IBM has warned consumer packaged goods(CPG) companies to embrace e-business - or face the consequences.

The IT giant says that companies mustwholeheartedly embrace the new world of e-business, or face severe consequences rangingfrom take-overs to the forced departure of senior managers.

IBM's global manager for CPG industries,Giovanni Linzi, says that technology advances mean there are endless ways for CPGmanufacturers to connect to retailers and consumers. These connections can significantlyimprove business efficiency, performance and profit, as well as build strongerrelationships with the ultimate buyers of CPG products.

Explaining that the CPG market faces a'continual barrage' of issues, Linzi said growth and shareholder value are the two biggestconcerns in the sector. "The CPG sector has not grown as fast as the general marketand several of the world's biggest players, for example, have failed to hit publiclyagreed business targets. These failures have forced the replacement of CEOs, and massiverestructuring."

It is these huge growth challenges that aredemanding new strategic initiatives. For example, Unilever has said it is to slash itsbrand portfolio from 1,600 to just 400 'power brands', while there is increasingglobalization of business processes across country boundaries to achieve global scale andefficiencies.

Substantial changes lie ahead

"I believe that the CPG market will besubstantially different in five years time," says Linzi. He sees that:

  • A number of CEOs will step down due to their inability to drive growth;
  • There will be more consolidation in the CPG sector - up to five in 2000 - creating a handful of CPG companies with the necessary product bandwidth to sell effectively on-line. Others will opt for alliances with non-competitive companies;
  • CPG loyalty programmes will become more common, and will be just as successful as retailer programmes by linking with non-competitors and retail partners to create 'super cards';
  • CPG companies will replace older, dying brands with new Internet only brands which could win a chic status with consumers;
  • CPG companies and retailers will work together on direct marketing based on loyalty programme data;
  • CPG companies will link their web sites to retailer loyalty schemes, so that consumer visits to the web site are rewarded at the check-out; and
  • There will be significant outsourcing deals in CPG companies as they focus on their core business.

Looking at potential consolidation in theCPG sector, Linzi comments: "I see three levels in the CPG market - Tier One, TierTwo and Tier Three. The relatively few companies in Tier One are global businesses with$25bn plus annual revenues. They will increasingly run on truly global business processes.Some current CPG businesses in Tier Two will make the leap to Tier One - but many willslip back to the medium size Tier Two - or even to Tier Three, which is inhabited by localor niche players.

"Tier One companies could buy out TierTwo operations to bolster their portfolio and scale. Indeed, the CPG market will be one ofextremes - massive at one end, small at the other - and it's quite possible that currentTier Three companies will become agents for those in Tier One by handling theirmanufacturing or distribution requirements."

Outsourcing is likely to rise rapidly upthe CPG business agenda as major players decide on how they must focus on their coreskills to drive growth and value. "This will be part of a massive focus on growth andcost-cutting," says Linzi. "Other initiatives will include the launch ofInternet-only brands, where there has already been some progress, and CPG companies willalso be influential in developing co-operative consumer loyalty card schemes with othernon-competing manufacturers and retailers.

"This could be particularly useful forSMB retailers. For instance, a recent study from the financial consultant Stern Stewart& Company in the USA revealed that, on average, companies that outsourced IToutperformed the stock market by about eight per cent for a period after the agreement wasreached. CPG companies will wish to take advantage of these factors.

"There will be new, nimbler entrantsusing e-business, new business processes, and new markets. If CPG companies aim at the'emerging market' of small-to-medium retailers, e-business could be vital to achieving newefficiency levels with this fragmented channel."

No real wonders on the web

IBM also unveiled the results of a surveyof nearly 600 web sites run by over 100 CPG manufacturers around the world. Among thefindings were:

  • One in ten had no web site at all, and a quarter had just one site;
  • Most sites were not registered with the main search engines; and
  • Less than nine per cent offered on-line shopping.

According to Linzi, the research indicatesthat only a few CPG companies have carefully thought through their web strategy andimplementation: "Today, an attractive interactive presence on the web isn't a luxury- it's a fundamental necessity for business success.

"These results support some recentresearch handled by McKenna for IBM, which found that CPG companies are at an evolutionarystage with the Internet. They're somewhere between having a static, information-only website and using the web to increase business process efficiency. There is a non-homogeneousimplementation of e-business capabilities, both within the industry and within thedepartments of an individual company.

"Very few are at the most advancedlevel of using the web as the basis for new business processes and for out-and-oute-commerce, but everyone is racing to move very quickly."

He highlighted that CPG companies using theweb are doing so either for business-to-business, or business-to-consumer activities."Either way, the CPG world is being shaken by increasing tremors of uncertainty.There are some big shocks on the way, and one of the biggest is e-business. CPG companies- and it doesn't matter how big or small they are - must embrace the networked world ifthey are to be left standing on their own two feet, let alone profitable. Smalleroperators are likely to lead the way in terms of total service delivery by e-business, andbig operators can't afford to be left behind.

