Could e-commerce

disintermediate supermarkets?
Winning strategies for CPG companies

Geoffroy de Myttenaere
geoffroy_de_myttenaere@mckinsey.com
November 21, 2013
Agenda

Evolution in food
e-commerce

Potential for
disintermediation?

e-Tail vs. Retail

Winning practices

McKinsey & Company | 1

Online food sales represent ~1% of total food sales in Europe in 2012
with differences across countries, and is growing fast
Ranking per online sales market size in Europe, 2012
Weight in Projected
Online Food sales total food CAGR CAGR
Countries EUR million sales 2009-12 2012-17

Europe 13,216 M EUR 0.9 % 14% 9%

UK 7,666 4.0 % 13% 8%

France 2,700 1.3 % 15% 10%

Germany 500 0.3 % 12% 8%

Spain 405 0.4 % 23% 13%

Netherlands 280 0.7 % 12% 7%

Switzerland 211 0.5 % 14% 9%

Ireland 132 1.0 % 20% 13%

Belgium 120 0.3 % 18% 11%

SOURCE: Planet retail; Euromonitor; Forrester; Local sources McKinsey & Company | 2
“Food”1 online sales are projected to grow at a rate more than five
times that of traditional (in store) sales

Forecasts suggest online volume for select categories1 will strongly

grow in the next four years
Total value of sales in France, UK, Germany, Belgium and Switzerland
EUR billion CAGR
95 761 12-17 ▪ Online CAGR will be 5
times the one of in-
12% 3% 16%
666 88% store, representing a
Online 2% significant part of food
market growth (12%,
x5 i.e., 5 times its fair
share)…
▪ … hence the
97% importance of online
In store 98%
retail for CPGs to
3%
maintain growth rate

2012 Growth 2017

1 “Food” include OTC drugs, Nutraceuticals, Personal Care, Grocery

SOURCE: Forrester research online retail forecast, 2012 to 2017 McKinsey & Company | 3
The pace at which categories “go online” has been accelerating
Percent
Researched online1, Percent
85
80 2012
75 Gone
to digital
70
65 Digital
60 battleground Computer HW/SW
Electronics
55
Large Appliances2
50
Mobile phones
45
40 Still in
Furniture Video Games
store
35
DVD/Video
30 Health & Beauty Music
Books
25 Clothing
Home décor Tickets
20
Office Supply
15
10 HH Products
Grocery
5
0
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85
Purchased online1, Percent
1 As a percentage of those who bought a product in the respective category in the last 6 months
2 E.g., refrigerator etc.

SOURCE: iConsumer 2010-12, average of all European countries surveyed McKinsey & Company | 4
Even if online purchase is still limited for certain categories,
majority of consumers are using online channels to research
Ever done research online US DATA
Percent
100

90 Emerging online Leading online

CPG categories CPG categories
80

OTC medication
70
Health & Diapers & wipes Cosmetics
hygiene
Soaps & lotions
60
Laundry & cleaners
50 Cereal
Dry grocery
Paper products Characteristics of leading and emerging online categories
40 Alcohol
Snacks or candy
▪ High “value density” (i.e. high price per kilogram)
30 Soft drinks ▪ Predictable replenishment cycle
Canned Fresh
food food ▪ High price motivation and transparency
20 Still in store ▪ Product sophistication and need for product information to
CPG categories generate purchase
10

0
0 5 10 15 20 25 30
Purchased online in the past 6 months
Percent1
1 As a percentage of those who bought a product in the respective category in the last 6 months

SOURCE: CDE survey – Q1a Please tell us where you have bought the following types of items over the last 6 months | 5
McKinsey & Company
[online vs. in store] Q17b. What types of research have you done for each category below?
Consumers are researching in more channels than before

Number of websites researched

before a purchase Where do you typically start your research online ?

