bonnieykong

From Amazon to Apple, technology has disrupted traditional commerce companies, where technology solutions have enhanced the experience of the product or services for consumers. However, certain industries, such as consumer packaged goods (CPG), have remained relatively stable. In the past, innovation in CPG has been focused on products’ functionalities (e.g., a fast-action dish soap, or advanced whitening toothpaste). Despite CPG’s brand legacy and R&D capabilities, younger consumers are increasingly drawn to emerging micro-brands, small-scale brands tailored to niche markets (The Economist, 2018). In the rise of consumer-technology solutions, how do CPG companies stay relevant in delivering consumer-centric solutions? The answer lies with direct-to-consumer (DTC) brands.

Overwhelmed with options in your local supermarket

What is a direct-to-consumer distribution?

Direct-to-consumer is the practice of selling to consumers directly, without the need of a third-party retailer or middleman. Adopting a DTC model has numerous benefits, including reducing costs associated with working with a middleman and furthering a company’s brand equity, where companies can further develop their brand relationship with customers on an e-commerce website or brick-and-mortar store.

Direct sales also allow for a better understanding of customer data (Chonsksi, Caldbeck, and Jordan, 2019). When selling to a third-party store, consumer brands know how much volume they are selling to a store, but they do not know how well a certain product is selling in terms of individual sales. Thus, DTC sales enable greater understanding of sales data and valuable insight for marketing purposes.

An example of a successful DTC company is Warby Parker, the online retailer of prescription glasses and sunglasses. Founded in 2010, the company emerged as an online-only model, where customers received different styles of glasses in the mail to try at home, and purchase the style that best fits them (O’Connell, 2012). Priced at $95 per frame, the glasses were substantially more affordable than glasses in stores. Furthermore, the company established a donation program, where for each pair of glasses purchased, a pair is donated in partnership with the nonprofit, VisionSpring. Thus, consumers associate Warby Parker with affordable styles and social consciousness, messages of the brand that may not be conveyed through a third-party retailer. Warby Parker has also grown its presence to stores across the United States, extending the brand experience.

How traditional CPG companies can innovate

While many retailers are adopting a DTC model, it is difficult to see this model applied with CPG brands because they are stapled goods. Household products have become part of ones’ routine, so there is little room for large-scaled innovation as such changes may not be accepted by consumers. At the same time, new “startup consumer brands” are emerging with an emphasis on an online-store or subscription model (Duguay, 2018).

The shift to e-commerce reflects changing consumer behaviors, where consumers are increasingly attached to their computers and mobile devices. With the rise of grocery delivery services, it is evident that consumers find grocery shopping a hassle. As a result, these emerging consumer brands complement the shift in consumer purchasing habits.

CPG companies can learn from this model by expanding their marketing channels and service delivery methods. While CPG brands have a presence on television and digital media, many consumers discover products and deals through their local supermarket. As a result, the supermarket plays an integral role in consumers’ perceptions of the brand. A DTC model would give CPG companies greater control of customers’ interaction with the brand. One way to accomplish this is through pop-up stores. For example, St. Ives, the skincare brand under Unilever, launched a pop-up store in New York City, where customers can purchase products and mix customized scents. Similarly, Kellogg’s, the iconic American cereal brand that has stocked grocery stores for a century, has opened a café in New York, where patrons can have a bowl of cereal with toppings. Both examples prove that traditional brands with a long legacy can continue to innovate by directly reaching the customers.

CPG brands are also partnering with emerging brands to expand their portfolio capabilities. In 2016, Unilever purchased Dollar Shave Club for $1 billion (Cao & Mittleman, 2016). Although Unilever has an existing portfolio of shaving products, the company was interested in Dollar Shave Club’s subscription model and its capability of developing a strong following quickly. Similarly, Colgate acquired a minority stake in Hubble, an online subscription company for contact lenses, in 2018 (Copeland & Terlep, 2018). With Hubble, Colgate is exploring innovative ways to deliver its legacy products (think a subscription model for toothpaste). With Amazon and Walmart expanding their footprint and capabilities, traditional CPG companies are looking for innovative solutions to remain relevant.