Professor Merlin Stone, IBM professor ofmarketing at the Surrey European Management School, added: "This survey shows howmuch progress CPG companies are making with managing their customers through the Web - butalso how far they have to go. I advise every senior marketing manager in these companiesto read it."

Brand promotion - a new era

IBM also believes that the CPG sector facesa dramatic change in the way that brands are promoted. IBM's European marketing directorfor CPG Industries, Gordon Scorer, says that brands are the lifeblood of CPG companies,and warns that traditional brand promotion is being fragmented and dissipated by thegrowth in retailers' own label products, as well as by growth in new channels such as theInternet:

"The question that the major CPGplayers have to ask themselves is: 'how does this affect all that we've invested in ourbrands over many years?' Bear in mind that the world's biggest advertiser is a CPG company- Unilever - and that two of the top three US advertisers are also CPG companies. Butisn't it telling that Procter & Gamble has described traditional advertisingstrategies as blind - 'who are we talking to?', 'deaf - we have no way of listening to ourconsumers?', and 'amnesic - we have no idea what messages our consumers have previouslyreceived?'."

He adds that after 50 years ofground-breaking development of state-of-the-art advertising, from TV to direct mail tobillboards, the CPG industry is now at a promotional cross-roads. He highlights the factthat Unilever and Procter & Gamble are now assessing co-operative brand advertisingwith some Internet service providers - e-marketing their brands. "As traditionalpromotion methods become ever less cost-effective, CPG companies need new strategies andchannels. They spend a massive amount on promotion - some ten per cent of revenue, or$80bn - but now have to find new ways of conveying new messages."

Scorer estimates that around 20 per cent ofa CPG company's advertising budget could be required for e-marketing and new channels by2005 - around $20bn of spend. IBM is already working with the CPG industry to developdigital branding strategies because developing relationships with consumers is a tough newtask that demands complex technological and branding skills.

E-business, according to Scorer, cancorrect the diminishing effectiveness of traditional promotion methods by increasing thenumber of consumer 'touch ' or access points for communication (such as the Internet,on-line kiosks, interactive television, call centres and loyalty cards). "Thesechannels are based on two-way, rather than one-way, traffic and can be very useful forcapturing lots of consumer data to start building more rewarding relationships," saysScorer.

He highlights the view that ten per cent ofconsumers generate 40 per cent of the profits for a CPG company: the trick is knowingwhich ten per cent to focus on. "There will be more spent on banner advertising andsponsorships on consumer-focused web sites. The real art is persuading someone to click onthese ads to get some reward, possibly through some offer tailored to that visitor. But todo that effectively, you need to know something about them, hence the co-operative workwith retailers."

E-business also impacts positively onsupply chain relationships between CPG manufacturers and retailers. With the high numberof manufacturers and retailers, there is a massive number of relationships to be managed -and e-business connects them all electronically, enabling the effective use of sales andcustomer data to make meaningful decisions in near real time.

Says Scorer: "CPG companies tend notto know a lot about consumer behaviour. Retailers do, so e-collaboration is a way forwardto reducing inventory and improving customer service. Continuous replenishment andvendor-managed inventory are currently being used by some manufacturers and retailers tosmooth the supply chain - but there is still immense opportunity for business and revenueimprovement through e-procurement."

Web site survey

The far-reaching survey undertaken by IBMof nearly 600 web sites run by over 100 major consumer packaged goods companies revealsthat the depth, breadth and sophistication of their 'dot.com' presence varies widely - andthat one in ten of these companies, which produce some of the world's most visibleconsumer brands, have no web site at all. In IBM's opinion, this wide variance reflects alack of coherent web strategies that could have a serious impact on the future businessprospects of some CPG manufacturers. The survey, completed at the beginning of 1999, isIBM's second survey of CPG web sites. The first, which took place at the start of 1998,sampled roughly 100 web sites run by 65 CPG companies. The most recent research foundthat:

  • Just over ten per cent (11) of the 106 CPG manufacturers had no web site at all, while nearly a quarter (24 per cent) had just one site. Just over a third (34.6 per cent) had between two and five web sites, 12 per cent had six to nine sites, and 22 per cent had a substantial Internet presence with ten or more web sites;
  • The majority of the web sites are not listed across the major search engines (ranging from AltaVista and Yahoo to InfoSeek, Lycos and HotBot). Just two companies were registered with all eight search engines, while 15 were registered with seven engines. Most of the surveyed sites are ranked poorly by the search engines, with only one in six (14 per cent) or less scoring better than 11 hits;
  • Less than nine per cent of web sites (50) offered on-line shopping, marginally up on the seven per cent recorded in IBM's earlier survey;
  • Nearly a third of the web sites collected market research data, particularly the personalities of web visitors captured by nearly half of those sites that do collect data), their consumption habits or product preferences (nearly 59 per cent of relevant web sites), and their Internet surfing behaviour (43 per cent of relevant sites);
  • In terms of feedback/interaction with visitors, one in four of all the web sites offered e-cards (a virtual postcard via e-mail). Nearly a quarter of the sites (134 or 23 per cent) provided competitions, including computer games with prizes, while promotional materials, such as baseball caps, T shirts and sport bags, were found at just over 12 per cent (74) of sites.