Percent of all respondents Percent of respondents doing online research

100 Retailer/ 23
store website
Google 19
3 or more 34 Manufacturer site 14

Price comparison site 14

Online professionally
2 16 9
-written review
Ebay 6
1 19 Website with 5
user reviews
Amazon 4

0 31 Other 3
User-generated 1
videos (e.g., YouTube)
Yahoo 1

Investing in having a coherent message between all channels seems more important than ever

SOURCE: iConsumer 2012; Europe McKinsey & Company | 6

Mobiles will be major new disruption for retailers, with 40%
of consumers already using it for in-store research

Use mobile for any product

research? Were doing mobile research? What type of research done?
Percent of respondents, across Percent of respondents; multiple Percent of respondents; multiple
all categories (N= 7,579) responses allowed (N= 1,614) responses allowed (N= 1,614)

Professional
32
review site
Price
At home 77 32
comparison tool
Not Using Same store
79 21 30
using mobile website
Other website 24
In store 40
Mobile coupon 21
User
15
review site
Other 25 Take photos 15

Scan barcode 10

Search 11
Use social
3
network

SOURCE: iConsumer 2011, average of all European countries surveyed McKinsey & Company | 7
Agenda

Evolution in food
e-commerce

Potential for
disintermediation?

e-Tail vs. Retail

Winning practices

McKinsey & Company | 8

The questions now are …

What other What impact

categories will will it have on
move to traditional
e-commerce? retailers ?

SOURCE: McKinsey McKinsey & Company | 9

In Europe, retail grocers display big dominance of the online food
market, weighting 80-90% of total food online retail and are expected
to maintain it within the next 3-5 years
Estimate of online addressable food & beverage market for next 3-5 years

UK current France current

Own direct online sales Own direct online sales

~1% ~5% <1%
Pure players ~15% Pure players

Multi-channel groceries 80-90% Multi-channel groceries 90-95%

Retail grocers maintain overall dominance Grocers are likely to maintain dominance
▪ No coverage and high acquisition costs ▪ High labor costs make it very
make it more challenging for new challenging for any model other than
entrants click & collect to work (which requires a
broad retailer network)
▪ There is more retailer capacity in
pipeline (e.g., Morrisons) ▪ Home delivery is likely to take some
share in urban areas where car usage
However, also likely to see a modest is lower
increase in share from Amazon in shelf-
stable categories
▪ They announced a reinforcement in UK
grocery team
▪ They are likely to consider acquisitions

SOURCE: Expert assessment; McKinsey analysis McKinsey & Company | 10

Nevertheless, history has shown that retail is not immune from rapid
change

SOURCE: McKinsey (2007) McKinsey & Company | 11

Could some “Food” categories go on-line? (1/3)

~20% cheaper

~30% cheaper

1 Collect the product at Auderghem shop

SOURCE: Amazon.fr; Colruyt Collect&Go service McKinsey & Company | 12

Could some “Food” categories go on-line? (2/3)

~10% cheaper

~20% cheaper

1 Collect the product at Hankar shop

SOURCE: Amazon.fr; Delhaize direct service McKinsey & Company | 13

Could some “Food” categories go on-line? (3/3)

10-20% cheaper

1 Collect the product at Auderghem shop

SOURCE: Amazon.fr; Colruyt Collect&Go service McKinsey & Company | 14

An idea that may seem far fetched …

McKinsey & Company | 15

… but real!

SOURCE: Amazon.fr; Colruyt Collect&Go service McKinsey & Company | 16

Is shop & deliver from bpost the Trojan horse?

“Dry package” “Dry package”

sender agent

Use “virtual
address”

Grocery Grocery Shop & Deliver End-Customer

players delivery
logistics
Just-in-time Just-in-time Delivery at
to maximize to maximize the specified
freshness freshness timeslot of
all packages
and
Grocery Fresh agent handling of
pure players returns/
packages
Just-in-time Just-in-time sent by the
to maximize to maximize end
freshness freshness customer

McKinsey & Company | 17

Agenda

Evolution in food
e-commerce

Potential for
disintermediation?

