Can consumer goods and consumer packaged goods companies succeed by selling directly to consumers? Some of the

world’s most innovative consumer-oriented organizations are now asking and sometimes answering this very question.

Channel Cannibalization—Not As Relevant As You ThinkLeveraging end-to-end consumer direct capabilities to build cross-channel sales and profits

Viewpoint paper

your market reach.

Table of contents

Light at the end of the tunnel .....................................1Cross-channel myths .................................................2The struggle to connect .............................................3Direct sales realities .................................................4The keys to going direct ............................................5Choosing the right direct sales partners ......................6Boosting sales with cross-channel marketing ...............7Conclusion .............................................................8About the authors ....................................................9

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Many firms have long been reluctant to open web-based consumer direct sales channels, primarily due to concerns about cannibalizing traditional channels and resistance from retailers, wholesalers, and other partners.

To survive and succeed in today’s tough marketplace, aggressive companies are starting to consider alternative channels, and in a growing number of cases, deploying direct-to-consumer sales and distribution strategies. This move will provide an opportunity to obtain customer purchase information directly, rather than through traditional syndicated data or other indirect sources, and will allow manufacturers and others to get to know their customers better.

This HP viewpoint paper examines the myths and realities of channel cannibalization from the perspective of Consumer Goods and Consumer Packaged Goods (CPG) sellers. It also reviews the opportunities, approaches, and key considerations of any cross-channel, consumer-direct sales initiative.

Light at the end of the tunnelSeveral powerful forces are shaping the current state of consumer direct selling.

Starting in late 2007, a sharp recession hit nations and economies worldwide and affected both retail and alternative-channel sales. Slower growth in the U.S. gross domestic product (GDP) and a weak housing market presented continued challenges to retailers and others through 2008. Lower consumer discretionary spending impacted both retail and direct sales, while higher fuel prices drove up the cost of shipping and delivery. Those macroeconomic trends compounded a general downward pressure on margins in the retail sector.

Consumer spending continued to decline throughout 2009 in most sectors, and finally, in early 2010, industry observers noted small but encouraging improvements in retail and consumer sales.

Thompson Reuters reported that retail sales increased by 2.9% in December 2009, with department store sales up by 0.7%, apparel store sales up by 4.7%, and discount sales up 5.3%.1 ShopperTrak reported that retail sales for the 2009 holiday season increased by 1.7%. During that same period, online direct-to-consumer sales grew by five percent, to $27 billion, compared to the same period in 2008.2

As in the past, most national Consumer Packaged Goods (CPG) firms continue to distribute through a wide range of retail channels, often depending on a few retail giants as their primary sales channel. But in today’s tough economic environment, many of those same retail giants have built their own “direct channel” to the consumer.

In fact, many brands are increasingly challenged by retailer-driven private label competition and by the blurring of brands on the shelf.

In a 2009 report, Information Resources, Inc. (IRI) predicted that retailers would continue to respond to the worldwide economic downturn by increasing the selection and promotion of private label store brands. That same report noted that consumers now view many private label brands as similar, or perhaps even superior, to brand-named CPG products.3 By introducing premium private label brands that create value-based competition for national brands, retailers are driving more consumer goods companies to the direct-to-consumer model.

1 Thompson Reuters—Reported by U.S. News, January 7, 2010: http://www.usnews.com/money/personal-finance/articles/2010/01/07/2010-discounting-forecast-retail-and-auto.html

2 ShopperTrak, January 12, 2010: http://www.shoppertrak.com/shoppertrak-predicts-18-percent-total-us-foot-traffic-rise-q1

3 IRI, Private Label 2009: Game-Changing Economy Taking Private Label to New Heights, September 2009

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In November 2009, Brand Week magazine reported on the growth of private label brands amid the continuing worldwide economic downturn. Brand Week cited statistics showing that private label brands now account for more than a third of all U.S. shopping cart purchases. The publication, however, also warned of the threat private labels pose to both name brands, as well as to the long-term interest of retailers themselves.4

Those trends pose a serious challenge to Consumer Goods brands and companies.

