Sucharita Kodali is a power predictor when it comes to retail, with brands hanging on to her insights as guideposts for their next investments. The principal analyst with Forrester Research has built her career looking at the rise of e-commerce and consumer behavior both online and offline. She offered her latest forecast during Signal 2022, focusing on the impact of digital commerce on consumer packaged brands including the growth of gray market goods, cajoling companies to re-examine every facet of how they reach customers: even the very packaging itself.
“Most will promote their URLs in teeny, tiny itty bitty little fonts on the back of packages at the bottom, and they lead you to an e-commerce site that’s not even optimized for commerce,” she says. “So when you do that, it is highly unlikely that you’re going to deliver very much from a [direct-to-consumer] standpoint.”
Kodali also spoke at Signal 2012, where her cautionary takes were focused on the growing power of online retail and especially Amazon, and its more than 40 distribution sites. Kodali encouraged consumer-facing brands to consider harnessing local businesses into pickup spots for consumers as a way to compete. Today there are few retailers that don’t offer this option.
Kodali also pushed consumer goods companies to consider mobile in-store efforts in 2012, and urged brands to consider in-store marketing over social media. “What’s interesting is the place where most CPGs are leaning into the most, the social networks, the search engines, those tend to be less paid attention to, and more ignored,” Kodali stated.
You can glean even more takeaways from Kodali, both from her 2012 talk and her more recent address in July 2022. Think of them as a collective 20-minute crash course on how to super charge your consumer strategy for the coming year.
Signal 2012
Signal 2022
TRANSCRIPT: Sucharita Kodali at Signal 2012
This is basically one of the biggest shifts that’s happened in retail in the last decade. We broke it out by the different types of retail sectors. As you can see, the 2010 column has the share of the various breakouts of all of the different types of hard goods as well as bricks and mortar as well as the pure play retailers. The 2010 column shows the migration and then the change on the last column, two types of retailers gain share the warehouse clubs, and the online retailers.
When we think about the online retail sector really is the story of a single player. Simply to call Amazon the Walmart of the web, would probably be one of the biggest understatements of all time, because, in my mind, it really is much bigger than that. It’s actually about Amazon actually being the new Walmart. This is a little bit of that data to help support that. There are a few investment banking studies that have actually been put out. This is one from Baird, Wells Fargo has another one too. But the two basic data points here that are particularly critical is that versus bricks and mortar store, Amazon not only beats many of these retailers, the only exception being Costco and Dollar General on price. Let me say that again. Amazon is now beating Walmart on price. Did we ever think that we would come to a day that there would be anybody beating Walmart on price. But the other column is that even including sales tax in the calculation, Amazon still beats everybody on price. So that’s a lot of what the bricks and mortar challenge has been is that let’s push sales tax, and we can finally get to parity.
A significant part of the analysis there is what is it about Amazon that they’re able to do what they do, and enables them to price. Because so much of the conventional wisdom is, ‘They have that scale that really enables them to do that.’ But the reality is more about the mix of some of their businesses, and which, the audience knows, it really is highly correlated to the marketplace. The marketplace, for those of you who don’t know, is about 36% of the units that are sold on Amazon, and it’s products that essentially are not shipped or owned in inventory, it’s all of those offers that are on the right hand side of the slide. The beauty of that is that they’re incredibly high margin. In fact, such high margin that by my estimates, the amount of revenue that Amazon is making from marketplace is almost in lockstep with their entire profitability. We know that there are other profit pools of the company like advertising and some of its digital services and cloud services. That blue column is actually higher. A significant part of the way that they’re able to beat a lot of the incumbent bricks and mortar players is because they’re simply under pricing and using some of these other methods to drive that gain. That is one of the biggest reasons that we see this, which is virtually every major competitor of Amazon in the bricks and mortar world now engaging in some sort of a marketplace presence. The reality is, is that pretty much is the path to survival, because it is either this, or it’s this. That’s a pretty critical piece the understanding of why we’re seeing marketplace and the shift in that way.
A lot of the balance of power is shifting to Amazon in other ways too. A lot of it is about how consumers are choosing to spend more of their wallet share. Amazon Prime is absolutely a significant piece of that. We’ve done surveys over the last couple of years with Bizrate Insights and even in the last 12 months between 2010 and 2011, from 9 to 12% is the increase in the percent of online shoppers that are now part of a web continuity program. So apologies for the slide here. But basically, what this breakout is, is of those consumers that are now part of a web continuity program for the most part, it’s Amazon Prime because nobody really is part of ShopRunner. Yet it goes to the breakout of more than half of those consumers are actually choosing to spend much of that incremental dollar volume with Amazon.
