Amazon.com's recent acquisition of Australia-based Shopify competitor Selz is starting to drum up speculation, coincidentally just as Shopify released strong financial results last month. The purchase occurred in January without any publicity, which sparks questions around the intent of the acquisition and what it means for the future of commerce. CPG firms should pay close attention to Amazon’s move, as well as what the implied shift in the commerce space could signify for their businesses.
According to Publicis Sapient’s Digital Life Index report, nearly three-quarters of U.S. respondents indicated that they think they will shop online more in the future. Shopify’s latest earnings report provides further evidence of the strong trend toward online shopping and, specifically, direct-to-consumer (D-to-C) solutions. It’s also clear that Shopify has what it takes to continue to be a competitive threat to Amazon. The company reported that it facilitated $119 billion in purchases in 2020, up 96 percent from 2019, and more significantly, Marketplace Pulse reported that this jump makes Shopify 40 percent as big as Amazon's marketplace, up from 25 percent in 2018.
From my view, Amazon’s purchase of Selz is not only a move to compete with Shopify, but also a clear indicator that D-to-C solutions are beginning to take a larger share of commerce. It also demonstrates Amazon's desire to capture revenue from brands leaving marketplaces or those that are adding D-to-C to their channel mix as a means of owning their own data. The ownership of first-party data has long been a source of strain between Amazon and its sellers.
Amazon owns sellers’ consumer data and leverages it to improve product recommendations, personalization, and other valuable consumer interactions. However, the online retail giant has come under fire for allegedly using that data to develop competitive Amazon-branded products. This practice has started to drive brands like Nike to leave Amazon, and likely many more will follow as they further develop their D-to-C commerce capabilities.
So, What Does This Mean for CPG Firms?
While COVID-19 has accelerated the shift to D-to-C for CPG firms, many are still lagging behind in achieving maturity in the space. If Amazon’s acquisition of Selz is any indication of where commerce is headed, these laggards will need to quickly up their game in order to remain competitive as the shift continues. Otherwise, they risk losing out on critical data and consumer relationships.
Brands have begun to realize that the indirect value of owning their own first-party data is as much as 1.7x that of the direct value of D-to-C capabilities, as quantified by Publicis Sapient research. Therefore, D-to-C has become table stakes as CPG firms realize the urgent need to capture and leverage first-party data in order to differentiate in the market and gain closer relationships with consumers.
However, winning in the D-to-C space will require brands to both deliver differentiated experiences and develop the core capabilities to support direct sales. Differentiated experiences such as consultation and customer service, exclusive products or packs, special pricing and trials, subscription or loyalty programs, and even purpose-driven features like charitable donation, will provide value to the consumer beyond that which they get from a marketplace, and will incentivize data sharing and purchase through direct channels. This differentiation will also help CPG firms manage retailer relationships that can be strained due to channel conflicts as well as alleviate the need to compete on price alone. In fact, brands that share insights gained through direct channels with their retail partners can strengthen those relationships.
Challenges of Shifting to D-to-C
Success in D-to-C will require CPG firms to overcome some key challenges. First, the dollar-for-dollar revenue will be harder to capture than through other channels. Therefore, indirect value, as mentioned above, will need to be factored into the business case. Startup investments and operations costs will strain near-term operating profit, and traditional consumer product unit economics are set up for retailers, not individuals, potentially causing longer-term strains on margin.
Another challenge relates to the upstart and run costs as compared to the revenue or margin opportunity. Historically, this has made CPG firms shy away from the direct model and lean more on online retailers and marketplaces. Companies like Shopify and Selz, which offer capabilities like fulfillment, customer support, tax, and legal, make it achievable for these companies to go direct.
Shifting to D-to-C will require new in-house technical and human resource capabilities. Furthermore, to fully realize the value, many will need to adjust their enterprise data strategy in order to capture, model and activate consumer data. CPG firms looking to quickly enter the D-to-C space and drive value can start with an “off the shelf” approach like those offered by Selz and Shopify while they learn about consumer preferences, develop the most desirable experiences, and ready their organization to fully operationalize.
Kristen Groh is group vice president, managing partner, consumer products at Publicis Sapient, a digital business transformation partner.
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Kristen Groh is a senior partner at Prophet, a growth consultancy, specializing in digital transformation strategies that guide brands toward uncommon growth and exceptional relevance. Kristen has built her career on the combination of deep client-centricity and hands-on practical experience, working in digital product, marketing, technology and design. She has worked with a range of retail brands including Estée Lauder, Aldi, Unilever and SC Johnson.