In response, manufacturers have increasingly begun to build direct and profitable sales channels to the ultimate consumers of their products. As we will explore in this viewpoint paper, direct channel sales now show a clear growth rate, often exceeding the growth rate in store sales.

To fully appreciate the promise of consumer direct marketing, it may help to explore some long-held misperceptions regarding this cross-channel strategy.

Cross-channel mythsCannibalization can be a real threat in many cross-channel situations. But research and real-world experience have shown that for many Consumer Goods firms and product manufacturers concerns about cannibalization may be somewhat overblown.

In some cases, selling directly to consumers may allow companies to circumvent their traditional retail channels. But in many situations, and when handled adroitly, consumer direct sales may serve to augment and even to enhance traditional retail sales.

The biggest concern—that selling directly will damage a brand’s return on investment by taking business away from retail channel partners—is usually overstated. Both research findings and market experience have dispelled many of the myths of channel cannibalization.

In a detailed 2009 survey of sales-oriented professionals at consumer product manufacturing companies, a leading research group found that most reported overwhelmingly positive results after opening a direct-to-consumer online channel. Despite their previous concerns about channel conflicts, fully 77% of direct-to-consumer online sellers reported overall beneficial effects of establishing direct relationships with their consumers ... benefits that included higher sales, better customer service, and more effective product development and marketing. Only 3% of those surveyed said the negative aspects of direct-to-consumer sales outweighed those positive improvements.

4 Brand Week: Battling Brand Malpractice, Nov. 2, 2009

That same survey showed that most manufacturers shared the common concerns about threats to their traditional retail channels. Many worried that traditional dealer network members would decrease their order volume once the manufacturer opened the consumer-direct channel. In fact, less than 15% of those surveyed reported that traditional retail partners had reduced their orders after the manufacturer opened a direct-to-consumer channel, while fully 20% say their retail partners had actually increased order volume after the shift.

Given the realities of today’s environment, which is defined by tough competition and growing private label shares, many savvy firms now view consumer direct sales not as an option, but as a necessity.

That necessity is driven by powerful historic and economic forces.

In the context of this paper, channel cannibalization is defined as the devouring of one avenue for generating sales—such as the traditional retail channel—in favor of opening a direct sales and communication channel between product manufacturers and the end consumer.

Cannibalization was a hot topic in the 1990s and early 2000s when eCommerce was first introduced, and companies thought that success in the new online medium would come only at the expense of traditional business and sales channels.

In the past, companies hoping to open online or other direct sales channels have worried about the threat of cannibalization. Many were rightfully concerned about disrupting their traditional distribution channels, or losing market share through a less-than-agile move to Internet-based direct selling.

For a time, those concerns have resulted in mixed success for some multiple-channel marketing efforts.

Maytag, for example, created a website to sell home appliances directly to consumers but later abandoned that direct sales channel after complaints from dealers and retail outlets. Yet other product manufacturers—including many who have historically sold through retail and catalog channels—have prospered by opening consumer direct sales channels.

In mid-1998, Levi Strauss began selling Levi jeans and other clothing products through the company’s own website. After complaints from traditional department stores and retail outlets, in 2000, Levi Strauss stopped selling directly to consumers and instead directed shoppers to local brick-and-mortar retailers.

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While CPG companies struggled with channel conflict, a number have made an effort to forge direct-to-consumer ties. Early consumer-direct efforts often centered on niche products like Tab, Proctor & Gamble’s reflect.com, and the General Mills mycereal.com projects. Niche products often do not justify the shelf space or slotting fees of a traditional retail channel, and highly customized offerings have too many iterations for a store to stock. But CPG companies benefited from these early consumer-direct efforts, in large part because they provided valuable insight into consumer preferences and new product opportunities.

But time and economics have led many top retailers back to the consumer direct model, and Levi Strauss is a prime example of that trend. Today, the Levi Strauss website offers a convenient online shopping portal where customers can view, compare, and purchase Levi’s, Dockers, and other popular name brand clothing. That same website also offers a store locator that guides interested consumers to brick-and-mortar retail outlets worldwide.