The concept of private label is also something that they are absolutely committed to. It’s something that that you don’t really hear a lot about, but it is important to keep that in mind. This is their Amazon Basics line, which isn’t their CPG line, yet. But what it is, is essentially their line of consumer electronics products that they’ve got into the business of sourcing, manufacturing and now selling. I do envision that that paper and plastic probably wouldn’t be that far removed. So what does that mean for brands, and what’s the next step that that brands can do in this journey to ensure that you not only grow in the channel that’s so incredibly important to you, but that you still are able to maintain margin and grow the business that you need to. I have four points here on this slide. We’ll start and go through them each sequentially.
One is to do the most that you can to help support those bricks and mortar businesses like the grocers supporting ‘pick from store,’ and ‘ship to store’ programs for your key regional accounts. We really think that is probably one of the biggest ways that bricks and mortar retailers will in fact be able to compete with the distribution system of Amazon with its 40-plus distribution centers around the world, is to have these local businesses that that are able to essentially be the commercial pickup destinations. Partners like Buy.com are actually good partners for that for a few reasons. One is that they actually have a marketplace that’s much more friendly for merchants. But also Buy.com is now owned by Rakuten, and Rakuten is probably one of your biggest marketplace success stories globally. In Japan, they essentially have been doing this for years where they take online orders and ship them to 7-11s. That’s an incredibly impactful way to help cut costs, but at the same time deliver value and service to customers. Local stores can’t match the web selection. But they absolutely are good in-store pickup locations. Just to give you a couple of examples, that image on the left side of the screen, these are all products that were once sold in my local stores, my local big box stores, but their long tail assortment are now only available online. So the idea is to take those kinds of items, and instead of only allowing it on places like Amazon, perhaps shipping them to a local Safeway, or a local Kroger. This is an example on the backside of the screen of John Lewis, which is a department store in the UK that takes its online orders and gives consumers the opportunity to pick them up at Waitrose stores also in the UK. Some interesting ways of kind of communicating that.
Target is is definitely also a player and a partner in this entire journey. They weren’t referring to CPG in this letter that many of you have probably seen, they were probably more likely focused on some of those hard goods players that are more in the near term impacted by some of the showrooming that’s going on. Creativity is going to be essential in every category. That’s really the letter that that Gregg Steinhafel sent out. I believe I was talking to somebody at dinner yesterday that you guys absolutely saw this as well. But the idea being how can you help change and impact your assortment so that it’s unique to them. It really helps to eliminate some of the showrooming or reduce it in a way that is a win win win for everybody.
My third point is that to keep up the investment in your mobile in-store efforts. We’ve seen many many examples of that here today. It’s partners like Motive and AisleBuyer that are really the ones that will probably lead the charge in particular for CPG as well as for the retailers and in the bricks and mortar consumable space. They’ll be your best bet for improving personalization and getting the getting the most you can out of your shopper marketing dollars.
The last bit is that every trip that any of you take to San Francisco, please go meet with eBay because they are desperate to beat Amazon. And their X.Commerce initiative is probably one of the only left remaining opportunities of a company with scale and hunger and capability to provide another channel for you. They need you as much as you need them and they can really help you with those smaller customers to help neutralize some of these other threats. So that is that is my piece. So hopefully I made up a little bit of time here. And thank you all.
TRANSCRIPT: Sucharita Kodali at Signal 2022
John Battelle
Our next speaker came to signal more than 10 years ago. We invited this great analysts to give us an update on the retail landscape. On Signal 360, PG’s Signal.com, we will put that up there for you so you can take a look at what 10 years ago looked like. You can compare it with what you’re about to hear from Sucharita Kodali, VP and Principal Analyst at Forrester in retail. Welcome to Sucharita. Welcome back.
Sucharita Kodali
Thank you John. It is wonderful to be back. And I am honored, flattered. Usually when, when journalists call me it’s usually about, ‘Well, why is this technology not going to work?’ So I hope you guys don’t throw tomatoes at me because what I’m going to talk about is today’s retail reality, but I’m going to frame it in the form of 10 truth bombs. I divided those into three big buckets. We have digital commerce, tech and sustainability, and the economy.
We’ll start first with digital commerce.This is something that’s near and dear to my heart. It’s what I’ve been studying at Forrester for the last 20 years. And I did a survey last year with brands which I thought would be useful to share. This is just a high level set that on average, CPGs generate about 23% of their sales from what we call digital. Of that digital about half or 47%, as you can see from this slide comes from marketplaces. Marketplaces are, of course, it’s the Amazon’s in the United States. It’s Mercado Libre and Latin America, and so on. The issue, however, with marketplaces, and this is my first point is that marketplaces are a double-edged sword. You all know that there is all of the great value that comes from a revenue standpoint, it comes from a sales standpoint. But on the other hand, there are an equal number of brands that see the issues with marketplaces, that it is a rampant mass that is fueled by the gray market.
