Retail and eCommerce – Fuel, A McKinsey Company https://get.fuelbymckinsey.com Wed, 29 Jan 2020 17:14:35 +0000 en-US hourly 1 https://wordpress.org/?v=5.2.2 Sizing Up The Subscription E-Commerce Market: 2018 Update https://get.fuelbymckinsey.com/article/sizing-up-the-subscription-e-commerce-market/ https://get.fuelbymckinsey.com/article/sizing-up-the-subscription-e-commerce-market/#respond Wed, 25 Sep 2019 19:10:46 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ The U.S. subscription e-commerce or box market continued its strong growth in 2018. Based on our analysis, the largest subscription e-commerce companies generated $7.5 billion in sales in 2018, up about 30 percent over the prior year. We estimate the total market size for subscription e-commerce services is about $12 billion to $15 billion. Largest […]

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The U.S. subscription e-commerce or box market continued its strong growth in 2018. Based on our analysis, the largest subscription e-commerce companies generated $7.5 billion in sales in 2018, up about 30 percent over the prior year. We estimate the total market size for subscription e-commerce services is about $12 billion to $15 billion.

Largest subscription e-commerce companies

To estimate market size, we analyzed Internet Retailer’s 2019 US Top 500 list of the largest e-commerce companies by sales, identifying the 16 that are primarily subscription-based. In total, these companies brought in $7.5 billion in revenue in 2018, up from $5.8 billion in 2017. (Exhibit 1.) Since 2014, the market has grown at a compound annual growth rate (CAGR) of nearly 60 percent.

Exhibit 1

HelloFresh passed Stitch Fix to become the largest subscription e-commerce company, with $1.4 billion in 2018 sales (up 119 percent from 2017). Stitch Fix fell to second place despite growing sales 26 percent to $1.2 billion. TechStyle Fashion Group, Blue Apron, and Dollar Shave Club rounded out the rest of the top five. (Exhibit 2.)

In addition, HelloFresh and Naked Wines had the highest sales growth from 2017 while Blue Apron was the only company on the list to see sales decline, with a drop of 24 percent from 2017.

Exhibit 2: Largest subscription e-commerce companies based on sales

Overall market size

We believe these figures, though helpful, are incomplete. Based on analysis of both published and private data, we estimate that additional sources of revenue not captured in Internet Retailer’s list to be approximately $5 billion to $8 billion. Examples of such sources include:

  • Companies that offer subscriptions but where the revenue from subscriptions is difficult to break out from overall financials, including subscription services from large online and traditional retailers such as Amazon, Walmart, Target, Sephora, Nordstrom, Overstock, The Honest Company, and Boxed.
  • Companies that are big enough to make the list but are not included, perhaps because they did not make their information available. For example, a recent report suggested that FabFitFun, which is not on the Internet Retailer US Top 500 list, generates more than $200 million in revenue a year.
  • Companies that are too small individually to make the list but that collectively could generate significant revenue.

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Taking into account this revenue in addition to the $7.5 billion identified by our analysis, we estimate the total market size of the subscription e-commerce market to be about $12 billion to $15 billion.

We believe the market is poised for continued growth.

  • As our prior research suggested, just over half of online shoppers are aware of even one of the leading subscription e-commerce companies [see Thinking Inside the Box]. As awareness grows, we would expect more consumers to try and eventually subscribe to these services.
  • In addition to the startups that highlight our list, an increasing number of larger brands have announced new subscription e-commerce services in 2019 including Nike, Macy’s, Bloomingdale’s, Urban Outfitter, and Banana Republic. Amazon also is continuing to expand its subscription offerings in apparel. We believe these new services will drive increased sales as well as raise overall awareness for the category.
  • Lastly, although funding is down from the its peak in 2015, VCs continue to invest in subscription e-commerce startups. Over the past three years, for example, such companies have raised close to $2.5 billion in VC funding, including nearly $400 million through August 2019.

Fuel will continue to regularly update our market sizing estimates as new data comes in, especially given the rapid growth we continue to see in the subscription e-commerce market.

