2%) or Germany (1%), but far from markets in which “online” is much more developed, such as France (11%) or the United Kingdom (14%).
If there is always a larger number of consumers (31% according to Nielsen IQ) who buy consumer products online, this level of 3% of the total sales value is nevertheless very weak and even the 11% in France or 14% in the United Kingdom cannot be compared with the importance of online commerce in sectors such as electronic products, sound, sporting goods or travel for which many physical stores have begun to disappear.
So how can we explain such low levels in a period that has never been so favorable? Could it be that e-commerce is not so adapted to consumer products?
For almost 3,000 leaders of large North American companies questioned by the consulting firm Deloitte last year, technological change does not stand out necessarily as a positive development. In fact, for more than half of them this acceleration is not good for either their companies or their customers (see full study here).
The scope of this study is very open in terms of sectors of activities but it can be intuited that, had it been focused on FMCG companies then the results would have been even more critical.
The fact is that e-commerce goes against some of the foundations of the FMCG retail model and can thus represent a threat
This “mass” distribution model, still known as a “modern channel” in some countries, was widely established in the 60s/70s with some clear and then groundbreaking principles setting it apart from the traditional organization namely:
Cost savings and lower prices are driven by:
- Large stores = > largest purchase acts and economies of scale for the distributor/manufacturer with repercussions on a falling retail price.
- Self-service = > the shopper assumes the logistics of the purchase, chooses the product with the possibility of manipulating it as the figure of the traditional store salesperson disappears.
Low prices and reduced margins in percentage are compensated by a much larger volume of sales and in more categories than traditional neighborhood stores:
- “Everything under one roof” = > increase of the shopping basket value thanks to the offer of additional categories ranging from hardware to electronics, fashion, or DIY.
- Boost of impulse purchases => with massive promotions and attractive pricing on some key products
However, two parallel phenomena have long since begun to destabilize these principles:
- The specialization of commerce and the emergence of “category killers” (DIY, fashion, electronics, sports etc.) = > these categories previously very important for hypermarkets gradually tend for them towards a “convenience” role.
- The return of the attractiveness of proximity stores = > with the centralization of negotiations prices in smaller stores are aligned with hypermarkets, although this channel remains less profitable for retailers.
One of the consequences of these changes is the loss of attractiveness of the peripheral hypermarket that was the flagship of the change to the civilization of consumerism. Little by little it has been moving away from the expectations of the shopper leaving the chains specializing in very large stores before a complicated but necessary change of strategy.
The rise of e-commerce comes to make this situation even more complicated and puts the distributor in front of several sources of complexity that increase the cost of their operations diluting even further an already limited profitability level:
- Taking in charge the order picking (sometimes in its own stores that are anything but efficient warehouses) assuming this cost such as the risk of errors and substitution problems in case of out of stocks. Professionals in the sector evaluate at 35/45′ the time needed to prepare an order.
- Proposing an attractive delivery cost, usually free for orders above € 100/120 or at loss making for lesser shopping basket.
- Ensuring the return of the purchase in case of customer dissatisfaction, inadequate products or picking errors.
- Organizing and managing a distribution network
- Doing without the “impulse buy” effect characteristic of physical sales, online purchases of FMCG being much more “rational”
Consequently, it seems that the interest of developing sales via e-commerce for a traditional FMCG chain is at least doubtful. A model designed from the beginning for online sales without an expensive network of stores would in fact be much more profitable and logical. The only factor that still limits the success of “pure players” is the lack of sales volume that limits the commercial discounts obtained from the manufacturers and thus their price competitiveness.
It is then not dubious to think that traditional FMCG chains are heading towards e-commerce with “lead feet”. Its 11% market share in France and 14% in the United Kingdom are explained by the success of the “drive” or “click and collect” models that have not yet found their audience in Spain. As if by chance, in France, this process that allows the development of online sales by limiting distribution costs for the distributor was driven by the Leclerc and Auchan chains that, as they are not listed on the stock exchange, maintain a total opacity in terms of profitability level and targets.
Does this analysis mean that e-commerce will always be the enemy of traditional distribution chains?
If they limit themselves to proposing on a website a limited assortment of standard products, it is clear that traditional chains run the risk of losing their attractiveness.
Even if the “online” service is essential today and helps building customer loyalty and boosting the amount of the shopping basket, in the end, the in-store shopping experience is at the heart of a retailer’s positioning. Examples like Ametller Origen in Catalonia (Spain) demonstrate that a focused quality offer aimed at a well-identified audience with a great in-store experience can be very successful.
The digitalization of the purchase process is also not necessarily synonymous of online shopping. It can also be another lever of differentiation even at store level via the use of augmented reality or services enhancing the purchase of the product such as recipes or tips for use, creating a true relationship with the customer.
Technology is now part of our everyday life and is here to stay and develop and the FMCG retail trade cannot remain on the sidelines of this movement. However, it seems that it is now in the process of reinventing itself a bit like these ocean-going ships of the second half of the nineteenth century that, for a time, had both sails and steam engine but were neither great sailboats nor good steamers. We are now surely living an intermediate step in the evolution of trade that will benefit the most creative and adaptable.
Following and monitoring e-commerce sales and getting all the “insights” necessary to understand its mechanisms and shopper behaviour in this different environment is a challenge and a necessity. At POS Potential we know how to manage and make the most of this important information.
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