Now, the issue with the gray market is that a lot of it actually is a result of some of the promotional activity of CPGs themselves. So this is data from JungleScout. They do a survey with Amazon sellers every year. As you can see they actually ask the Amazon sellers, what is their business model. You’ll see here from this slide that about a fifth of all of Amazon sellers call themselves what’s called retail arbitragers, which basically means these are people who go buy things are on sale in physical stores with the intent to go sell them on online marketplaces later. I would estimate that this is probably about five to 10% of all of the units that are actually sold in physical stores that you think are going to end consumers that actually end up on online marketplaces. This is the definition of gray market.
The challenge there is that marketplaces end up being sales accretive, but not necessarily brand accretive. This is a huge issue for brands, because if you don’t get your houses in order, this is a massive liability. Now, what can you do about it? What are some of the opportunities we’ll talk about that. But one of the big things is to continue to embrace DTC, which I know has had a lot of challenges, particularly in CPG. But from that same survey that we did with brands who do embrace DTC, they found three major benefits. First, of course, is all of that awesome first party data. Eightyfour percent of brands say that they are getting all sorts of insights from a market research standpoint and a new product launch ability capability. The second is profit, because when brands actually do DTC well, they actually do see higher margins. Third is of course, all of that brand protection and the ability to insulate yourself from the gray market. Now, the issue is that so many CPGs have not managed to really nail the profitability piece and there are a number of reasons for that. They don’t see necessarily the marketing benefits. The reason for that is that they tend to not exploit one of the best parts of their entire value proposition which is the packaging.
When you look at any given CPG like this is you know, one P&G and example and another that is not. Most CPGs will do basically promote their URL in teeny, tiny itty bitty little font on the back of packages at the bottom, and they lead you to an e-commerce site that’s not optimized for commerce. When you expect when you do that, it is highly unlikely that you’re going to deliver very much from a DTC standpoint. That’s an important part of the challenge here. To me, it reminds me of the 1998 equivalent of a retail store, not telling its shoppers in a physical store that they had a URL either or place that you could go do business. I’m just saying that there is an opportunity. Maybe not this, as this is actually a text to buy, you know, kind of number, which is bigger than the font size of the brand name, but there is an opportunity to do more than what is currently done.
Number three, there is no media that’s more powerful than retail media. Here is my evidence. At Forrester, every year, we do a survey with consumers. We ask them of about a dozen different media tactics, ‘What do you pay attention to the most?’ and ‘What do you ignore?’ Every year, year after year in the United States and Europe and a number of regions around the world, the most paid attention to tactic? In-store ads. The least ignored? The one that they pay attention to and they least ignore is that that in-store ad. That points to the value of trade promotions, and the latent strength and the capability of retailer media networks. But what’s interesting is that the place where most CPGs are leaning into the most, the social networks, the search engines, those tend to be less paid attention to and more ignored. So when we look at where is the best ROI, it needs to be where you’re looking at with retailer media networks. There’s a lot that that still needs to be happening there. They need to improve their ultimately their execution. I would love to talk more about that. But in the interest of time, I’m gonna move forward, feel free to reach out to me, because there’s a lot more to say on that.
The second big bucket is tech and sustainability. We talked about the marketplaces with the gray market. The single biggest opportunity that brands have with respect to better managing that gray market is to engage in a technology that already exists, which is the individual tracking of goods. I know it’s an expensive transition, but this is crucial. And I’m talking about way more than just putting lot numbers on packages. This is individual tracking down to boxes and bags and having serial numbers that are unit specific. The reason for this is that without knowing exactly what goes where, to whom and when, you are not going to know where the leakages in your supply chain are. Those leakages are what ultimately lead to that gray market.