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An Early Look Inside the D2C Startup Playbook https://get.fuelbymckinsey.com/article/an-early-look-inside-the-d2c-startup-playbook/ https://get.fuelbymckinsey.com/article/an-early-look-inside-the-d2c-startup-playbook/#respond Mon, 18 Mar 2019 18:24:59 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ Fuel recently launched ConsumerRadar, a benchmarking tool for direct-to-consumer (D2C) startups measuring more than 50 distinct metrics. The participating startups provide Fuel with high-level acquisition and financial data, and receive a detailed report showing how they compare to a cohort of peers. Over the next few months, we’ll be sharing more insights for the broader […]

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Fuel recently launched ConsumerRadar, a benchmarking tool for direct-to-consumer (D2C) startups measuring more than 50 distinct metrics. The participating startups provide Fuel with high-level acquisition and financial data, and receive a detailed report showing how they compare to a cohort of peers. Over the next few months, we’ll be sharing more insights for the broader community from these findings. For more information about participating in ConsumerRadar please click here.

The startups

The startups came from categories that included apparel, home goods, and pet care. The group had an average founding date of 2013 and had annual revenue of $30 million in 2017. The analysis featured an infrastructure and tools survey. Participants used a 1-5 scale to self-report their perceived proficiency across 22 metrics related to data usage, marketing technology and automation, and agency relationships.

While the current data set is somewhat limited, the initial results raise some interesting questions about how D2C ecommerce startups engage customers, leverage data, and think about their marketing ROI.


Figure 1. ConsumerRadar self-reported survey (n=8), cohort results.
Scoring: 1 = low capability, 5 = high capability “Companies that focused on triggered email use and personalization, when accounting for other variables, had approximately 2X higher growth efficiency than the cohort average.”

Paid social dominates spend, but this is shifting  

Unsurprisingly for D2C, the group are strong believers in paid social media (average of 4.85/5). They spend a significant portion of their budget through these channels and leverage advanced targeting options to reach specific audiences. However, many startups expressed a desire to cut back due to increasing acquisition costs coupled with diminishing returns, instead looking at less-costly channels. In many cases, companies were shifting budgets to traditional offline channels including out-of-home, radio, and direct mail – based on successful limited-geography tests.

Triggered emails and personalization drive better growth efficiency

Most of the group reported strong expertise in email marketing. The startups made email onboarding a priority, including the use of a series of personalized triggered emails within the first few weeks after purchase (4.60/5). Most also had a dedicated email strategy with always-on campaigns (4/5).

Usage was more mixed when it came to triggered emails based on certain behaviors onsite, such as abandoning a cart, and personalizing emails based on previous customer interactions (3.85). Companies that focused on triggered email use and personalization, when accounting for other variables, had approximately 2X higher growth efficiency than the cohort average.

3rd party data and leveraging agencies

None of the companies in the cohort used a DMP (Data Management Platform) to enhance the targeting of paid media (1/5). This likely stems from the high cost of setting up and managing a DMP for a startup under $100 million. Very few of the participants had set up organizational standards for managing 3rd party data (1.70/5).

The findings were mixed for agency partners. Three quarters of the startups had engaged an agency to some extent over the prior calendar year, but agencies were generally not viewed as thought leaders or strategic partners. Instead they were used mostly for execution and occasional staff augmentation (2.30/5). Whether this is a function of the early life-stage of our companies, or a sign that more marketing teams are bringing capabilities in-house is something we intend to explore further.

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Moving forward

Over the next few months we would like to include more startups in the benchmarking in order to conduct a more rigorous analysis to further correlate practices with growth efficiency. If a consumer startup could benefit from a personalized report showing how it measures up against a cohort of peers across 50+ customer acquisition and business health metrics – visit here to get started.

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Checking Out Amazon Go https://get.fuelbymckinsey.com/article/checking-out-amazon-go/ https://get.fuelbymckinsey.com/article/checking-out-amazon-go/#respond Tue, 19 Jun 2018 19:08:25 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ I finally visited the Amazon Go store in Seattle last week.  I thought the ability to walk out of the store without waiting in line was a great customer experience.  The visit also re-enforced my belief that computer vision and deep learning will revolutionize how retailers operate. The Amazon Go store, located in downtown Seattle […]

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I finally visited the Amazon Go store in Seattle last week.  I thought the ability to walk out of the store without waiting in line was a great customer experience.  The visit also re-enforced my belief that computer vision and deep learning will revolutionize how retailers operate.

The Amazon Go store, located in downtown Seattle near Amazon’s headquarters, opened to the public earlier this year after several years of employee testing. The store features what Amazon calls “Just Walk Out Shopping,” which automates the checkout process so that you just walk out and Amazon bills you for what you take.  Amazon is reportedly planning on rolling the store format out to several additional markets, including San Francisco and Chicago.