e-Tail vs. Retail

Winning practices

McKinsey & Company | 18

Online food retail category management business model is today
quite different from what one could have expected from this channel
Common aspirations of online
business models
Consumer
▪ Differentiated strategies to
A address specificities of online
understanding
and in-store customers
▪ Long-tail assortment, the
B Assortment “endless aisle”
▪ Cheaper prices
C Price
▪ Differentiated model
D Promotion ▪ More aggressive pricing
▪ Different mechanics
Product
▪ Opportunity for rich multimedia
E visuals, extensive product
information
descriptions, user-generated
context
▪ Aspirational visuals
Merchan-
▪ Exploration of the category in
F multiple different ways
dising
The actual multichannel operating
model
▪ Retailers applying the same
strategies to online and in-store
consumers
▪ “Core range”– fewer SKUs than
in store
▪ Same or more expensive (in-store
price + delivery charge)
▪ Similar to promotions in store, yet less
frequent than in physical stores
▪ Standard banners with little room to
differentiate, less control of brand, no
user-generated content
▪ Sub-optimal visuals, with limited
control
▪ Frequent shopping from Favorites
lists without seeing the rest of the
shelf
McKinsey & Company | 19
CONSUMER UNDERSTANDING
Online food shopper behavior is different from that of offline
consumers, hence calling for a different approach

Online shoppers seem much less loyal than in-store

Online can influence the retailer’s preference of shoppers
shoppers
Main retailer choice, percent
100% 100% 100% N = 1.444 N = 255
Shoppers that
do not have a 16%
16% main retailer
21%
24%

14% 64%

15%
15%

17% Shoppers that

10% 84%
7% have a main retailer

7% 8% 5%
3% 4%
3% 36%
44% 44%
Others1
43%

All shoppers Offline shoppers Online shoppers In-store Online

Note: limited sample size needs research boost to confirm results. Regional distribution of respondents might affect results (e.g. online shoppers more
concentrated in urban areas, increasing the share of stores that have a strong presence there
1 Other retailers are: Casino, Petit Casino, Franprix, Spar, Leader Price, Carrefour City, Carrefour market, Simply market, Monoprix, Cora, Intermarché,
Super U/Hyper U, Match, Aldi, Ed/Dia, and local fresh product markets

SOURCE: Grocery survey in France Q4-2011, sample size 1,500 McKinsey & Company | 20
ASSORTMENT
Food assortment of online grocers is significantly shorter than offline
Number of SKUs offered online within grocery offer

Number of food SKUs offered online and

offline by major European retailers
~45,000
18,860 -58%

~100,000 Key insights to CPG

-93%
6,900
▪ Limited collaboration between
~30,000 CPG and retailers to select the
online SKUs with low data
11,290 -62%
sharing and still limited retailer
capabilities to understand
~30,000 online consumers and do
things right
6,900 -77%
▪ Assortment skewed towards
online shopper habits (e.g.,
~30,000 more heavy products)
6,500 -78%

Offline1 Online
1 Maximum assortment present in a single store offline

SOURCE: Web shops of each retailer; Planet Retail; McKinsey analysis McKinsey & Company | 21
ASSORTMENT
Online retailers assortment choice seems to reflect different
strategies by category
Number of SKUs offered online and in store

Online1 In store Coverage in %

Carrefour 112 320 35

Hygiene-
beauty; Leclerc 100 252 40
Facial care
example 36
Auchan 257 14

Carrefour 12 19 63
Homecare;
Washing
Leclerc 5 27 19
powder
example
Auchan 11 14 79

Sweet Carrefour 91 213 43

grocery;
Chocolate Leclerc 57 264 22
tablets
example Auchan 62 195 32

1 “Drive” websites

SOURCE: Store visits at Carrefour (Sartrouville) Auchan (Plaisir) and Leclerc (Herblay) and their associated “drive” shops
McKinsey & Company | 22
– July 2013
ASSORTMENT
Food retailers online tend to push their private labels as well
as large brands, yet brands are not all treated similarly
SKUs offline1 SKUs online1 Coverage Key insights on
Number Number Percent this category
Private Private labels
Private labels 45 26 57 are over-
labels
represented
Lindt 50 22 45 online

Cote d’Or 32 11 35 Online share

Leading of branded
brands SKUs is not
Nestlé 25 10 40 systematically
in line with
Milka 17 6 37 offline’s

Villars 17 0 0 Small brands

tend to have
a low
Fairtrade brands 13 2 18
Smaller representa-
players tion on online
Poulain 7 3 48 shops in
average, with
3 some being
Others 18 16
totally absent2

Total 224 83 37

1 Based on the average between Auchan, Leclerc, and Carrefour

2 Exceptions exist: for example, small brands with "online" focus manage to have more SKUs online than in-store - Alter-Eco at Leclerc has 16 SKUs
online, only 2 SKUs in shop

