Direct-to-Retailer Model for CPG Domain : why it needs your attention
Traditionally, the CPG supply chain starts with raw material sourcing and manufacturing, followed by packaging, warehousing, wholesaling, distributing, and then retailing before the consumer purchases them for end consumption. At a high level, the key actors involved in this are: manufacturers, wholesalers, distributors, retailers, and consumers.
The traditional model worked well for centuries, but there are a few key growing challenges with this model.
· Unorganized Distribution Network: Distribution network efficiency is a key success factor for success in the CPG industry. A strong and effective distributor validation system needs to be established to pressure-test the distributor’s capability around operational efficiencies, infrastructure and capacity arrangements, industry experience, quality management, tech adoption metrics, performance metrics, competition understanding, compliant and lawful operation, etc. Many times, it is difficult to judge, which may result in an inefficient network.
· Lack of end-to-end visibility: Perhaps by far the most complex challenge to solve. With so many actors involved in the chain, it is extremely hard to keep track of the demands, which leads to inaccurate demand forecasting. Consumer good demands can change abruptly based on seasons, external events (e.g., pandemics), people’s choices, large-scale campaigns, positive or negative news and narratives, social influences, and many more. However, the tracking of consumer behavior, which mostly happens through offline shop visits, is always delayed and hence difficult to react to.
· 3rd party warehousing nuances: For CPG products, warehousing plays a crucial role. But most of the time, warehouses are managed by third parties, and hence, it is difficult to get clear communication and visibility on inventory and the supply chain. Apart from that, chances of lack of quality control at the warehouse, unexpected costs, packaging and waste management, regional regulatory compliance, and above all, complex and delayed technology integration can cause damaged goods, high regulatory fines, hidden charges, and unsatisfied customers.
· Immature digital supply chain: To cope with the growing needs of digitization of supply chain, detailed out by McKinsey Supply Chain 4.0, it is essential to rethink the supply chain complexities and find out ways to simplify and streamline the process. However, it is important to understand that lack of digitization is a multi-faceted challenge that cannot be resolved just by moving to another execution model, but it can still ease the roadmap. Data collection and management across the chain are the keys to success.
To solve some of these issues, a different business model is becoming popular. And that is “Direct-to-retailer”.
The D2R model establishes agreements and relationships directly between the manufacturer or franchise owner and the retailers without involving intermediaries such as wholesalers or distributors. In this distribution model, the retailer directly influences product development and the overall manufacturing process (source: yourretailcoach.com) and thus becomes a more empowered party, which is fair considering the retailer is much closer to the end consumer and can understand consumers better.
Examples of the direct-to-retail model: P&G established a direct-to-retail model with large retailers like Walmart or Target. D2R is common in retail pharmacy; a few examples of direct omnichannel retail pharmacy chains include MedPlus, Apollo, MedLife, CVS Health, Rite Aid Pharmacy, and Walgreen.
Both manufacturers and retailers benefited from the D-2-R model. Below are a few of the advantages.
For Manufacturers
· Max Reach, more locations: Manufacturers can reach more consumers through retailers and expand to more locations. This is because retailers can provide details about consumers who are currently using competitor’s products and can be targeted with appropriate messaging. Similarly, in locations where there is no presence, retailers can provide insights into whether the location will be favorable for the brand or not.
· Customer and inventor visibility: At the same time, the deep insights based on retailers POS and digital databases help brands better understand their customers and accordingly adjust their product design strategy, align their sales and marketing strategies, and streamline their distribution strategies. This gives the brand a competitive edge. Product inventory visibility becomes more prominent too because of the simplicity brought to the supply chain mechanism.
· Control over branding and marketing: Because the agreement is direct between manufacturers and retailers, manufacturers can ensure the retailers are maintaining the brand value by upholding high and stringent quality standards, proper brand messaging, better handling and fulfillment, and collecting customer’s feedback to actionize steps required to ensure consumer satisfaction and loyalty.
For Retailers
· Increased profits and product mix: Since the intermediaries are gone, this model helps ensure better profitability for retailers. Due to direct access to manufacturers, retailers get the exclusive advantage of differentiating product mixes with premium quality.
· Faster time-to-market: Because of the direct relationship between manufacturers and retailers, the retailer-selves can easily be replenished with proper demand forecasting and inventory details in no time. Some licensees specifically work with local manufacturers to meet demand deadlines.
· Deep effective communication: Manufacturers and brands can effectively converse with retailers through efficient b2b marketing techniques and streamlined campaign operations, enabling retailer’s sales capabilities.
Consumers also reap the benefits of this model, including a far better experience because of the more integrated, connected, and data-driven customer journey with end-to-end visibility. But the bigger advantage is superior-quality products within an affordable price range!
Hope, all these explain why D2R is the future for the CPG domain.
D2R Marketing Approach
Now, being a Martech enthusiast, my interest is definitely around supporting marketing tech.
Let’s focus on the key D2R marketing techniques for a successful outcome.
A. Retailer App
First and foremost, a retailer website and a retailer mobile app need to be made available to retailers. This is the core component around which marketing initiatives will evolve.
Key features of the app may look like below:
B. Campaign Marketing
Below are a few key outbound marketing techniques using campaign automation tools like Marketo and loyalty solutions like Capillary.
Audience
· Build a unified view of retail partners through CRM integration.
· Manufacturers may create segments of retail partners based on criteria such as location, size, and market focus for a targeted campaign.
· For a new location, look-alike-modelling for retailers can provide opportunities to grow well.
· Lead management for retailers is followed by stringent validation before onboarding.
Content
· Tailor marketing messages and campaigns to address each of the core retailer segments. Messaging can be personalized for a retailer.
· Leverage generative AI to create product images, descriptions, and promotional material aligning retailer’s branding at scale.
· Enable retailers with product information through events, webinars, whitepapers, and other contents.
Channels
· Keep regular communication through various channels (email, sms, WhatsApp, app notifications, etc.) about new product launches, updates, etc.
· Ensure the recency and frequency of such communications are managed in an automated fashion.
· Honor retailers consents and preferences for all kinds of communications to ensure they get the required attention and the ROI of promotional communications is at par.
Offers & incentives
· Implement incentive programs for retailer motivation—powered by easy and efficient campaigns and offers management.
· Volume discounts, early payment discounts, seasonal and promotional discounts, flash sales, rebates, samplers, flexible return options, etc. are common kinds of incentives for retailers.
· Run joint marketing initiatives, share exclusive product line access, provide in-store merchandising supports, provide high-quality point-of-sale materials, execute joint business planning around retailer target sets, etc. are various other methods to motivate retailers.
Loyalty
· Retailer loyalty program to incentivize retailers for high performance in the form of cashback or redeemable points in the form of cash, gifts, or free products.
· Enabling VIP access to events, early product launches, exclusive product line access, etc. can be a good variation of incentives.
· Gamification features for better engagement, rise in loyalty tier, etc.
· Easy enrolment and member-only discounts for retailers.
Measure and Optimize ROI
· B2B marketing budget allocation for campaign and corresponding campaign performance and ROI
· Retailer engagement metrics, promotion and incentive effectiveness, tech adoption metrics, real-time inventory visibility, market trends, etc. are the common metrics to track and optimize.
A high-level approach for retailer marketing may look like below (MVP phase)
This way, with effective marketing campaigns and personalizing messaging for targeted, specific retailer segments according to their specific needs and preferences, manufacturers can build strong and collaborative partnerships, increase brand visibility, and consequently drive increased sales through the direct-to-retailer model.