Customer experience

The Amazon Go store is not merely a good experience.  It is a GREAT experience.  While the pace of adoption will depend on store format and size, it’s hard to imagine automated checkout won’t become the industry standard over the next 5-10 years.

The customer experience is both easy and fun:

  • You scan a QR code via the Amazon Go app to enter the store (the app is linked to your Amazon Prime account).
  • You grab what you want (I put some items into a reusable shopping bag and some into my pockets).
  • When you are done, you just walk out of the store (see figure 2). It feels a bit odd to check out this way at first – it almost feels like stealing.
  • Amazon then charges you for what you bought.
Figure 1: Check-in/checkout

My receipt was spot on. For example, Amazon charged me for the bagel I stuffed into my pocket but didn’t charge me for the Cheerios I picked up and eventually put back before leaving.

No one shops for the checkout experience.  Checking out is a necessary evil required to tally your purchases and pay. By automating the checkout process entirely, Amazon is able to speed up the shopping trip and reduce operating costs. While retailers have experimented with other options such as scan and bag, mobile POS, self-checkout, nothing I have seen beats the speed and convenience of Amazon Go.

Merchandising

Amazon Go is a small format convenience store (1800 square feet) with a focus on fresh prepared foods (see Figure 2). In addition to prepared food and meal kits from Amazon and local vendors, the store also carries a mix of packaged goods, refrigerated items (e.g., yogurt, milk, cheese), frozen food, and Amazon logo items.  There was a small amount of Whole Foods 365 private label products as well.

The store also sells wine, and there was an employee stationed at the wine section to check IDs.  It will be interesting to see how this process gets automated over time – perhaps using facial recognition to confirm identify and age.

The store does not carry hot food (coffee, soup, etc.) or random weight fruits or vegetables, most likely because of the difficulty of accurately tracking and charging for these items using computer vision.

Figure 2: Prepared food selection

The selection is highly curated. I imagine over time Amazon will adjust the assortment mix based on sales, customer shopping behavior, and local demographics.

Technology

There is A LOT of technology in the store, particularly in the ceiling (see figure 3).  As the image shows, there are cameras every foot or so.

Figure 3: Technology in Ceiling

Computer vision uses AI and deep learning to analyze digital images and videos.  According to their website, Amazon Go uses this technology coupled with sensors to track each person in the store, what they take off the shelf, put back, and carry out of the store.

Given the amount of hardware in the store, it’s hard to imagine Amazon Go is scalable or affordable for most retailers as it is currently constructed, or the right choice for consumers who are looking for fresh fruit and veggies.  However, it is likely that Amazon and startups targeting the space will rapidly innovate to bring down costs and increase effectiveness.

But the technology works well today.  Amazon charged me only for the things I bought.  It did not charge me for items I picked up and put back – or for free items (including a reusable shopping bag and cream cheese for my bagel).

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Interestingly, it took about 10 minutes from the time I left the store to receive my receipt (I did two trips into the store and this happened both times).  I am not sure why.  It could be as simple as a slow email server, but my guess is that either a) the technology takes several minutes to process the video from your trip to figure out what you actually bought and/or b) there are humans reviewing the results from the video analysis to ensure accuracy.

In summary, Amazon Go is a great customer experience.  And while the current technology set up might not be scalable, automated checkout is likely to become the industry standard in the coming years at a store near you.

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The next $20 billion digital market – ID verification as a service https://get.fuelbymckinsey.com/article/the-next-20-billion-digital-market-id-verification-as-a-service/ https://get.fuelbymckinsey.com/article/the-next-20-billion-digital-market-id-verification-as-a-service/#respond Mon, 04 Jun 2018 19:13:24 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ The steady shift toward online transactions, and the rise of crypto currencies, are helping create the next $20 billion market.

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The steady shift toward online transactions, and the rise of crypto currencies, are helping create the next $20 billion market.

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ConsumerRadar: Benchmarking Your Startup’s Journey https://get.fuelbymckinsey.com/article/consumerradar-benchmarking-startups-journey/ https://get.fuelbymckinsey.com/article/consumerradar-benchmarking-startups-journey/#respond Thu, 31 May 2018 19:14:44 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ At Fuel by McKinsey, we’re passionate about seeing startups succeed. Most of us come from a startup background ourselves and know first-hand the incredible highs and the painful challenges of successfully scaling a company. For that reason, we are pleased to announce the launch of ConsumerRadar, Fuel by McKinsey’s proprietary benchmarking tool designed to help […]

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At Fuel by McKinsey, we’re passionate about seeing startups succeed. Most of us come from a startup background ourselves and know first-hand the incredible highs and the painful challenges of successfully scaling a company.