SOURCE: Store visits at Carrefour (Sartrouville) Auchan (Plaisir) and Leclerc (Herblay) and their associated “drive” shops
McKinsey & Company | 23
– July 2013
PRICE
Price range is most often narrower in online shops,
and generally skewed towards low and middle price items Minimum and maximum

Unit price in EUR Average1

Carrefour Auchan Leclerc

1.94 2.01 1.72

Drive

2.16 2.09 2.17

In store
Chocolate
tablets 0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 0 1 2 3 4 5 6 7 8 0 5 10 15 20 25

9.34 11.45 9.24

Drive

10.75 10.08 8.23

In store
Washing
powder 5 10 15 20 25 30 5 10 15 20 5 10 15 20 25

8.17 5.90 5.70

Drive

8.37 8.64 7.85

In store
Facial care
0 3 6 9 12 15 18 21 24 27 0 5 10 15 20 25 0 5 10 15 20 25 30 35

1 Based on store visits at Carrefour (Sartrouville) Auchan (Plaisir) and Leclerc (Herblay) and their associated "drive" shops. Prices and ranges as of July 2013

SOURCE: Store visits at Carrefour (Sartrouville) Auchan (Plaisir) and Leclerc (Herblay) and their associated "drive" shops
McKinsey & Company | 24
- July 2013
PROMOTION
Promotions online tend to be a subset of offline promotional
array: same mechanics but less products
Example: Leclerc promotion “back to school” 2013 (September)

Number of promotions in “back to school” event

#, based on in-store catalog and website special promotional section
Key insights to CPG
148
Mostly a subset of national
in-store deals (same SKU, ▪ Online offers
Discounts for purchase of same price points) generally replicate
47%
2 or 3 similar items offline ones, using
similar prices and
75 visuals
▪ So far, promotions
47% online are far more
Discount in Leclerc vouchers 39%
limited than offline,
potentially driven by
53% several considerations
Immediate discount 14% of retailers
0%
– Likely lower online
Offline Online profitability
– Less important role
of promotion as a
traffic driver

SOURCE: Website and online catalog, based on Fouesnant-Pleuven physical store and associated online (“drive”) store McKinsey & Company | 25
PRODUCT INFORMATION
Product information is still very limited, despite some attempts to
implement innovative features –while this channel is likely to require
more content than in-store to replace the physical product experience
Leclerc is developing innovative features, yet still at an early
Carrefour offers basic product information
stage

▪ Only basic information

▪ No product information on the page
▪ No user-generated content
▪ 3D zoom allows for reading detailed information
on product package
▪ No rich multimedia visuals
▪ No user-generated content
▪ No rich content and “advanced” product
information

SOURCE: Leclerc and carrefour online shops (“drive”) McKinsey & Company | 26
MERCHANDISING
Online merchandising is more complex than offline,
driven by the high number of paths to purchase,
making it key to understand how consumers buy
Several routes enable customer purchase

Frequently purchased items Wishlist

Key insights to CPGs

▪ It is key to strive to be
on the favorite list
(e.g. through
sponsored
Promotions and Browsing by Direct product advertisement or free
featured products categories search samples)
▪ It is key to optimize
Most consumers primarily use favourites list to shop, and therefore do not browse shelf lisibility across all
through the shop and categories to the extent they do offline the possible paths to
purchase (despite
variation of shelf
layout) across all the
“Favourites” lists are is the different path
primary way in which people Consumers need to do their shopping
shop. People just do not “shop” using favourites, or they would spend
the full shop. hours doing their shopping. Returning
consumers tend to use them primarily
Former CEO, major online
retailer Industry expert

SOURCE: Leclerc online shop (“Drive”) McKinsey & Company | 27

Agenda

Evolution in food
e-commerce

Potential for
disintermediation?

e-Tail vs. Retail

Winning practices

McKinsey & Company | 28

There is no clear winner yet, so CPGs must act quickly
to become early movers and winners online
Example levers to optimize e-catman capability and performance

A Understand the consumer purchasing journey:

Strategy and
▪ Role of online shopping for the consumer
consumer
▪ Consumer behavior towards online shopping
understanding
▪ Retailer online strategy

