Consumers are embracing e-commerce. Are consumer products companies prepared?

If you’re a consumer products company wondering whether the upsurge in e-commerce due to the pandemic is an anomaly, the answer could not be any clearer: the consumer has decided that online shopping is here to stay.

Last year was one for normalizing the trend as consumers finally freed from pandemic restrictions went back to in-person shopping in newly reopened stores. That meant that e-commerce sales only grew 14% year-over-year compared to the massive 32% growth in 2020. By any measure, double-digit growth is significant, especially when it comes after a once-in-a-lifetime growth year. And that first year of the pandemic acted as a catalyst that has transformed consumer behavior forever and supercharged all projections. By 2026, e-commerce is expected to make up 35% of total retail sales for consumer product companies, up from just 12% in 2016. In absolute dollars, that means more than $600 billion of spending is expected to shift online (Figure 1).  

So, are consumer products company ready to make the most of this opportunity? Before COVID-19, the conventional wisdom was that consumer products were often too difficult to deliver profitably to customers’ homes, and Americans still wanted to shuffle and poke their way through actual stores anyway. Now that we know that consumers like the convenience of e-commerce, companies must make some decisions to protect margins while still accommodating for the expected growth. One reason for rising costs (and consequently falling margins) over the last two years was that many companies were forced to invest heavily and hastily in e-commerce. This was not a mistake, but a necessity of doing business.

There were two kinds of responses: Companies either created themselves an oversized and overpriced infrastructure or they were unsure and slow and did not do enough to capitalize. For the former, relevant questions to ask include how much to continue investing and how to do so while being profitable. For the latter, the main quandary is how to catch up to competitors while protecting margins. In either case, now is the time to take stock of the situation and find the right solution for the business.

Consumer product companies have much to do to optimize their digital platforms, product lines, and distribution systems for e-commerce while navigating macroeconomic headwinds including cost inflation, supply chain hang-ups, labor shortages, and an economic slowdown.

The AlixPartners framework helps CP companies quickly assess where they stand and how to transform their e-commerce operations in a way that differentiates them in the marketplace. Here is a breakdown of the five pillars of the framework:

Take stock of the operating model: CP companies must adopt an operator mindset across both digital and brick-and-mortar operations to configure the optimal way to go to market, combining direct-to-consumer, retailers’ e-commerce platforms, online marketplaces, and physical stores. And they need to design an organizational structure that will best support this plan, with a potentially clean-sheet approach to key processes, including distinct metrics and incentives.

Make right assortment decisions: Companies must construct comprehensive brand, category, and channel-level strategies with pro forma financials, which will eventually lead to better decision-making and improve profitability. Design-to-Value can help drive product appeal while reducing costs.

Go deep into digital: When companies take an unbiased view of the right KPIs, they can maximize returns on advertising spending. In addition, utilizing available data smartly and with discernment to find usable insights helps in making optimal decisions and generating faster impact.

Manage supply chain challenges: There are constantly changing dynamics in demand profiles, costs to serve, and reverse logistics. Companies must focus on structural tradeoff decisions, such as full versus limited assortments and dedicated e-commerce space versus co-locating. This will require knowing when and how to accelerate execution and the ability to avoid pitfalls.

Bring it all together for success: Key enablers will include effective organizational design based on the operating model, state-of-the-art digital capabilities, collaboration with retailers in a joint framework, and rapid and pragmatic evaluation and selection of optimal IT partners.

E-commerce is an inexorable force that will continue to demand investments if companies want to keep up, much less get ahead of, where consumers are continuing to go. This is one trend that is likely to outlast the pandemic, which means that the urgency to act has never been higher.

This is the first of our six-part e-commerce series. In upcoming editions, we will tackle each of the five pillars of the AlixPartners framework.