For that reason, we are pleased to announce the launch of ConsumerRadar, Fuel by McKinsey’s proprietary benchmarking tool designed to help B2C ecommerce startups better understand how they compare to their peers on their growth trajectory and key business health metrics.

We want to help B2C startups accelerate growth by:

  1. maximizing return on marketing spend
  2. improving acquisition effectiveness
  3. better engaging and retaining customers
  4. building effective marketing organizations
  5. knowing what good looks like and how close you are

Participating companies provide Fuel by McKinsey with financial and marketing data. In return you will receive detailed benchmarks on all critical performance levers against a relevant cohort. In addition, you will receive an in-depth read out by a Fuel consumer expert of your company’s performance on more than 50 critical metrics – and ways to address any gaps.

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All data is strictly confidential, and the list of participating companies will not be shared publicly.  If you are interested in participating, please sign up with the link below or email adam_mitchell@mckinsey.com

Happy scaling!

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Creating the Next Generation of Grocery Loyalty https://get.fuelbymckinsey.com/article/creating-the-next-generation-of-grocery-loyalty/ https://get.fuelbymckinsey.com/article/creating-the-next-generation-of-grocery-loyalty/#respond Wed, 04 Apr 2018 19:19:07 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ The next generation of loyalty programs are starting not in the grocery aisle, but in Silicon Valley. While taking advantage of new technology comes naturally to direct-to-consumer e-commerce startups, brick and mortar retailers are still catching up. Best-in-class loyalty programs go beyond static shopper and punch card loyalty programs. They leverage digital technology to keep […]

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The next generation of loyalty programs are starting not in the grocery aisle, but in Silicon Valley. While taking advantage of new technology comes naturally to direct-to-consumer e-commerce startups, brick and mortar retailers are still catching up. Best-in-class loyalty programs go beyond static shopper and punch card loyalty programs. They leverage digital technology to keep customers coming back.  And this increasingly means working with retail tech startups creating leading edge loyalty, personalization, and marketing tools.

I moderated a panel at Shoptalk on Next Generation Loyalty with Marcus Pfruender from Metro AG, a German retail and wholesale group with 760 wholesale stores in 25 countries; Tarang Sethia from 7-Eleven; and Cheryl Williams from Wakefern, the largest retailer-owned cooperative in the U.S. which supports 344 Shoprite and other supermarkets.  We discussed how these retailers are taking advantage of digital and other new technologies to increase long-term loyalty.  Here are some of the key takeaways:

More than just money

The best loyalty programs need to deliver value beyond monetary rewards.  McKinsey recently surveyed ~10,000 consumers across 9 industries on the perception and influence of loyalty programs.  Unsurprisingly, customers care first about monetary rewards within a loyalty program.  However, it is nearly as important for consumers to feel special and recognized, for example with surprise and delight offers.

Digital technologies provide a vastly expanded set of options to create more relevant, engaging, and easier-to-use loyalty programs.  Here are some examples of how Metro, 7-Eleven, and Wakefern have transformed their programs from print to digital:

  • Expanded reward program options. 7-Eleven has moved from a paper-based punch card program for coffee and a few other items (e.g., buy 6 cups of coffee and get 1 free) to a mobile points-based program that rewards shoppers for everything they buy.  The program also provides shoppers with bonus point offers (e.g., buy 2 Cokes and get 500 bonus points) that provide value without discounting.
  • Digital coupons. Wakefern was an early adopter of digital coupons; in total Wakefern has delivered over 1 billion digital coupons since it launched its program in 2011.  Digital couponing also offers a simple way to deliver surprise and delight offers.
  • New ways to communicate. In China, Metro delivers its entire loyalty program, including registration and all communications, via WeChat, the popular messaging and social media app.  Metro has also incorporated real-time communication and heavy gamification to better appeal to its Chinese customers.
  • Affinity clubs. 7-Eleven offers frequency clubs customized to what customers like – for example Diet Coke vs. Red Bull.
  • 3rd party partnerships. Retailers can extend their loyalty programs by partnering with 3rd  parties. Most obviously, retailers should work with CPGs to create and fund digital coupons and other promotions.  APIs also make it much easier to work with a broader range of partners.
  • AR and gamification. Retailers can use AR and gamification to create richer and more fun shopping experiences.  7-Eleven for example is using AR to create a Pokemon Go type game to promote the upcoming Dead Pool movie.

