CPG Subscriptions: The Evolution and Opportunity
Unpacking the Global CPG Subscription Evolution
Global consumer packaged goods (CPG) companies were once considered brand behemoths immune to stagnation. Their investment in advertising to bolster brand equity and strong relationships with retailers worked for over 40 years. But in the last 10 years, with the onset of direct-to-consumer (DTC) ecommerce models and changing consumer preferences and behaviors, traditional CPG companies have seen sluggish revenues.
The surge in direct-to-consumer (DTC) ecommerce—with U.S. spending this year expected to total between $850 billion and $930 billion—has amplified the limitations of the traditional retail model on which CPG companies have built their businesses. Without a direct sale to the customer, they lack the ability to tap into valuable customer data or even begin to build relationships to cultivate loyal shoppers.
The pandemic laid bare just how far behind the CPG industry is, but that hasn’t stopped them from trying to mimic the DTC model. For example, PepsiCo took its first step towards DTC ecommerce, launching PantryShop.com and Snacks.com so stuck-at-home customers could curate their own snack bundles. And in the UK, Heinz launched Heinz to Home, allowing customers to build bundles of their favorite beans, sauces and soups. The Heinz initiative, unlike PepsiCo’s, is a subscription-based model—arguably the future of DTC.
It’s a model that has long caught the eye of large CPG companies—Unilever’s purchase of native subscription brand Dollar Shave Club in 2016 is an early example. Yet five years later, these brands are still struggling to gain a foothold. In order to successfully build subscription-based DTC businesses, global CPGs need to focus on two core questions: How can brands break through their legacy models? And which subscription model is going to lead to the most return on investment?
How do you break the status quo?
Global CPGs are built to scale mass market products through a mostly singular sales funnel: through brick and mortar or online retailers. As a result, they are limited in their control over price, customer data, or even bringing a new product quickly to market.
CPG’s recognize that consumers are attracted to young, fresh brands and product categories, but building a brand from scratch is challenging, particularly for billion-dollar companies with entrenched legacy systems. It also requires expertise in areas not previously needed for CPGs, like how to manage churn, last-mile delivery, customer relationship management, and digital marketing.
To overcome those myriad challenges, many CPGs have turned to M&A. Following the Dollar Shave Club acquisition, other CPGs quickly followed suit. In 2017, Nestle acquired Blue Bottle Coffee, which offers subscriptions on its site. And P&G acquired personal wellness brand Native.
In addition to acquisition, many CPGs also launched their own startup incubators or venture arms to jumpstart their entry into subscription ecommerce. In 2019, L’Oreal’s tech incubator launched a new subscription-based site called Color & Co, an at-home hair color brand to compete with startups like Madison Reed. Venture arms are on the hunt for the next big thing. And with good reason: from 2017 to 2019, almost 90% of large CPG’s growth came from their small to medium sized brands.
For CPGs that opt to grow or build ecommerce subscription brands, there is another key question that needs to be answered in order to follow a path of growth: which subscription model is the right one to pursue?
Which model wins?
For any company building a subscription program, it’s important to decide which model makes the most sense for the product line, brand and customers. There are three buckets that subscriptions tend to fall into: replenishment, curation, and access.
For most CPGs, replenishment is the most straightforward choice. With replenishment, customers sign up for a recurring subscription for goods they shop for regularly. Not surprisingly, categories like beauty and grooming, pet supplies, baby care and home essentials are sweet spots for the set-it-and-forget-it replenishment model. Low price and convenience are key to its success.
Curation, or subscriptions that include a variety of personalized products placed in a box or a bundle, are usually intended to surprise and delight. Birchbox pioneered this subscription model with its monthly deliveries of beauty samples. For large CPG brands that have struggled to build connections with consumers, the curation model allows for personalization and convenience, thanks to the rich volume of data it yields. However, churn is higher (53% vs. 49%) for boxes, perhaps because it is less of a utility and more of a novelty.
Access resembles a membership model, where customers pay a fee to use a company’s goods or services. While this model may be less applicable to many CPGs, there are ways to experiment. In 2019, Tide launched a branded laundry service, where customers prepay through an app and have their laundry picked up and then dropped off at lockers or drop boxes.
But is it worth it?
For years, global CPG brands have been dipping into the subscription space, but they’ve yet to take advantage of the many benefits. DTC ecommerce and—subscriptions in particular—allows brands to control pricing and discounts, reduce dependency on retail partners, acquire valuable data and create a closeness to the customer.
Ultimately, as customers continue to move away from traditional in-store retail shopping and lean into ecommerce and fresh, often mission-based brands, global CPGs must follow. They need to be as nimble as the upstarts that have been paving the way.