Introduction Advances in digital technology are changing the way the consumer packaged goods (CPG) category operates — from product design to sales channels to inventory management. Data analytics powered by machine learning have enabled companies to produce more relevant products and to better manage inventory with more accurate demand forecasting. The growth in e-commerce has also facilitated a direct-to-consumer approach, resulting in the emergence of startups that threaten the status quo of traditional CPG players and which are forcing incumbents to adapt to online. This is how digital disruption has affected CPG. E-Commerce Sales Thrive: Traditional Companies Adapt Amid Threats from Startups As sales in physical stores have become saturated, the online channel has become the principal driver of CPG sales growth:

• Paris-based marketing company Criteo estimates around 90% of overall CPG growth came from online channels in 2018.
• According to US-based market research company Rakuten Intelligence, US e-commerce CPG sales grew 29% year over year in the 52 weeks ended August 25, 2018, while total CPG sales grew only 2.6%.

To stay relevant, traditional CPG companies have invested in direct-to-consumer online commerce. Unilever set up a flagship store on China’s Tmall.com in 2011, while P&G opened a store on the same site a year later. In 2010, P&G launched its own online shopping site, called eStore, to offer US consumers its brands such as Tide, Crest and Oral-B. [caption id="attachment_87468" align="aligncenter" width="640"] Unilever’s flagship store on e-commerce platform Tmall.com
Source: Tmall.com [/caption]   [caption id="attachment_87469" align="aligncenter" width="640"] P&G’s online shopping site eStore
Source: Pgshop.com [/caption]   E-commerce as a share of P&G’s total revenue has increased steadily from about 5% in fiscal 2016 to about 7% in fiscal 2018, according to the company’s annual reports. Unilever recorded 47% growth in e-commerce sales in fiscal 2018 according to the company’s annual report, outpacing global e-commerce market growth. Unilever expects e-commerce sales to account for 10% of its total turnover by 2023. However, incumbent CPG companies are at a disadvantage when adopting the e-commerce model. For CPGs selling typically low-cost items, the direct-to-consumer model carries unfavorable economics: It is much more profitable to ship a large number of units to one retail customer than to dispatch the same number of units, one or a few at a time, to many individual shoppers. Moreover, CPG operations were designed around a wholesale model, meaning they must invest heavily to build out direct-to-consumer fulfillment capabilities. At the same time, CPG companies face challenges from startups. To avoid further disruption from digitally native and omni-channel CPG startups and capture more of the growth in e-commerce, traditional CPG companies have to invest in DTC e-commerce despite the model’s potentially margin-eroding economics. In the long term, established CPG companies are better positioned to understand customers’ shopping behavior by analyzing data from online shopping portals, so they can pinpoint what, when and how many of specific products to produce, enabling them to meet demand in a more agile way while avoiding excess production. As e-commerce ramps up, CPG firms may build their own distribution centers in strategic locations for cost-efficient delivery. Going online gives CPG companies access to valuable customer data they might not otherwise have – and data is becoming increasingly crucial. Direct-to-Consumer Underlines the Need of Personalization We believe the strong growth in online channels is not simply a result of consumers shifting some of their spending online: There is a “pull” effect from CPG startups that personalize offerings and establish a closer relationship with customers. For example, California-based haircare brand eSalon tailors unique hair color formulas for customers after they create a personal profile that asks for information such as hair history, color goals and facial features. This creates a personalized shopping experience, with extra touches such as individually labeled bottles bearing the customers’ name, formula ID and date of production. Since the company’s launch in the US in 2010, it has expanded to Canada, the UK and elsewhere in Europe. In addition to shifting online, traditional CPG brands are also personalizing products. For example, Gillette launched the Razor Maker concept in 2018 that allows customers in the US to create their own razors with customized engraving, preferred grip and color. [caption id="attachment_87470" align="aligncenter" width="640"] Gillette’s Razor Maker concept
Source: P&G [/caption]   Packaging Evolution As a Result of E-Commerce Large CPG companies are looking to make e-commerce more operable, especially to overcome the last-mile challenge that carries logistics costs. One of the first steps is to innovate product design and packaging to make products more suitable for delivery – especially for products that contain chemicals or liquids. P&G launched the Tide Eco-Box in January 2019. The bag-in-box design avoids the need for additional boxing or bubble wrap, and concentrating the formula cut water content 30% (shedding extra weight). The lighter box design makes it easier to load onto a delivery truck – and more can be loaded as they take up less space. [caption id="attachment_87471" align="aligncenter" width="640"] P&G’s Tide Eco-Box laundry detergent
Source: P&G [/caption]   In 2018, Unilever’s household and personal care brand Seventh Generation, a leader in natural products and sustainable production, launched EasyDose Ultra-Concentrated Laundry Detergent – fully five pounds lighter and nine inches shorter than the original 100-ounce bottle. The smaller size and lighter weight makes it far more delivery-friendly. [caption id="attachment_87474" align="aligncenter" width="409"] Seventh Generation’s EasyDose Ultraconcentrated Laundry Detergent
Source: Seventh Generation [/caption]   Subscription Model Brings Customers Closer to CPG Companies The subscription model is one of the more disrupting aspects of online as it reinvents the way consumers shop for CPG products: Consumables people buy regularly can be purchased using a monthly or quarterly subscription. A number of startups have launched online services to challenge incumbent CPG brands. US-based Dollar Shave Club delivers razors, shaving amenities and other personal grooming products by mail, successfully challenging the dominant position of P&G-owned Gillette.  As Dollar Shave Club directly approaches its customers, it is able to engage them and build a unique brand experience:

• Dollar Shave Club offers subscribers an exclusive community experience. When customers sign up, they get a welcome email, occasional free samples and a monthly newsletter called The Bathroom Minutes to keep customers informed of new product information and offers.
• The company also focuses heavily on social media: When members share pictures of their monthly box on Instagram, the company selects favorites and rewards members who posted the winning pictures.