More than just the loyalty program

It’s important to set a broad vision for building loyalty.  7-Eleven’s vision, for example, is to make every visit more valuable.  This broad vision provides a platform for not only its loyalty program but for other innovations.  Some options we discussed during the session:

  • Incorporate a broader set of capabilities. 7-Eleven is adding multiple new tools to its digital experience to engage shoppers beyond its loyalty program, including a digital wallet, the ability for gas customers to pay at the pump with a phone scan, money transfers, integrated e-commerce delivery, and in-store pickup.
  • Leverage new technology to improve the overall customer experience. Retailers increasingly see out-of-stocks as a loyalty issue: shoppers get annoyed when the item they want is not on the shelf, reducing the likelihood they will come back next time.  To reduce out-of-stocks, Wakefern is experimenting with computer vision technology mounted on shopping carts to identify areas of out-of-stock and prompt store associates to replenish shelves.  Wakefern is also developing AI solutions to improve forecasting and replenishment.  Lastly, no article on loyalty or retail would be complete without mentioning Amazon Go, which is creating a checkout-free shopping experience for the company’s Prime loyalty program members.
  • Deliver value-added services. Metro’s loyalty program is focused on its wholesale customers, including retailers and restaurant owners.  In addition to cash back, Metro provides loyalty program members with access to exclusive professional content and advice, relevant insurance services, and even recycling options for used cooking fat.

Personalize, personalize, personalize

Personalization is the core of a modern loyalty program.  Although retailers collect vast troves of data on consumer behavior, they often struggle to take advantage of it.  Retailers need to invest in the technology and talent to make personalization come alive.  This means investing heavily in analytics and also recruiting the right talent and partners to bring in new skills.

To stay ahead of the curve, Metro, 7-Eleven and Wakefern are testing artificial intelligence to automate and enhance their personalization programs.  By identifying hidden patterns in consumer behavior, AI can allow retailers to more tightly align incentives and consumer preferences.  For example, most offers today are personalized based on what you already buy.  AI, however, can uncover latent demand patterns – the items consumers don’t buy today but might like to buy at the right time and price.

 “Always be in beta”

Ok, I stole this quote from the other panel I moderated on startup food and beverage companies.  But I think it applies even more to loyalty.

Retailer loyalty programs often launch with great fanfare.  There are months (and sometimes years) of careful loyalty program design.  There are launch parties in-store.  There is a slew of online and offline marketing.  There are training sessions for store employees.  That all lasts about two weeks.  After that, most loyalty programs sit unchanged for years. Eventually even the best-designed programs risk becoming little more than background noise, undermining their value to create customer engagement and incremental sales.

Instead, marketers need to continuously enhance and upgrade loyalty programs to keep them fresh.  7-Eleven is in a period of rapid innovation, rolling out a new mobile rewards program and testing new features such as chatbots, scan and pay, on-demand ordering for delivery or in-store pickup.  Wakefern has also continued to evolve its loyalty program, first launched in 1989, by adding digital coupons, digital wallet integration, smart kiosks in store and more.  Wakefern also continues to test new concepts such as scan and bag and AI to better personalize offers.  Metro has also remade its loyalty program from paper-based to digital.

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How can established retailers build the capabilities and skills needed to execute these best practices? One critical strategy is to tap startup innovation to deliver the next generation of shopping experiences and “create value beyond the check.” This doesn’t necessarily mean creating a corporate venture capital fund or making a lot of equity investments. While such tools can be a part of a partnership approach, it is more important to find and scale technology that will drive the next phase of growth and figure out how best to incorporate that technology.  At a minimum, established retailers need to:

  • Create a strategic roadmap for external startup innovation that identifies critical opportunities where startups can accelerate growth.
  • Develop a process for identifying and evaluating startups for partnering. Retailers need to establish a systematic process, not an ad hoc effort.  While corporate VCs or Silicon Valley offices can surface opportunities, startup innovation ultimately needs to be owned by the operating executives responsible for delivering results.
  • Create game plans for piloting and scaling startup partnerships. Retailers need to ensure they move at the right speed.  Startup innovation can’t move at the typical 3-5-year pace of internal IT investments.  At the same time, retailers need to tailor the pilot process to the stage and resources of the startup.  It is better to rapidly test and learn in a limited number of stores than to go broad too quickly only to have startup run into cash flow, manufacturing, or supply chain problems.

