The Blurring Lines Between CPG & Retail
By Bob Johns, associate editor
CPG companies are increasingly entering the retail world through their own brick-and-mortar stores and online sales as they continue to expand the brand and seek added-revenue streams.
It used to be if you wanted a product produced by a CPG (consumer packaged goods) company you had to go to a specialty retailer who carried the product or to a big-box store. Now CPG companies are expanding their brands through their own stores and e-commerce sites. Adidas has opened more than 2,000 stores and is continuing to expand with plans to open hundreds more worldwide. According to Adidas’ 2012 full-year results, retail sales were up 14%, and same-store sales increased 7% year over year. This is phenomenal growth in retail right now. However, the physical store is just one way Adidas is expanding its brand and revenue. According to its global sales strategy, Adidas is focusing on its own retail locations, e-commerce, mono-branded franchise stores, shops-in-shops, joint ventures with retail partners, and cobranded stores with sports organizations and other brands.
This seems to be a trend with sports apparel companies, with Nike taking a similar approach. In its 2012 fiscal year, Nike’s direct-to-consumer business, including stores and e-commerce, grew 26% and has become a $3.9 billion sales channel. It operates over 800 stores internationally, with just under half being located in the U.S.
Under Armour is achieving growth through a multipronged approach. According to its annual report, Under Armour is focusing on wholesale by expanding its footprint with major retailers to create shop-in-shop dedicated floor space with exclusive displays, lighting, and imagery. Additionally, the company is focusing on expanding its direct-to-consumer channel with its e-commerce site and brick-and-mortar locations, which has grown from 21% to 29% of total revenue in the past 2 years. In fact, the company is using the new store model to accelerate growth specifically in the footwear and women’s apparel markets, according to its 4th quarter 2012 earnings webcast.
This phenomenon of CPG companies expanding through their own retail channels is not restricted to sports apparel companies. Perhaps the best example of this is Apple. The company opened its first Apple store in 2001 and now has over 400 around the world. In 2012, the stores represented nearly 12% of overall revenue. And, the growth figures seem to indicate the company actually suffers from a lack of stores, based on foot traffic of over 372 million, an increase of 74 million people with only 33 new stores having opened, according to infoapplestore.com. Apple execs have always considered the e-commerce site and stores to be a chance to expand the Apple culture and offer the customer a unique buying experience while expanding the brand’s influence. In response, Microsoft has gotten into the mix by opening stores in major markets across the U.S. and Canada to try and replicate Apple’s success.
Even companies like M&M’s, whose parent is Mars, Inc., have gotten into the mix by opening flagship locations. M&M’s has opened M&M’s World locations in New York, Las Vegas, Orlando, and London to not only drive sales, but to promote the brand and create a buzz. Obviously the profit margins can also be higher since the CPG controls both the manufacturing and distribution of the product.
Retailers already face intense competition from other retailers. As CPGs continue to expand their retail presence, retailers may choose to no longer carry the CPG’s products, instead of either being undercut by the CPG’s own stores. In the same vein, though, CPGs have been in an ongoing battle as retailers continue to expand their own brands, usually placed right next to the CPG’s products in similar packaging at a cheaper price. This may be one way CPGs can combat retail brands, but I don’t see myself running out to a Kraft store for mac and cheese anytime soon.