Number five, every ESG, which is environmental, social and governance, and this is perhaps one of the hottest terms in business these days, every single one of his ESG initiatives, while often with the noblest of ambitions are beyond what I’ll call green washing, they are green wishing. Which is where companies really want to believe that what they’re doing is environmentally sound, but what ultimately actually happens is very different. So a couple of examples. One is actually a P&G example with PureCycle, which is a fantastic technology, in theory. What it is, is about being able to recycle almost any type of plastic because you probably have heard that most plastic doesn’t get recycled. Now, the issue with PureCycle, though, is that it’s a technology that’s been around for like seven years and doesn’t yet have a live deployment anywhere. In fact, to the contrary actually has a bunch of short sellers who are skeptical about whether or not that it will ever meet the promise of what it’s supposed to be. Another example on the right hand side of the slide is a case study from a dips manufacturer in New Zealand that was looking to basically switch out all of its plastic containers to bamboo. The issue with bamboo is that even though it’s compostable, it can only be composted in an industrial composting facility, which most municipalities do not have. If you don’t have it, it just ends up back in the landfill. So the carbon footprint is no different then what you would have had with plastic. Now these are issues that the grocery industry really needs to grapple with because it’s such a huge part of the carbon emissions problem. Ultimately, the solution, part of it is going to have to come from business and enterprise. But a lot of it is going to have to come from government, it’s going to have to come from laws, it’s going to have to come from us, as voters advocating for higher standards. Some of those standards are going to be things like industrial composting facilities, or Styrofoam recycling machines. Yes, you heard that right. Styrofoam can be recycled, but very few municipalities have the capability of doing it. That’s why most of it ends up in landfills.
Number six, without having these standards in place, these government regulations, higher bar, what we end up with is that consumers just volunteer to consume less. That’s where you end up with ultimately a big problem for everybody in the retail industry, where if consumers just pull back entirely, that’s kind of the heart of your business. Unless you have a plan for how you’re going to manage things in the closed loop and the circular economy, unless you have a plan for how you are going to take advantage of the pie that’s left, that is massively problematic.
So number seven, this is one that could be heresy. At Forrester, one of the things that we do and we have tried, we really have tried to ask people, ‘How can the metaverse help you? What are your problems? What do you know about it? o you even see this being valuable anywhere?’ So we probably asked 100 executives atFortune 500 companies about how the metaverse could be impactful. And we literally asked this question, ‘How important is it to your organization on a scale of one to 10?’ Really, the answer that summed it up best was this. [Slide shows, “I’d say negative 5.”] The reason for this really has to do with things that are deeper here. These executives are people who are grappling with inflation, supply chain. These are people who are being asked to make statements on topics like abortion and gun control. They don’t really have time to focus on things like the metaverse. To them the metaverse is at best in-game advertising now. But this vision of this immersive world is a decade or probably two away. So that brings me to the economy.
One of the things that I want to point out, because you’ve probably heard over and over again, how imminent a recession is, what a catastrophe the economy is. Consumers are spending more in retail now than ever before in history. They are spending more than they certainly were in 2019. All of that inflation that you’re hearing about, the shopper is more than covering, and often covering with a smile on their face. We know this because they’re buying things like travel, and other discretionary items like food away from home. So the question you may ask is, why then do half of people think that the state of the economy is actually poor? The best answer for that is actually this data. It’s from the Economist and YouGov, which does a survey almost every week, fantastic data, if you can get your hands on it. The single biggest demographic differences in the data there was a field was associated with political affiliation. When you look at who voted for whom in 2020, three-quarters of Trump voters say that the economy is poor. Meanwhile, a quarter of Biden voters think the economy is poor. As a business leader, what does that tell you? Well, to me, what that suggests is that we need to be really wary of information around data like consumer confidence, because much of that could really be just noise. Instead, what we really need to be looking at is data on actual spend, because that’s probably more tied to the elasticity of demand. Just think about that. It also suggests that if and when the recession does come, it will probably be more on the milder side. You have to be thinking about if you think that an economic apocalypse is imminent, maybe you could be overcorrecting, at least based on some of the data that we have here.
Number 10. The human condition is going to improve when we educate people, not when we deliver. And I’m being frivolous here when I say like chicken, but it’s like Cheetos, and chocolate getting delivered in light speed is something that we really need to step back and think about what is going to help versus what are things that are nice to haves. When I stepped back and look at where we have funded business, we have funded so many retail startups in the last several years, much of which does go to sectors like quick commerce or fast fashion. But when we look at sectors like education, they’ve been pretty underfunded. Of those startups that have received $36 billion, a lot of them have been Chinese startups. We have a planet that is on fire, we have major issues. We need so many more people like Daniela Rios. But she and her future progeny, that’s going to come more from the $36 billion on the education side, not from the startups that are funded through quick commerce. What I would ask you to do is, as these startups approach you, is to have a high bar for them. Ask them, what is their purpose? What are they doing for society? Make sure that they themselves have answered, what is their mission that’s going to improve the world? Are they even carbon neutral? Because if the answer is that, no, it’s not or they don’t have a path to it, you need to keep looking and trying to find those players that that are improving the human condition.
With that, I am just going to wrap up, I’m already at time anyway, This is the summary. If you guys want the slides, or if you have any additional questions, feel free to reach out to me. Thank you again for having me.