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The New Rules of Food and Beverage Innovation https://get.fuelbymckinsey.com/article/the-new-rules-of-food-and-beverage-innovation/ https://get.fuelbymckinsey.com/article/the-new-rules-of-food-and-beverage-innovation/#respond Tue, 27 Mar 2018 19:20:36 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ Venture capital firms poured over $1.1 billion last year into food and beverage startups.[1]  I recently moderated a panel at Shoptalk with two investors in the space, Lauren Jupiter from AccelFoods and Andrew Bridge from BrandProject, along with Marisa Bertha from 7-Eleven. We discussed the emerging trends and business models that are disrupting the industry.  […]

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Venture capital firms poured over $1.1 billion last year into food and beverage startups.[1]  I recently moderated a panel at Shoptalk with two investors in the space, Lauren Jupiter from AccelFoods and Andrew Bridge from BrandProject, along with Marisa Bertha from 7-Eleven. We discussed the emerging trends and business models that are disrupting the industry.  Here are some of the key takeaways:

The old rules of CPG don’t work with younger shoppers. 

Millennial and Gen Z shoppers are looking for authentic brands that fit with their lifestyles, something they don’t see their “parents’ brands” delivering.  Some of the trends that are important to these younger shoppers include:

  • What is the story behind the brand and its founders?  Younger shoppers shy away from the manufactured marketing of traditional CPG products.
  • Younger shoppers want “real” ingredients and expect labels to be clear and easy to understand.
  • Overall, younger shoppers are seeking out products that deliver health benefits in addition to flavor, such as plant-based proteins and foods with functional health benefits (pickle juice anyone?).
  • The Internet has changed expectations not only online but also in the store. Increasingly, consumers want to be able to use their mobile phones to order ahead, pay, capture loyalty rewards, and more. When they do go into the store, they expect to find the item on the shelf.
  • Younger consumers want on-the-go nutrition such as portable proteins, whether they be plant- or animal-based.  Retailers see the breakfast category as ripe for re-invention with new, portable offerings.

D2C is a powerful launching pad for new brands

Many food and beverage startups start out selling directly to consumers online.

  • D2C brands are able to capture deep data on their consumers—unavailable in brick and mortar settings—which they can use to deliver a personalized consumer experience, refine product strategy, and build long-term loyalty.
  • By selling directly, food and beverage brands can also experiment with new business models, in particular subscriptions (Blue Apron, Freshly, and NatureBox are examples of innovators in the space). In recently published research, we showed that subscriptions can provide a strong base of recurring revenue although churn rates are high and companies must deliver a superior end-to-end experience to succeed.
  • Going direct to consumer first can dramatically enhance the chance of success when these brands expand into brick and mortar retail. For example, by analyzing customer data, these brands can determine which retailers are the best fit, identify the most likely SKUs to sell in-store, target the optimal geographies, and refine their messaging.

 “Always be in beta”

  • Food and beverage startups need to be “culturally obsessed” with the consumer and continuously refine their products and experiences to meet consumer needs. E-commerce provides an immediate feedback loop that can allow startups quickly to course correct missteps or capitalize on opportunities.  To build loyalty and word of mouth, startups should also work closely with their most passionate and valuable customers, gathering feedback on existing products and testing new ideas.
  • Established CPG companies need to take a page out of the startup playbook and look for ways to speed innovation. Despite heavy investments in customer insights, too many CPGs seems out of step with younger shoppers, leading to calcified product portfolios and slow to no growth.

The challenge isn’t getting on the shelf.  It’s staying there. 

Food retailers are looking to meet consumer demand by adding emerging brands, making it easier than ever for startup companies to get on the shelf.  However, with so many new brands to choose from, retailers are quick to pull products that don’t deliver quick sales or pull in new customers.

  • Startup food and beverage brands need to focus on “smart growth.” It is better to start small when entering brick and mortar (say by focusing on a single retailer in a single geography) to manage the complexities of retail distribution.  Brands that expand too rapidly can run into crippling cash flow, manufacturing, or supply chain problems.
  • Startup companies are often skilled at digital marketing, leveraging Facebook, Instagram, Google, and other media to create awareness and word of mouth. In-store requires a very different set of skills.  To standout, brands need to communicate their stories at the shelf via packaging, promotions, shelf-edge marketing, and the other tried and true tools of retail marketing.  They also need to tap digital shopper marketing, such as mobile, location-based offers to drive traffic to the store.