In January 2010, the toymaker Mattel launched an eCommerce website to offer all its popular brands directly to consumers. Like many consumer goods firms, this manufacturer generates almost half of its overall revenue from three big retailers. But given the competitive and economic realities of today’s marketplace, Mattel recognized the value of extending its channel coverage to include a robust and direct eCommerce effort.

Also in January 2010, Procter & Gamble Co., the world’s largest maker of consumer products, announced the launch of an eStore test site. P&G said it would offer hundreds of popular consumer products directly to consumers through the new website. Further blurring the traditional lines of consumer sales, P&G had previously acquired and opened several retail outlet chains—including the 36-location The Art of Shaving chain as well as dry cleaning stores and high-end hair-care salons.

Within the last few years, Crocs, the maker of unique and popular footwear, and fashion leader James Perse launched innovative new web-based channel strategies. Those and other forward-looking firms recognize that both consumer preference and market realities now point to a cross-channel future. The global recession has forced many retailers to close stores and to display a smaller selection of manufacturer products in those scaled-down locations. Consumer goods manufacturers now realize they can use web-based direct channels to build stronger consumer relations, to gain valuable insight into consumer wants and behaviors, to improve new product and service development, and to drive both online and off-line sales.

Many industry experts believe that, while retailers and wholesalers naturally resist consumer direct selling by Consumer Goods firms, direct sales can be a win/win for all parties. In fact, cross-channel strategies now often exert a positive influence on the traditional retail store channel.

The struggle to connectWhile progress has been made, CG firms often struggle to connect directly with consumers. This disconnect exists, at least in part, because retailers collect and own the point of sale data needed to understand consumer wants and habits. While Consumer Goods companies can purchase syndicated data, retailers currently have far stronger connections with consumers, and those retailer-to-consumer bonds will only strengthen as retailers increasingly capture today’s online and tomorrow’s mobile buying relationships.

In this environment, Consumer Goods companies must find an appropriate and balanced channel strategy. That approach must enable continued growth through their major retail channel partners, while at the same time leveraging the direct channel to reach, understand, and sell to the end customer. By offering selected products or services on a consumer direct basis, companies can simultaneously strengthen both their brand and their key retail channel partner relationships.

Consumer Goods companies are increasingly using the web to connect more directly with end consumers by offering coupons, recipes, lifestyle tips, and product information online. Many companies are also leveraging the emerging social media, online consumer panels, virtual reality presentations, and other avenues to foster innovative new direct-to-consumer relationships.

This challenging but rewarding strategy can work. But, to give this approach the best chance of success, it must be supported by robust, end-to-end consumer direct capabilities. The fact is few Consumer Goods or CPG firms have the experience or resources to tackle this important channel alone.

Manufacturers who hope to succeed without risking cannibalization should carefully consider a move to direct-to-consumer sales, keeping in mind these questions: • Are we currently losing share to private label brands

or to rival online competitors?• Will consumers purchase our traditional retail

product in an online environment?• How can we leverage direct marketing to strengthen

our established brands?• What online infrastructure is needed to capture

customer attention and sales and provide an adequate return on investment?

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• How can we deliver a consistent, positive direct experience that will build consumer satisfaction and loyalty?

• To support a consumer direct channel, what changes are needed to our supply chain and distribution network?

• What adjustments are needed to our internal processes and systems?

• Do we have the IT, data, and business intelligence capabilities needed to succeed in a consumer direct marketing environment?

• How can we leverage direct sales to support or enhance traditional retail marketing?

If not carefully mediated and fully resourced, a move to direct selling can devolve into internal chaos, confused customers, and lost sales. When supported by comprehensive consumer direct systems and infrastructure, a cross-channel approach can open robust new sales and brand management opportunities.

Direct sales realitiesAs we have seen, a strong case can be made for direct-to-consumer sales. In fact, the direct channel provided one of the few economic bright spots for 2009 and beyond.

In a report on U.S. consumer shopping habits, Retailer Daily cited predictions of continued restrained retail spending, growth in store brands, and an escalation in assortment- and channel-based competition.

