Convenience products

Convenience products for consumers are ‘the products they need, but are not willing to spend much time or effort when shopping’. The purchase can be an impulse buy, so retail shelves can be quickly depleted, requiring constant replenishment. These convenience products are handled through supply chains as Consumer Packaged Goods (CPG) and Fast Moving Consumer Goods (FMCG).

The CPG sector has the four major subsectors:

1. food and beverage,
2. personal care and beauty
3. home cleaning
4. pet care

Packaged food products have challenges in their supply chains of: retail shelf life (‘use by’ date) restrictions; cold (frozen) products and short shelf life (cool) products, which includes milk based products, dips and pizza bases.

The FMCG sector has three major subsectors:

1. White goods for the kitchen: refrigerators, cooking appliances etc.
2. Brown goods for the lounge, mainly electronics: computers, TV, music systems etc.
3. Automotive aftermarket

A feature of CPG and FMCG business model has been the building of relationships by manufacturers with major supermarket and chain stores. As brands, volume production and distribution capability became critical to success, mergers and acquisition (M&A) to build global businesses became a common feature. However, this business model in CPG is likely to undergo change, due to changes in retail markets in both developed and developing countries.

CPG private label brands

A major change that has been occurring for some years is the increasing acceptance by consumers of CPG brands owned by retailers and made by suppliers under contract. These products are identified as ‘home brand’, ‘own brand’ or ‘private label’.

Private label products were previously labelled with the name of the supermarket chain that sold them. However, the later trend has been for supermarkets to offer ‘phantom brands’ that are owned by the supermarket chain, but packaged to look like independent brands. Consumer acceptance for food products has occurred due to lower prices and the perception that these brands are equal in quality to the major CPG brands. This helped the products to lose their negative image, which enabled retailers to offer private label products in other CPG subsectors, such as personal care and beauty.

Retailers provide private label products for different consumer segments – value, mid-value and premium categories that address the variety of consumer needs. In European countries, private labels brands have about 30 percent or higher of CPG sales, especially where retail chains that emphasise their private labels have a strong presence. When expanding internationally, the private label retailers have continued to use their suppliers. The additional volumes for the suppliers, together with established product quality have enabled lower prices and acceptance by the new consumers.

For a manufacturer that provide private label products, as a business or in association with their own brand, the benefits include:

• Minimal investment in additional manufacturing costs. With Procurement responsible for buying new materials, especially recyclable packaging, there may be added costs
• Can deliver products that meet retailers’ deadlines, using existing production infrastructure, packaging equipment and manufacturing expertise
• Manufacturers have a need to create new products and varieties that differentiate from major brands

However, some of the challenges of a private label supply contract are:

• ‘Special offer’ promotions that must be made to order to specific delivery slots
• Introduction of ‘new’ and ‘improved’ products, that result in an increased product range. The additional SKUs may be identified as ‘long tails’, with low and variable sales that appeal to ‘niche’ buyers. This results in uneven re-ordering patterns and product replenishment time (from the inventory or sales trigger to receipt of new stock)
• Sales forecasts are variable and subject to short term changes
• Demand for shorter lead times, requiring investment in ‘agility’
• Ensure supply and price of materials for the contract period. The consulting firm McKinsey has noted that about 85 percent of food commodities are in concentrated supply areas and/or have an exposure to drought. This will increase volatility in supply and price, which retail buyers are unlikely to cover

The challenge for domestic manufacturers is that they may commoditise their business when producing private label goods to minimise the threat of offshore supply. If they do not invest in product development to innovate their own products, the smaller, independent suppliers could be forced to exit the market, leaving less choice for consumers.

Also, an ongoing trend is that smaller, independent brands are ‘de-listed’ whereby, to free up shelf space for it’s private label products, a supermarket chain does not renew a supply contract with a manufacturer (in the US, a ‘mid-market’ company has annual sales of more than U$100m (US Census Bureau) and in the EU it is less than €40m). This action can force a manufacturer to increase their private label range, that may imitate the big selling products offered by the large global brand companies. Over time, the large companies could have less incentive to invest in new products or may try to divest under-performing product groups.

Importantly, retailers may not consider they have an ongoing relationship with the supplies past the current contract. Building the relationship is critical and all clauses in the current contract must be met, including compliant labels and barcodes that are necessary to avoid a product recall.

CPG on-line distribution

What is happening in physical retail is likely to happen in on-line retail. The business models of dominant consumer brands could be eroded by the growth of retail consumer platforms (such as Amazon) and the lower barriers to entry for advertising through social media by smaller brands.

For less complex CPG, such as cleaning products and paper goods, retail consumer platforms can replace the major brand products with private label brand products. Other product categories such as hair and skin care, and toothpaste, can also become competitive when promoted as ‘phantom brands’.

When on-line shopping for CPG, private label products can be promoted through text and voice. Over time, these can become the preferred product line for consumers and then they automatically replace global brands.

Although this blogpost has discussed CPG products, similar changes have commenced in FMCG with smaller, less costly products. For automotive and apparel there will also be changes that could affect supply chains.

For manufacturers, increases in sales through on-line will rebalance the channels of distribution and could affect the ‘cost to serve’ for retail customers. The main changes to supply chains occurs upstream, through the contract negotiations for supply of materials that can influence Operations Planning and Logistics operations.