If a consumer product goods (CPG) manufacturer can get buyers to subscribe to receive periodic deliveries of its products, the benefits are massive. It earns guaranteed revenues; it can improve its inventory forecasting by knowing demand in advance; it obtains efficiencies in terms of serving customers; and it can achieve precise deliveries but still ship ahead of time, which reduces its shipping costs by eliminating the need for next-day deliveries. Accordingly, many of the biggest names in CPG manufacturing—including Procter & Gamble, Nestle, and Unilever—are acting like retailers, offering subscription services that directly target consumers, rather than going through conventional retail channels.

The benefits are remarkable, but are they attainable? Anecdotal evidence suggests that this model also creates substantial challenges that the CPG firms have not quite figured out how to overcome. In particular, consumers appreciate the convenience and fun of a subscription box that delivers novel options to them on a regular basis, but they also grow bored of the service relatively quickly. That is, after a few months, they may find that they are receiving too much of the same product, not receiving their most preferred items, or getting too much or too little of the options. One early subscriber to Oreo’s monthly delivery service noted that despite the fun of trying different flavors of her favorite cookie, ultimately she could buy the treat for far less money in the local grocery store. The value of the unique flavors simply was not enough to balance the higher cost of the subscription service.

This example repeats in other snack and pet product categories, where subscription services have struggled. In contrast, successes are prominent in personal care (e.g., razors) and beauty categories. Shave clubs, such as Dollar Shave and Harry’s, already account for about 12 percent of the razor market. Unilever, which purchased Dollar Shave Club several years ago, also expanded the subscription offerings to include beard oil, cologne, and toothpaste, and it continues to expand the number of subscriptions it maintains. In addition, Unilever is attempting to leverage this experience by introducing the Skinsei service for beauty products, which will attempt to avoid boredom by changing the cosmetics it ships to subscribers regularly, such as based on the time of year.

These successes are not the only inspiration for CPG manufacturers to keep trying to establish subscription services though. They also consider the activities of their existing retail partners, like Amazon. With its subscribe-and-save service, the online retailer promises discounts if shoppers agree to receive deliveries of various household goods on a regular basis. These deliveries account for several billion dollars in revenues for Amazon.

But to support this offering, Amazon also pressures the CPG companies to provide it with products at a price discount. In the meantime, it continues to push its own branded products, to compete directly with the national brands of its CPG partners. In the face of such moves, the CPG companies perceive no real option other than to compete directly in the retail subscription channel with Amazon. They want those revenues, rather than giving up so much of the pie to Amazon’s retail dominance.

 

Discussion Questions:

1. What are CPG companies doing to compete directly for retail customers?
2. What are the advantages and disadvantages of this strategy from the perspectives of the CPG firms, retailers, and consumers?

Source: Martinne Geller, Reuters, January 17, 2019