Digital has a way of disrupting the way we do business and the CPG retail model may be its latest victim.
As you browse the site, something stands out. Alice.com’s prices aren’t lower than its competitors some of the time, they’re lower all of the time. How is that possible?
The Retail Model
Let’s take a step back. Every day, you pay for the privilege of walking into a store, standing in front of a neatly arranged shelf of similar products and wait in line to purchase them. Some of us digital types pay for the privilege of searching well-produced websites and having our purchases shipped directly to our doorstep.
That payment, known as markup, is the backbone of the retail industry. The model has survived because it works. Farmers, craftsmen and manufacturers get to focus on what they do best and consumers get a more convenient shopping experience and a larger selection of goods. But the model is starting to show its age.
The emergence of mega-stores has allowed the retail channel to apply pricing pressure on manufacturers, simultaneously lowering profits for producers while limiting choice for consumers. If businesses want to sell their goods in large chains (which command a sizable chunk of the marketplace) they need to play ball, offering lower prices that the retail chains can use to drive competitors out of business.
How Alice is changing the game
Unlike other stores, Alice doesn’t charge markup. In reality, the consumer is buying directly from the manufacturer. Alice steps in to handle the transaction and ships the products, essentially playing matchmaker, but they don’t make any money on the process. The result saves consumers a bundle. The site also searches the web for coupons and automatically alerting and applying them to users’ shopping carts, so savings can get pretty substantial.
This is great for consumers. It’s also great for manufacturers who retain more control over their pricing and enjoy larger profit margins per sale. But how does Alice get their cut?
Understanding the Personal Goods Industry
The personal goods industry is rather unique. Most of the products are low-engagement (you don’t think that much before buying them) and you need them in continuous supply. I buy Old Spice deodorant and when I run out, I buy some more. Procter and Gamble (manufacturers of Old Spice) rely on the fact that I don’t sample new products every time I go to the store. Their goal is to turn me into a routine customer who doesn’t waste time thinking about which deodorant to buy.
The biggest threat to their business is if I am somehow knocked off autopilot and try a new brand. If that happens, I might like it more and become a Mitchum Man. CPG companies spend tons of money on discounts, promotions and samples to try to do just that. Individual purchases don’t create much value in themselves, but routine customers are a tremendous asset.
What Alice Offers
The Alice model focuses on the repeat consumer. When logged into the site, users can create a custom shelf of their favorite brands and products. Ordering (and reordering) is as simple as dragging a product off the shelf and into your cart. Alice can even learn your usage habits and automatically reorder products on a schedule. Every five weeks, you’ll be getting that toilet paper refill.
Essentially, once a user’s profile is configured, there is almost no reason to dive back into Alice’s full product selection. Because you don’t see competitors, there is far less temptation to switch brands than in a brick-and-mortar store.
In other words, an Alice consumer is far more valuable to Procter and Gamble than a CVS consumer. Not only is the profit margin higher, but there is less risk that a loyal consumer will be poached from one of their brands. This means less money spent on advertising, marketing and promotion.
This is how Alice makes money. They sell brands the opportunity to leverage these hyper-valuable consumers on their site. They also allow manufacturers to court consumers with offers, specials, programs and samples run on the platform. The Alice system even allows brands the ability to target their marketing spend towards their competitors’ loyalists. As such, Alice’s model is less like retail and more akin to a media platform, offering manufacturers the ability to promote and incentivize their products.
“The CPG industry spends billions of dollars each year trying to influence consumer behavior through traditional advertising, and much of that spending is wasted,” said Mark McGuire, president and co-founder of Alice.com. “In contrast to this ’spray and pray’ approach, Alice allows manufacturers to connect directly with consumers through targeted couponing, sampling and loyalty programs. The result is more accountability for the advertiser and more value for the end consumer.” (http://alice.com/press)
What this means for retail
How will traditional pharmacies stay relevant in the face of Alice’s “matchmaker” model? Could more industries adopt a similar concept? At this point, it’s unclear.
But the game is certainly changing and retailers will need to evaluate not only their digital and traditional footprint, but the value they add to consumers. It will need to exceed all that markup they’re charging if they hope to survive.