“Look for brands caught in the trap of greater store brand focus and assortment optimization to forge alliances with key retailers, enter or step up efforts as store brand suppliers, and/or explore direct-to-consumer sales.”5

When Unilever introduced its environmentally-sound Small and Mighty liquid detergent in the United States, for example, the company worked closely with Walmart to create the market, build demand, and put the product on the shelves. P&G now offers special eSAVER values on the Kroger website, thus linking its promotions to that retailer’s crucial loyalty and database marketing programs.

5 Retailer Daily, December 2009: http://www.retailerdaily.com/entry/ 47512/consumers-cpg-value-2010/

Other Consumer Product and CPG firms are collaborating with retailers to develop account-specific merchandising strategies, shelf-ready packaging and other solutions. Still others—such as Nike and the Mars candy company—now allow consumers to go online to create customized product variations, which are then shipped directly to the consumer.

Also, as the recession eases, at least some consumers appear to be returning to long-trusted national brands. According to the Wall Street Journal, in early 2010, price deflation in the food segment allowed brand-name food manufacturers to offer discounts, thus protecting market share and luring price-conscious consumers away from private labels. Other studies, however, show substantial numbers of consumers are sticking with private label brands even as their economic situations improve.

The Nielsen consumer research firm also predicts the continued rise in manufacturer direct-to- consumer marketing.

“Online price wars and the squeeze on in-store assortment will fuel large and small manufacturers to give consumers options to buy direct from manufacturers or from online services from the likes of Amazon, Drugstore.com, and Alice.com.”6

Direct-to-consumer marketing has also grown in other segments, including the sale of food and agricultural items. According to the U.S. Department of Agriculture, from 1997 to 2007, direct-to-consumer food marketing grew by 104.7%, while total agricultural sales increased by only 47.6%.7

Household products now account for a relatively small but growing percentage of online (and thus, direct to consumer) sales. As reported by the Wall Street Journal, in 2009, $10 billion worth of household products were sold direct to consumers via the Internet, up from $4 billion in 2003, but a fraction of the estimated $361 billion in overall online sales for that year.8

Of course, consumer-direct selling must be convenient for the end-consumer. If buyers are forced to navigate multiple sites to fill their shopping “basket,” that can be time consuming and frustrating. Like traditional retail stores—which aggregate multiple products and categories in one brick-and-mortar location—

6 NielsenWire, December 2009, Tom Pirovano, Director Industry Insights, the Nielsen Company: http://blog.nielsen.com/nielsenwire/consumer/innovation-creates-opportunities-for-cpg-growth/

7 U.S. Department of Agriculture, USDA Agricultural Marketing Service, 2007 Census of Agriculture

8 Wall Street Journal, New Web Sales Option for Household Goods, January, 2010

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manufacturers must find an eCommerce model that makes online shopping simple and enjoyable. The advent of sites like Alice.com may be the next important step toward creating a more convenient online supermarket for packaged goods.

Companies need a comprehensive approach to succeed in the consumer direct setting. In a 2009 report on web-based customer loyalty, the Aberdeen Group recommended best-in-class online customer loyalty strategies based on a personalized eCommerce framework that includes analytics-backed marketing, merchandising, and post-purchase support.9

Other research shows that online sales can at times complement and even enhance sales through brick-and-mortar stores. In a Working Knowledge study published by Harvard Business School, research suggested that the relationship between these types of retail operations is situational—at least in the short term—beneficial for some, less so for others.

Consumer Goods companies can now build consumer direct relationships to accomplish a number of important goals. • Leverage actual customer sales data (instead of

market research or panel interviews) to extend and confirm their core consumer segmentation plans

• Study prior purchase behavior to improve the effectiveness (and lower the cost) of new product launches

• Seize the mobile commerce opportunity, by leveraging more powerful mobile devices and faster, broader Internet connections to forge more intimate relationships with consumers

9 Aberdeen Group, Online Customer Loyalty: Converting Occasional Shoppers into a Loyal Consumer Base, September, 2009

• Meet customer demand across multiple channels of interaction

• Create a single view of the consumer, allowing managers to build brand awareness, sales, and cross-channel profits

The keys to going directTo address a successful consumer direct initiative, companies must deploy a blended strategy that combines community building, direct product sales, and an affinity with established retail channel partners. This sensible approach reinforces the brand without threatening customer loyalty from the retailers, or the risk of becoming a commodity in the relevant category.