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Retailers and CPGs need to focus on “strategic value above the check.”

  • Retailers and CPGs need to more actively partner with startups to accelerate growth. While many established players have set up corporate venture arms to invest in relevant startups, these investments often don’t deliver significant value to the business (to say nothing of financial returns).  Retailers and CPGs should focus on helping their startup partners establish commercial success first before thinking about any potential equity investments.
  • Retailers and CPGs need to develop clear strategies to take advantage of startup innovation. While corporate VCs or Silicon Valley offices can surface opportunities, startup innovation ultimately needs to be owned by the operating executives responsible for delivering results.
  • CPGs in particular should explore acquiring startup food and beverage brands to refill their innovation pipelines and bring in new talent. For better or worse, it’s often easier for established players to buy new innovation than to develop it in house.

[1] Source: Pitchbook.

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Loyalty In the Age of Disruption https://get.fuelbymckinsey.com/article/loyalty-in-the-age-of-disruption/ https://get.fuelbymckinsey.com/article/loyalty-in-the-age-of-disruption/#respond Fri, 21 Apr 2017 19:39:27 +0000 https://get.fuelbymckinsey.com/article/auto-draft/ The retail industry is facing unprecedented disruption as new technologies and competitors upend established ways of doing business.  Paradoxically, these trends make it critically important to retain and grow loyal shoppers, but at the same time they make it harder than ever to build strong and lasting customer relationships. I recently moderated a panel on […]

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The retail industry is facing unprecedented disruption as new technologies and competitors upend established ways of doing business.  Paradoxically, these trends make it critically important to retain and grow loyal shoppers, but at the same time they make it harder than ever to build strong and lasting customer relationships.

I recently moderated a panel on loyalty at Shoptalk where we discussed the trends shaping loyalty in this age of disruption, as well as the strategies and tactics leading retailers and e-commerce providers are using to build loyalty for the long-term.

Shoptalk is a nextgen retail and ecommerce event.  Now in its second year, the event brings together senior leaders from both brick and mortar retailers and e-commerce and retail tech startups to discuss the trends shaping the consumer and retail landscape and to share ideas.  Shoptalk is a must-attend event for anyone in the retail space.

For my panel, I was joined on stage by Karen Chiarucci, VP of Marketing & Customer Engagement for Payments, Gap, Inc.; Whit Goodrich, CMO, Retail Cards, Synchrony Financial; Jabob King, CMO, Plenti, American Express; and Aarthi Ramamurthy, Founder & CEO of Lumoid, an innovative e-commerce startup focusing on consumer electronics.

We had a wide-ranging conversation on how to build successful loyalty programs followed by Q&A from the audience.  Below are some of the key takeaways from the panel:

