How FMCG companies can use E-commerce to broad-base their portfolio

A few days ago, I had published a report on how FMCG companies can use E-commerce to launch new products and even new categories. One of the questions I received on this report was, shouldn't companies focus on strengthening their core rather than launching new products left right and center? 

That question misses the point of the report completely. The point is that the emergence of e-commerce, turns an "OR" situation in an "AND" situation. It is very obvious that all companies need to focus on their core, and without that it doesn't matter how many new products they launch. But resources and risk for new launches in an ecommerce set up can be significantly lower than in a GT (general trade) set up and therefore a company can afford to launch a multitude of products in e-commerce in a relatively short time, without diluting its focus on the core. 

Some products (either because of the consumers it caters to or because of its price point or several other reasons) can't use this ecommerce launch strategy and for them a traditional launch is more suitable. But several can. Not all products launched in ecommerce will succeed. But the ones that fail will have taken up very little resources, and it makes it easier to identify products that do succeed and divert greater resources towards them in tandem with their ramp up. 

Finally, e-commerce will not help you if you launch a product which does not fit well with your brand. Patanjali noodles failed not because they couldn't manage the GT supply chain, but because the brand values did not connect with the product.  

Following is an excerpt from the report

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How e commerce and digital helps

E commerce can help by accelerating new product launches and entry into new categories/sub categories.

 

Solves distribution targeting

 

If one launches a niche or premium product, in the GT environment one needs to decide where to distribute it. The obvious solution is to of course distribute it in large towns and within that the large ‘A class’ outlets.

 

However, there is no telling what might work where. It is possible that for some reason not fully understood, the product may work in only a particular region in India, or that it may work in Tier 1 towns better than metros, contrary to expectations. If this happens, there is unfulfilled demand on the one hand and slow moving stock on the other.

 

If the product is launched on ecommerce however, the company does not need to bother getting its distribution strategy right. The product will be sent to the customer directly as and when he orders.

 

Solves the question of launch quantity

 

A problem related to that of which outlets the product needs to be launched, is how much of it needs to be fed into the pipeline. Depending on the outlets that the company decides to service, an initial quantity will have to be supplied to the retail stores. Now the company has two options

• The company can do a regional launch, say in only one state, so that the number of stores it needs to supply is low and accordingly the initial production is also low. This will reduce the risk of stock write off if the product does not sell. However, it will slow down the speed to market. And while acceptance in one state certainly reduces the failure of a national launch, it does not eliminate it.
• The company can do a national launch, in which case the retail stores to be covered will be higher and the quantum of stock write off it if it does not work is higher.  

A digital launch solves this issue. A very limited quantity can be produced and the stock can be held centrally in just a few locations across the country, rather than thousands of stores thus reducing the quantum of stock write off if the launch fails. As and when customer orders come in and the company gets a sense on the demand, production can be ramped up accordingly.

 

Enables a large number of launches

 

Launching a large number of products in general trade is problematic because the salesman has a limited bandwidth in terms of number of SKUs. If a salesman goes with too many SKUs for order taking, focus is lost, and he is unable to sell enough lines per bill (i.e. number of unique products per bill).

 

That is why many companies have “split routes” i.e. each salesman sells only part of the company’s portfolio in order to get better focus and enable higher number of lines sold per bill. This happens as a salesman gets a limited amount of time with the shopkeeper and has to run through a long list of items. In several companies two or more salesmen of the same company visit the retail store selling different parts of its portfolio because no one salesman can do justice to more than a certain number of items.

 

In a scenario where the salesman struggles to meet targets for number of lines sold per bill for the existing portfolio, it will become very difficult to also convince the shopkeeper to buy several new products as well in the limited time that is there for a visit (the salesman needs to cover ~40-50 stores per day, and the shopkeeper too does not want to spend any more time than necessary).

 

In an ecommerce set up, this issue does not arise. There is no salesman time constraint in this set up, and therefore this is not a limiting factor in terms of the number of new launches that can be handled at once.

  

Ad spend can be variable

 

To have effective launch marketing for a brand in a mass medium such as TV, there is a minimum cost – a minimum number of spots that the ad needs to be run for in order to make an impact. Since TV channels have mass reach, their ad rates are determined by their viewership. But for niche/premium products, there may be only a partial overlap between the target audience for the new brand and the total viewership for the channel.

 

The company has to pay based on rates calculated based on viewership, thereby, there is a lot of wasteful ad expenditure here. TV is the cheapest advertising medium for mass market products which have scaled up to a particular size; however for niche/premium products which are just starting out, the TV ad budgets can be quite high, and justified only if the product succeeds in gaining traction. If not, the ad spend is a write off.

 

Digital advertising on the other hand (Youtube, Google, ecommerce portals such as Bigbasket, Amazon and social media websites such as Facebook and Instagram) can target users much better, and the minimum spend required can be lower here vs. TV. Moreover, the ad spend can be gradually ramped up as the sales of the product increases and if the product doesn’t gain traction, the unproductive ad spend is much lesser.

 

This means that many more products can be launched if advertisement is done via digital media using the same budget vs. a TV campaign. Given a certain failure rate (which can be pretty high for new launches) the innovation cycle can be accelerated using digital ad spends because the value at risk (in terms of ad spends which yielded no benefit) from a failure is lower (the reader may remember that the same is true for value at risk from stock write off too is lower as explained earlier).