Leverage deep understanding of the online shopper behavior to best tailor strategy to this specific channel, for example :
B Differentiate promotion mechanics compared to offline, for example with privileged loading promotional offers
Assortment, D Innovate in promotional theatralization
C
price and
promotion D Adjust promotion frequency to online shopping frequency
E Maximize product/brand trial to generate “first purchase” and be part of the “previous command” / favorite list menu
F Identify online “KVI” products and consider differentiating your pricing strategy vs. in store

G Build editorial skills to optimize placement on the digital shelf – use rich product descriptions, user reviews/content, videos,
Product 360 degree images, secondary placements, listings, and advertising
information H Embrace the online showroom – partner with retailers to get additional creative control online through a strong shopper
experience, especially for CPGs with a broad portfolio of complementary products

I Be visible at store or category entrance

J Theatralize your aisle
Merchandizing
K Connect digital marketing to point-of-purchase purchase– utilize digital marketing channels (brand site, social, display) to
direct consumers to purchase

SOURCE: McKinsey analysis McKinsey & Company | 29

UNDERSTAND THE CONSUMER PURCHASING JOURNEY
CPGs needs to understand changes in consumer behavior
which fundamentally impact the path to purchase… INVENTED FOR ILLUSTRATION
PURPOSES
Journey No. 1 = Considered buying
▪ 39-year-old woman new product
▪ Fashion forward
▪ Buys luxury and
shops at department
stores Browsed online Browsed the
▪ Tired of her old beauty sites Went to local category and
moisturizer supermarket purchased the
product as it was
Journey No. 2 familiar`
▪ 21-year-old woman
▪ Fashion forward
Purchased
▪ Limited income and Olay
shops at mass Definity
merchandisers moisturizer
▪ Wanted to start using Read reviews in
Immediately added it to
moisturizer magazine offline
her online grocery basket
using her mobile –
arrived 2 days later
Journey No. 3
▪ 30-year-old woman
▪ Fashion modest
▪ Middle-income and
shops for skin care at
her local pharmacy Looked on Bought online
▪ Needed a solution for Olayforyou at food
her skin website for retailer’s
skincare advice
SOURCE: McKinsey analysis McKinsey & Company | 30
Understanding the consumer decision journey is therefore imperative

▪ Online retailers are becoming a rich

source of product information,
▪ Consumers see a TV commercial, discussions, ratings, and feature
or a print ad, or get a direct mail comparisons, even if people don’t buy
piece, and, if engaged, they search online – often seen as more credible
for the product than MFR sites

Evaluate
▪ In-market prospects
check ▪ Consumers voice
recommendations from opinions, forward
online communities, content, enlist others in
social networks, Bond
collaborative
blogs, and ratings Consider Buy discussions, and
providers openly share what they
▪ They will have are considering
conducted significant
online research before
going into a store Advocate Experience

▪ Customers will increasingly ▪ Customers are using online

“sample” the brand
experience through their
online interactions before
buying, noting the navigation,
flow, content quality, etc., all
of which affects their
attitudes
service support (i.e., customer
communities, live chat) more often
for help postpurchase
▪ Customers expect to shape a brand
by contributing feedback, providing
new content, or engaging in
discussions online

SOURCE: McKinsey consumer decision journey McKinsey & Company | 31

DIFFERENCIATE PROMOTION MECHANICS COMPARED TO OFFLINE
Retailers are actively seeking to drive repurchase –
Creating opportunities for joint promotions and tailored CRM

Example implications
Incentive advertised on site Tailored CRM
for CPGS

▪ Device approach to
develop total e-store
loyalty via our brands
(e.g. build joint e-CRM
program, such as
Tesco beauty club)

McKinsey & Company | 32

PROMOTIONS
Retailers offer the opportunity to better dramatize promotions
and hence maximize promotional uplift

Case example Example implications for CPGS

▪ Test and learn dynamics to best

dramatize promotions and
maximize traffic to own products
▪ Leverage coupon for price sensitive
shoppers
▪ Be part of ongoing promotions (e.g.,
loyalty program)

SOURCE: Web search McKinsey & Company | 33

MAKE YOURSELF VISIBLE TO GET ON THE FAVORITE LISTS
Coca-Cola run a free product trial on Tesco.com, to get onto
the Favourites list
Case example Example of implications for CPGS