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  • Customer first. Regardless of program type, loyalty programs must begin and end with the customer.  While almost every company says they put the customer first, few actually make the investments in people, technology, data analytics, personalized marketing programs, etc. required to truly run the business from the customer out.
  • Creating differentiation. With so many loyalty programs out there, it can be hard to differentiate your program.  One key is to make sure any loyalty program is consistent with, and builds on, a company’s brand.  By tailoring the program to the most important needs of your shoppers, whether it be lower prices, or exclusive experiences, or faster services, retailers can ensure their programs provide the right incentives and rewards for loyal behavior.  While loyalty programs can be differentiated, loyalty schemes – gimmicky and over-complicated programs focused on driving short-term sales – cannot.
  • Hone in on key customer pain points. For both online and offline retailers, successful loyalty programs solve customer pain points.  One reason that Amazon Prime has been so successful, for example, is that it removes its customers’ biggest pain point, shipping costs, from the purchase decision.
  • Rewards and incentives need to be easy, relevant, and attainable. To influence customer behavior, retailers need to create programs that are easy to understand and easy to use.  If you can’t explain your program with a simple graphic or few paragraphs of text, it’s probably too complicated.  Rewards and incentives also need to be relevant, understanding that what matters to one shopper (say updates on the latest in fashion) can be vastly different from another shopper (who just cares about deals).  Finally, benefits need to be attainable.  Customers will lose interest in a program quickly if they have to spend too much or it takes too long to earn a reward.
  • Don’t forget to surprise and delight. Great loyalty programs find occasions to surprise and delight customers outside of formal program mechanics.  We sometimes forget the power of a small gift that simply says “thanks for being a loyal shopper.” At Kroger, for example, we used to include a coupon for a free item in our quarterly loyalty mailers for something the customer bought regularly, say a free pint of ice cream or frozen food entrée.
  • Avoid unnecessary roadblocks. Signing up for a loyalty program needs to be as easy as using Amazon or PayPal.  People don’t come to a store or site to sign up for a loyalty program – they are there to buy your products – so the process needs to be a natural extension of the shopping process.  In addition, it’s important to train associates on the program and how to sign up and use it so that they can become advocates (and to keep training – with turnover and other pressures, I’ve seen cases where within a few months, almost no store employee can answer even basic programs about how a loyalty program works or how to sign up).
  • Digital is not a nice to have. Retailers should leverage digital and mobile technology to provide an enhanced experience to customers.  For brick and mortar retailers, the key is providing an integrated experience that brings the digital and physical together.  One big advantage of mobile is that it is much easier and cheaper to deliver personalized offers and content digitally than in store.  Mobile apps in particular can offer significant value to customers by making it easy to find coupons they’ve downloaded, build shopping lists, check point balances, and even pay.  Retailers can also leverage digital to provide store employees with updates on in-store promotions or provide direct access to CRM systems to deliver better service to customers.
  • My app or yours? To borrow a tech term, most retailers’ apps are closed platforms – they only let consumers use their apps and their technology when they are in the store.  While some retailers are large enough to make this strategy work, most retailers struggle to get sufficient mobile downloads and engagement.  One option is to partner with one or more of the top consumer mobile apps.  The Gap, for example, is starting to accept Apple Pay and is exploring ways to getting their rewards into Apple’s Wallet app.  The goal is to create a seamless experience for the customer regardless of whose app the customer wants to use.  As one panel member said, “It’s hard to fight your customers if they want to use popular apps.”
  • Data drives everything. Data is the lifeblood of a successful loyalty program.  For most companies, the challenge is not capturing the data, it’s figuring out how to use it effectively.  By integrating transaction, channel, interaction and other data, retailers can understand the customer and what her day looks like at increasingly granular levels.  Moreover, digitally-enabled data collection can provide a fuller picture of customer interests and preferences that are nearly impossible to discern in a brick and mortar setting – for example, what do customers look at but not buy, what do they add to their wish list, and what do they share on Facebook or Pinterest?   These insights can be used to deliver relevant offers and content when and how the customer wants.  Perhaps more importantly, they can be used to make better business decisions; for example, what items to carry and what pricing and promotions will optimize sales and profits.
  • Focus on the right metrics. Customer engagement is the best measure of loyalty program success because it drives everything else.  Retailers thinking about adding loyalty programs should test a variety of program elements to evaluate what resonates with customers and what doesn’t.  Panel members cautioned against being overly focused on transaction counts or making money from the program in the early days.  It can take time to build momentum.  While economics are important, it has to come in the context of customer lifetime value.  In too many cases, retailers count on breakage (the amount of reward checks that don’t get redeemed) to make their numbers.  If customers aren’t redeeming their rewards, however, it means the retailer isn’t engaging them and is missing the upside opportunity to enhance those relationships.
  • Is a coalition program right for you? Many retailers with low shopping frequency can struggle to make a loyalty program pay off.  If your customers shop only a few times a year, a coalition program could be worth exploring.  In a coalition such a Plenti, customers can earn in one place and burn in another (Plenti’s partners include Macy’s, Rite Aid, Southeastern Grocers, Hulu, and Expedia).  As a result, customers have more opportunities to earn rewards which leads to more usage which leads to more value for all the coalition partners.  The risk with a coalition program is that the retailer’s brand can get lost in the noise so retailers need to carefully weigh the pros and cons before proceeding.
  • Actively explore partnerships. Retailers can leverage other partners without necessarily joining a coalition program.  For example, Safeway has long partnered with Chevron as part of its fuel rewards program.  Digital technologies make it much easier to integrate with partners.  For example, at Shoptalk, Visa highlighted wallet technology that lets a retailer or restaurant provide rides on Uber in return for in-store purchases.  Previously a program like that would have required the retailer to print and mail a paper certificate which the customer would then have to remember to redeem.

I’d like to thank Shoptalk for inviting me to moderate the panel.  We had a great time discussing what’s new in loyalty and what it takes to create a successful program.  I’m already looking forward to next year’s show!

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