Dollar Shave Club was so successful that Unilever acquired the company in 2016. [caption id="attachment_87475" align="aligncenter" width="590"] Dollar Shave Club’s Restock Box for subscribers
Source: Dollarshaveclub.com [/caption]   Similarly, New York-based startup Hubble operates a subscription model for contact lens delivery. Colgate invested in the company in 2018, just two years after it was founded. Under the partnership, Colgate will trial selling its teeth-whitening products through Hubble’s platform. [caption id="attachment_87476" align="aligncenter" width="640"] Hubble’s delivery box
Source: Hubblecontacts.com [/caption]   The rapid rise of online and the growing popularity of subscription models pose a real threat to traditional CPG companies. To keep up, legacy CPG companies have followed suit by launching their own subscription models for various products. Since acquiring Dollar Shave Club, Unilever has expanded Dollar Shave Club’s subscription service to include shower and oral care products. P&G also started a series of subscription services including:

• Gillette On Demand razor subscriptions to counter Dollar Shave Club.
• Tide Wash Club in Atlanta: Customers sign up online for regular delivery of Tide detergent.
• Tide Spin service in Chicago that will pick up, wash, fold, and deliver laundry.

By launching subscription businesses, traditional CPG companies can get closer to their customers, delivering a more personalized experience and remaining relevant in a fast-changing competitive landscape. CPG companies – just like their digitally native upstart competitors – have to carefully manage these programs to optimize shipping costs and maintain customer interest through regular outreach Big Data Analytics to Understand Consumer Preferences for Precise Marketing and Product Launch With all the challenges associated with going online, the move also offers many benefits never before available. For example, companies can collect insights on buying patterns and products interests by analyzing the way consumers search, review and shop online. Even paying with mobile devices in store generates customer data that can help companies understand the customer shopping journey – and adapt marketing accordingly. At its annual investor meeting in December 2018, Unilever outlined a vision for an increasingly precise marketing future: From mass marketing to mass customization and ultimately hypo personalization. To achieve this, a company will gather a large database of customer data. Unilever has been trialing precision marketing in Thailand using data from 37 million customers there, equal to around 70% of Thailand’s online population and around 50% of the country’s total population. By analyzing the data to glean insights into consumer behavior, Unilever says it has become more able to grasp the preferences of Thailand’s consumers. Similarly, P&G shifted much of its digital media budget to programmatic advertisements, referring to the process of automatic buying of ad space by machines and algorithms in real-time bidding. Any company which bids the most based on predefined prices can display their ads to target consumers, enabling more precise marketing against different customer segments. Similarly, P&G is looking to more carefully target ads by inviting retailers across Europe, India, the Middle East and Africa to share shopper data. The shopper data will allow P&G to build a graph it can use to target audiences and deliver more relevant advertisements. Data analytics can also support faster product launch. In China, Unilever worked with Alibaba to launch the first skincare product under its Purifi brand from concept to product in just seven months. By tapping into Alibaba’s e-commerce platform to gain real-time feedback and insights from its large user base, Unilever was able to more quickly identify consumer preferences, helping speed product launch. Managing Inventory with More Accurate Demand Forecast As CPG companies are fast-moving, they need to closely monitor inventory to ensure timely stock replenishment and resource prioritization to minimize costs. Traditional demand forecasting requires a lot of manual work – which carries with it the risk of human bias. Plus, data sets are often isolated and do not provide a full picture. Machine learning algorithms can integrate internal and external data to form a more complete picture and build correlations by combining historical and real-time data to allow for a more granular analysis. Machine learning goes beyond text and numbers to analyze images and videos, and can automate some demand forecasting processes. Large CPG companies have been investing in predictive analytics tools to help more accurately gauge demand:

• Hindustan Unilever, Unilever’s India subsidiary, used a predictive analytics software called Jarvis driven by artificial intelligence technology to forecast demand and sales.
• P&G partnered with US-based supply chain solutions company E2open to develop its latest demand planning solution for the global market.

With more accurate demand forecasting, CPG companies can optimize inventory management. Key Insights Digital technology has enabled changes in CPG production, distribution and inventory management. CPG companies no longer have to rely on retailers as the only sales channel, and are increasingly adopting e-commerce to keep up with changing consumer preferences – and online competitors. Advanced data analytics give more accurate insights into consumer preferences so CPG companies can offer more relevant products and cater ad content to speak directly to the customer – and to reach the right ones. The direct-to-consumer model has enabled startups to break into the established CPG market, but also created challenges for traditional CPG companies as they work to maintain their market positions while also optimizing operating costs.