An effective consumer direct selling initiative must address the full range of multichannel activities, from marketing and sales support to order and payment processing, fulfillment, distribution, and customer service. Those end-to-end capabilities must span the physical and information requirements of e-business, contact center and demand response, fulfillment, returns, logistics, and cash management activities. A proven solution should also address security, hosting, and technical management of cross-channel systems.

Given the complexity of multichannel marketing, companies should seek a solution that integrates online, retail, catalog, direct media, and other channels into a single, seamless environment. Those cross-channel systems should create a single view of the customer, and must provide the direct data access executives’ need to make fast, informed business decisions.

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The fundamental requirements of cross-channel and consumer direct selling include:• Order and payment processing—Cross-channel

order and payment processing must incorporate proven solutions for order management, promotions support and continuity processing, payment processing authorization, and reverse payment processing. To fully enable cross-channel operations, those applications must be closely integrated to existing ERP systems, and to back-office, order and financial management systems.

• Fulfillment and distribution—Consumer direct selling requires a mastery of fulfillment and distribution systems, including warehousing and inventory management; receiving, kitting, pick/pack/ship; and manifest and distribution optimization. Direct-to-consumer marketing also requires expertise in value-added personalization, letter shop operation, on-demand printing, and returns processing.

• Cross-channel integration—A reliable channel strategy must provide robust integration capabilities, including merchandise and inventory data, pricing, product content, customer data, shopping histories, and other variables.

• Customer service and support—Customer service may be the most important, and daunting, aspect of consumer direct selling. When selling direct to the end customer, companies must address all aspects of cross-channel contact center operations (including multilanguage capabilities), up-selling and cross-selling, cancel and save services, and the delivery of product information and support. Consumer direct firms rely heavily on the performance of their back-office services, program reporting, and analytics capabilities.

• eCommerce/mCommerce solutions—In today’s dynamic consumer marketplace, companies that hope to sell direct must have access to sophisticated eBusiness solutions. They need flexible, scalable eCommerce, mCommerce, and cross-channel technologies and infrastructure. Those systems must provide end-to-end solutions, from enterprise-level system implementation and hosting, to business intelligence, analytics, and in-store devices. They should offer the flexibility to adapt to new features and innovations, new portals and new emerging social networks, rapid changes in promotional programs, or regional growth and the launch of new brands.

Ideally, a cross-channel, consumer direct strategy will allow each organization to acquire these capabilities as a comprehensive solution, or as separate services, depending on their market and business requirements.

Choosing the right direct sales partnersTo succeed in the consumer direct sales environment, a growing number of Consumer Goods and CPG firms are now partnering with allies capable of enabling a proven, scalable channel strategy. A reliable consumer direct partner will offer comprehensive outsourcing and application solutions to handle the fundamentals of marketing via multiple and diverse channels.

Those basics include maintaining visibility and traceability for customer demand, managing a cross-channel-oriented supply chain, planning for volume growth and seasonal fluctuations, increasing personalization, and launching consumer-oriented promotional campaigns. Consumer direct selling creates and uses large volumes of POS data and must be supported by high-volume IT and Business Intelligence systems, including demand signal repositories.

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Consumer direct marketing requires targeted cross-selling and up-selling. It depends on the rapid, error-free movement of massive volumes of inventory from warehouses directly to the consumer. It requires firms to master the details of order management, logistics, and payment services. To succeed, manufacturers must also become experts at customer service, relationship management, and problem resolution.

Of course, while tackling these consumer direct requirements, consumer-oriented firms cannot forget their traditional core activities: merchandising, marketing, and product management.

HP can assist in those efforts by providing comprehensive direct-to-consumer cross-channel solutions. The company delivers customer relationship management services for more than 450 clients from 144 locations in 30 countries and 48 languages, and handles more than 65 million orders, ships nearly 50 million units, and manages over 20 million direct-from-consumer inquiries each year.