Implications for other industries

Aside from CPG companies, it would be interesting to see whether a DTC model applies to other traditional industries such as household appliances and electronics. Unlike CPG brands, there is not a high turnover for the product. You will not go through a washing machine as you would go through laundry detergent. Household appliances and electronics innovate with new functionalities are advancements in their existing technology (think a faster food processor). The challenge is that the average customers are not enticed to purchase the newest model of an appliance item because they are satisfied with a product that serves its fundamental purpose. As a result, household products are not agile to customer needs.

However, a DTC model can still be applied in this industry. Purchasing appliances is still an experience, and many consumers want to see the product before purchasing it. Similar to Warby Parker, household appliance brands can have dedicated retail stores to showcase their line of the product instead of going through a third-party retailer (e.g., department stores). Another benefit of having dedicated stores is that customers can ask specialists questions about the product. Household appliances can also consider an e-commerce model, where users can test a product at home before committing to purchase the product. The limitation of this proposal is the cost of shipping and greater risks associated with larger products.

Looking Ahead

DTC distribution has proven to be successful, especially for emerging brands that have gained a loyal following. By selling products directly to the consumer, brands can control the messaging of the product. When it comes to CPG brands, there is are a lot of avenues for further growth including launching pop-up stores or partnering with emerging brands. Ultimately, a better understanding of the customer will position CPG companies for greater growth.

References

Cao, J. (2016, July 21). Why Unilever Really Bought Dollar Shave Club. Retrieved March 8, 2019, from https://www.bloombergquint.com/business/why-unilever-really-bought-dollar-shave-club#gs.0ippbt

Chokshi, S., Caldbeck, R., & Jordan, J. (2019, February 25). A16z Podcast: Who’s Down with CPG, DTC? (And Micro-Brands Too?). Retrieved March 8, 2019, from https://a16z.com/2019/02/15/cpg-dtc-microbrands-grocery-online-offline-commerce/

Copeland, R., & Terlep, S. (2018, July 02). A Toothpaste Club? Colgate to Invest in Online Startup. Retrieved March 8, 2019, from https://www.wsj.com/articles/a-toothpaste-club-colgate-to-invest-in-online-startup-1530537593

Duguay, A. (2018, March 15). If The Consumer Is Strong, Why Are CPG Brands Struggling? Retrieved March 8, 2019, from https://www.forbes.com/sites/forbesfinancecouncil/2018/03/15/if-the-consumer-is-strong-why-are-cpg-brands-struggling/#3bfb3fcb4728

O’Connell, V. (2012, July 19). Warby Parker Co-Founder Says Initial Vision Was All About Price. Retrieved March 8, 2019, from https://www.wsj.com/articles/SB10000872396390444097904577535111565440718

The growth of microbrands threatens consumer-goods giants. (2018, November 08). Retrieved March 8, 2019, from https://www.economist.com/business/2018/11/08/the-growth-of-microbrands-threatens-consumer-goods-giants

A review of the article “Effects of Recommendation Neutrality and Sponsorship Disclosure on Trust vs. Distrust in Online Recommendation Agents: Moderating Role of Explanations for Organic Recommendations” by Wang, Xu, and Wang (2018)

Ever wondered why a pair of 5-inch stilettos, completely out of your price range, shows up as the first product option when searching for a pair of trainers online? Much of the answer lies in how recommendation agents (RAs) – essentially the algorithm tool that sits on many online stores’ and aggregator’s websites – reflect neutral or bias outcomes. Neutral RAs will display outcomes based solely on the user’s requirements. However, biased RAs manipulate the outcomes to promote sponsored products, irrespective of its relevance to the user’s requirements. In the adjacent example, a user searching for “rainbow socks” is first presented with a sponsored box-set of socks and, below that, the product aligned to his/her requirements.

The Study

This study explored the extent to which consumers perceive their psychological contract – a “contract” that online users establish to guide their trust and interaction with websites – to have been violated through the manipulation of search outcomes to favour sponsored products. The outcome of this violation is a loss of trust or even creating distrust in the recommendation agent. A second study looked at how the disclosure of sponsorships or the display of explanations can restore lost trust or reverse distrust that has settled in. Data was collected by means of a lab-experiment during which the researchers manipulated the order of search outcomes to simulate bias and neutral RAs and then surveyed participants on trust and distrust.