Gain access to favorite lists, as

most consumers shop from
favorite lists (For example by
giving free sample in exchange
for an access to the favorite list,
CPGs are “buying” visibility
directly from the consumer for
their next purchases)

Clicking promotion (at the top of the “fizzy drinks”

category) gave access to a promotional code to obtain
a free purchase of Coke Zero
By “purchasing” Coke Zero online, it was automatically
added to a consumer’s “Favorites” list, increasingly the
chance of them purchasing it in the future

SOURCE: http://www.tesco.com/ McKinsey & Company | 34

EMBRACE THE ONLINE SHOWROOM
CPG have the opportunity to leverage their deep understanding
of consumers and e-shoppers to best feature the product
Example L'Oréal Maybelline mascara on 3rd party retailer

Different "pack shot" ; different product descriptor;

various levels of “brand content”

SOURCE: Web search McKinsey & Company | 35

EMBRACE THE ONLINE SHOWROOM
Kellogg's enriches content by displaying recipes that feature
their product
Case example Example of implications for CPGS

▪ Enrich brand contents, for

example by displaying
advices, recipes, usage
examples
▪ Enable and leverage user-
generated content

SOURCE: Web search McKinsey & Company | 36

BE VISIBLE
J&B and Badoit uses animated advert to attract attention
on the homepage of LeclercDrive

Case example Implications for CPGS

J&B use an animated graphic
showcasing the product on
the homepage of the
LeclercDrive website
Maximize visibility at
“store”/category entrance as
consumer browse websites in a
complex way (favorite lists,
special offers, etc.)

Badoit puts a strong visual

advertisement before
entering the detail of the soft
drinks and alcoholic
beverages segments

SOURCE: http://www.leclercdrive.fr McKinsey & Company | 37

BE VISIBLE
Kellogg’s sponsored placement on the Tesco Favorites list

Case example Example of implications for CPGS

Gain access to favorite lists

▪ Sponsored ads in the
category section may not be
visible enough
▪ Similarly to “sponsored ads”
on web search engines,
appearing in a “sponsored”
section in favorite lists is a
reliable access to consumers

Kellogg's sponsored
placement at the top of the
cereal category within the
Favourites list for its new
cereal

SOURCE: http://www.tesco.com/ McKinsey & Company | 38

CONNECT DIGITAL MARKETING TO POINT OF SALES
Carling provides “buy it now” links to retailers
on their website
Case example Example of implications for CPGS

▪ Linking one’s website to

retailers online shops allows
to monetize traffic, and to
connect directly CPGs online
promotion to sales at
retailers, while maintaining
own sales at low cost (vs.
selling directly)

Carling displays a “buy now” offer linked to specific

retailers basket
Links spell out which retailers are currently stocking
the product

SOURCE: Carling website McKinsey & Company | 39

There is no clear winner yet, so CPGs must act quickly
to become early movers and winners online
Example levers to optimize e-catman capability and performance

A Understand the consumer purchasing journey:

Strategy and
▪ Role of online shopping for the consumer
consumer
▪ Consumer behavior towards online shopping
understanding
▪ Retailer online strategy

Leverage deep understanding of the online shopper behavior to best tailor strategy to this specific channel, for example :
B Differentiate promotion mechanics compared to offline, for example with privileged loading promotional offers
Assortment, D Innovate in promotional theatralization
C
price and
promotion D Adjust promotion frequency to online shopping frequency
E Maximize product/brand trial to generate “first purchase” and be part of the “previous command” / favorite list menu
F Identify online “KVI” products and consider differentiating your pricing strategy vs. in store

G Build editorial skills to optimize placement on the digital shelf – use rich product descriptions, user reviews/content, videos,
Product 360 degree images, secondary placements, listings, and advertising
information H Embrace the online showroom – partner with retailers to get additional creative control online through a strong shopper
experience, especially for CPGs with a broad portfolio of complementary products

I Be visible at store or category entrance

J Theatralize your aisle
Merchandizing
K Connect digital marketing to point-of-purchase purchase– utilize digital marketing channels (brand site, social, display) to
direct consumers to purchase

SOURCE: McKinsey analysis McKinsey & Company | 40