HP has gained more than 30 years’ experience delivering large, complex continuity programs for direct-to-consumer companies across the country, and is one of the nation’s largest zone-skippers and co-minglers. To support those consumer direct capabilities, HP manages two million square feet of warehouse space through six global distribution facilities.

Boosting sales with cross-channel marketing By opening multiple channels—including direct sales pipelines to the buying public—companies can benefit both themselves and their customers.

Direct sales channels reduce transportation expenses, logistics, and the overall cost of goods sold. Companies can deploy direct-to-consumer sales strategies to reduce both fixed and variable support costs, and to streamline IT requirements. Consumers now often find buying direct to be more convenient and satisfying, perceptions that translate directly into higher customer spending.

In fact, for many Consumer Goods and CPG firms, opening a consumer direct channel is a unique opportunity to build closer, more informed, and more loyal relationships with the people who ultimately purchase and use their products.

In real-world implementations, companies have used effective, innovative direct brand strategies to:• Boost sales and profit by an average of up to 25%• Leverage cross-selling and up-selling to improve top-

line growth up to 5%• Counteract losses from private label brands• Reduce fixed costs by 10% to 25%• Increase shopper spending by up to 500%• Reduce cost of goods sold up to 10%, while

reducing transport and logistics costs by up to 30%• Gain a 360-degree view of their customers• Lower IT support and capital costs by up to 25%

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ConclusionConsumer direct cross-channel marketing holds great promise for consumer goods manufacturers.

But consumer-oriented firms have long worried about cannibalization and the potential negative effects direct sales might have on their traditional retail sales relationships. In today’s challenging business environment—which is defined by slower consumer spending and mounting competition from retailer private labels—a growing number of firms no longer see consumer direct sales as just a possibility.

Astute firms now see it as a necessity.

Yet, while many now recognize the promise of direct-to-consumer marketing, few Consumer Goods firms have the internal resources or expertise to launch a multiple-, cross-channel effort. That is why many have chosen to partner with allies with deep experience in consumer-direct processes and marketing.

Going direct offers clear and compelling advantages—and some very real challenges. By adopting a comprehensive channel strategy, companies can succeed by getting a lot closer to their consumers.

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About the authorsDale K. MiyakawaDale Miyakawa is the U.S. leader of HP’s Retail Industry Consulting and Solutioning practice. Miyakawa’s current responsibilities include setting the retail consulting and solutions strategy for HP Enterprise Services, building thought leadership, consulting to clients, business development, and practice management. He has more than 25 years’ experience in the retail industry as a practitioner and consultant across multiple retail segments with significant experience involving mergers, acquisitions, and consolidations. Miyakawa has consulted to retailers on business transformation, information technology strategy, systems integration, program management, and outsourcing. Prior to joining HP, he was a managing principal/partner with IBM’s Business Consulting Services, Distribution Sector national retail practice, and managed the Western Region. Miyakawa holds an M.B.A. from the University of Southern California, attended post-graduate studies at the Claremont Graduate University—Peter F. Drucker and Masatoshi Ito Graduate School of Management, speaks at trade conferences and is quoted in a number of trade publications.

Will Ruiz Will Ruiz is the U.S. leader of HP’s Consumer Goods Industry Consulting and Solutioning practice. He has over 20 years of experience in the areas of new product development, manufacturing operations and strategy, IT strategy, and business process innovation. His background includes a broad range of operations and order fulfillment engagements in the consumer packaged goods, wholesale distribution, quick service restaurant, food retail and manufacturing industries. Before joining HP (EDS), he was a principal with IBM’s Business Innovation Services group. Previously, he was a manager with Ernst & Young’s Management Consulting Performance Improvement practice and a senior manufacturing engineer with Analog Devices. Ruiz holds an M.B.A. (high honors), as well as a master of science degree in manufacturing engineering from Boston University and completed the Strategy Value Creation Programme at the London Business School.

© Copyright 2010 Hewlett-Packard Development Company, L.P. The information contained herein is subject to change without notice. The only warranties for HP products and services are set forth in the express warranty statements accompanying such products and services. Nothing herein should be construed as constituting an additional warranty. HP shall not be liable for technical or editorial errors or omissions contained herein.

4AA3-1858ENW, Created November 2010

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