Fast-Rising E-Commerce Could Jolt Package-Goods Giants

Bernstein Report Finds Niche Brands Gobble 'Shelf' Space Once Owned by Leaders

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E-commerce once may have been a minor factor for packaged-goods, but it's fast becoming a significant market that could shift market share to smaller players and disrupt pricing and other key parts of the industry's business model, according to a new report by Sanford C. Bernstein.

Top selling cereal at Amazon
Top selling cereal at Amazon

The Sept. 25 report estimates e-commerce sales have risen to 9% of category sales for health products, 5.9% for beauty care and 5.7% for pet care. Those numbers are all up substantially and, in the case of pet products, more than double levels of five years ago, according to estimates developed using Bernstein consumer surveys and proprietary programming tools.

For much of the category, e-commerce still accounts for 1% or less of sales. But Bernstein predicts online sales will reach $222 billion -- or around 25% of U.S. consumer-packaged goods spending overall -- within five to 10 years, said analyst Ali Dibadj.

Driving much of that growth will be Amazon, the firm predicts. "We believe strongly that Amazon's push into CPG is in its early innings," the report said, noting that Amazon will continue to use its Prime and "Subscribe and Save" programs to build share.

That has potential to reshape the CPG market by giving smaller and niche players higher market shares, pressuring prices and margins, and creating demand for new packaging and shipping options.

The top five sellers in manual toothbrushes and breakfast cereals are widely different at Amazon compared to store-based retail, according to the report, based on July 25 sales at Amazon and Nielsen data for the four weeks ended June 7. The niche Radius Totz and Dr. Collins Perio toothbrushes cracked the top 5 at Amazon, but Colgate and Procter & Gamble Co.'s Oral-B products dominated in stores. Bob's Red Mill Gluten-Free Whole Grain Rolled Oats were the top seller on Amazon, while General Mills' Honey Nut Cheerios were the top seller in stores.

"E-commerce seems to be democratizing 'shelf space' as top brands do not dominate the e-commerce channel as much as they dominate brick-and-mortar retail," the Bernstein report said.

Top seller at offline stores
Top seller at offline stores

Pricing is also far less predictable on Amazon than offline. The report found the price for a four-pack of 8.9-ounce Cheerios ranged from $7.22 to $19.98 during a two-week period in July on Amazon. Such price swings could pose problems for CPGs as they try to keep products in stock at Amazon, and could undermine pricing or create margin pressure on CPGs from offline retailers, Bernstein said.

Mr. Dibadj said it wasn't clear why the prices moved so much, but Bernstein found them using various customer profiles, and he doesn't believe General Mills was driving the decisions.

The rise of Amazon could also raise costs by creating different needs for package design and direct-to-consumer shipping, among other things. And while Amazon doesn't have CPG private-label goods now, it does in many of its more-established categories.

Fast-rising online CPG sales may seem enticing on the surface, the report said. "But its implications will be enormous. Given that lower prices, specialized niche selections and delivery convenience seem to be the key drivers for consumers to purchase online, the outcomes for large incumbents may not be entirely positive."

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