Findings

Neutral vs bias: participant’s had higher levels of trust and lower levels of distrust in neutral RAs when compared to bias RAs.
Sponsorship disclosure: participants had higher trust in a biased RA with sponsorship disclosure than a biased RA without sponsorship disclosure. However, sponsorship disclosure did not lower distrust.
Explanations: participants had higher trust in a biased RA with explanations than a bias RA without explanations. Again, distrust was not resolved by displaying explanations.

The same study was completed in Hong Kong which confirmed the findings from the USA and that the findings are applicable cross-borders.

Practical applications

We see the roles of recommendation agents and sponsored advertisements come to life on social media platforms such as Instagram. As a celebrity with more than 120 million followers, Kylie Jenner is an influencer. Her followers would pay attention to the products she uses. However, based on her Instagram posts, her followers do not know whether or not a product is sponsored. In the example below, we do not know whether Lyfe Tea is a recommendation coming from Jenner or a third-party sponsor. Based on the findings of the study, individuals are less likely to trust this product promoted by Jenner, making her post a potential example of bias without sponsorship disclosure.

Kylie Jenner’s non-disclosed sponsored ad

Conversely, there are numerous examples of paid sponsorships on Instagram. Below, we see a post by a social media influencer, where it clearly states that the post was paid for by Volvo. In a snap survey in a recent Masters-level class at RSM, more individuals trusted the below social media influencer over Kylie Jenner because of the disclosure that the post was paid for by Volvo. By seeing that this is a sponsored post, individuals know up front that it is biased.

Strengths of the study

The study researches a relevant topic, due to the popularity of e-commerce, and takes a holistic approach in the experiment design. The researchers clearly identify the factors associated with trust, including biased and non-biased sponsorship disclosure, and neutral recommendation agents. The experiment itself focuses on purchasing a camera within an ecosystem designed by the researchers, where they can better manage participants, as opposed to having participants go on a third-party e-commerce website.

Weaknesses of the study

The study doesn’t really reflect consumer decisions – consumers make purchase decisions online based on a tradeoff between perceived benefit, perceived risks and trust(Kim, Ferrin, & Rao, 2008). Even when their trust has been violated, they may still proceed based on their perception that the benefits exceed the risks or distrust they have.

It may also not be appropriate to generalize outcomes of the study which is derived using students as data subjects. Hanel and Vione (2016) found that, when testing personal or attitudinal variables, such generalizing is problematic as students vary randomly from the general public.

Implications

The fact that individuals would have higher levels of trust in neutral RAs over biased sponsored-disclosed RAs indicates that individuals are more likely to trust recommendations that are sincere, over paid-for advertisements by a company where the motive for recommending the product may be for financial gain. In the digital age, we may not know who our peers are online, but there is a level of trust established with the majority or popular opinions.

In regards to motives for consumer-focused businesses, this is an opportunity to create online communities for products. Glossier, a US-based cosmetics startup company, began as a platform where users share reviews on different beauty products. This evolved into Glossier-lined products, which were developed through the reviews on their platform. Although their business model has evolved to be more commercial-focused, the platform still exists. The members of the Glossier community are neutral RAs and have been integral to the development of the company.

Ethical implications should be considered in the role of recommendation agents. In the example of the Fyre Festival, concert organizers paid social media influencers to promote that they will be attending the event, creating hype that is seemingly organic. While these social media organizers were paid, they did not disclose this fact to their fans; influencers were promoting a concept to the masses without knowing much about the event themselves. Eventually Fyre Festival fell apart, and some individuals believe that the social media influencers are to blame. In fact, the improper use of influencers is now the subject of a $100m class-action claim against the organizers. Thus, having sponsorship disclosure is also a matter of ethics. While this can be detrimental to a business, the practice better informs consumers.

References

Hanel, P. H., & Vione, K. C. (2016). Do student samples provide an accurate estimate of the general public? PloS one, 11(12), e0168354.

Kim, D. J., Ferrin, D. L., & Rao, H. R. (2008). A trust-based consumer decision-making model in electronic commerce: The role of trust, perceived risk, and their antecedents. Decision support systems, 44(2), 544-564.

Wang, W., Xu, J., & Wang, M. (2018). Effects of Recommendation Neutrality and Sponsorship Disclosure on Trust vs. Distrust in Online Recommendation Agents: Moderating Role of Explanations for Organic Recommendations. Management Science.