Linzi warns CPG manufacturers that theirhighly variable Internet presence, on-line facilities and attractions for visitors, andoverall presentation could spell disaster for those who lag behind the on-line revolution:

"From the first basic, but vital, step- being registered with the main search engines - through to the finer nuances ofattracting and communicating with visitors, only a few CPG companies appear to havecarefully thought through their web strategy and implementation. With more and more peopleaccessing the Internet, with all its great potential benefits for supporting corporate andproduct brands, I'm alarmed that so many of the sample appear to be under-represented - ornot visible at all - in the new electronic marketplace."

Linzi says that a number of CEOs in the CPGsector may even be forced to step down because their businesses have not adapted totoday's digital world, for instance, by launching Internet-only brands, and there will betremendous pressure from investors for new business models that are dot.com-aligned.

Linzi adds that business and technologytrends are likely to see CPG manufacturers and retailers linking together to ensure astrong brand presence and fulfilment service for net surfers: "I think it will leadto some major consolidations in the CPG industry because there are only a handful ofcompanies that have the insight, foresight and courage to look ahead - and do somethingabout it. It's common knowledge that some of the world's biggest CPG makers and marketersare under pressure; for example, Unilever recently announced that it was to cut its brandportfolio radically to concentrate on what it calls the power brands.

"At IBM, we see a move towards closerco-operation between retailers and manufacturers as the former demand unique capabilitiesand services from the latter. Today's business model for developing and promoting CPGbrands could well be near the end of its life as new channels, such as the Internet,create new ways of talking with, and understanding, consumers."

Web analysis by food category

IBM's analysis of the web sites alsoincluded their characteristics by product category. The following are those relating tothe food and drink industry.

Alcoholic Beverages (excludingbeer): 11 companies with 49 web sites. Nearly 35 per cent of these sites offeredenhanced download facilities for screen savers, wallpaper, audio files and so on, comparedto the CPG sector average of 25 per cent. They offered better than average facilities foron-line shopping, with the offer of consumer collectibles eight per cent higher than theaverage. There was far greater use of games with prizes (ten per cent vs. five per centaverage), substantial use of retailer locators (22 per cent vs. 16 per cent average),consumer market research data capture ran at ten per cent above the average, and clubmembership is offered on 12 per cent of sites (vs. the eight per cent average). Thissector is worse than the average when it comes to offering on-line communicationfacilities (18 per cent don't vs. the 14 per cent average), and also has a below-averageoffer of FAQs (14 per cent vs. 23 per cent).

Beer: 13 companies hosting 43 websites. A third of these web sites offer chat rooms or message boards but have abelow average use of Internet communication facilities (21 per cent of sites had nofacility vs. the 14 per cent average). They also have fewer sites offering FAQs -frequently asked questions - (12 per cent vs. the average of 23 per cent). Screen saversand other downloads are offered by 37 per cent of sites (average is 25 per cent), and theyoffer more promotional merchandise than non-beer alcoholic beverage sites (30 per centhave shops). They offer more sophisticated games (the number of 'shocked' {Shockwave} websites is 12 per cent higher than the average), but have a below average collection ofmarket data (14 per cent vs. 29 per cent average).

Bread, cakes and biscuits: 12companies with 23 sites. Bread and cake producers make good use of collectingmarket data (39 per cent against 29 per cent average), but visitor guides and informationfollow-up facilities are below average (13 per cent of sites vs. 26 per cent average),while FAQ sections, found on 17 per cent of sites, trail the average of 23 per cent. Theyhave more limited search facilities for web sites (13 per cent against a 20 per centaverage), but search facilities for retailers outstrip the average (nine per cent vs.three per cent). Over half these sites offer shocked games.

Canned fruit and vegetables: threecompanies with six web sites. All offered on-line communication tools, and halfoffered prizes, downloads or promotions. Only one site offered shocked games, while searchfacilities are set up on half the sites. Two sites collected data and offered FAQs, butjust one site offered a visitor guide, chat facilities and a shop.

Cereals, flours and flakes: fourcompanies with eight web sites. Seven sites offered on-line communication, whilehalf the sites offered user instructions and other promotions. Customer service tools werevery limited - one company offered a visitor guide, another a FAQ section. Only onecompany provided entry to a competition, two sites linked visitors to retail shopsstocking the products, and half the sites collected market data.

Chocolate products: six companieswith 30 web sites. These show strong youth-orientation with a third of sitesoffering games or entertainment, compared to an average of 29 per cent. This sector hadthe lowest use of visitor guides (seven per cent vs. 23 per cent average), while userinstructions and FAQs are notably below average (just ten per cent offer them). Searchfacilities are also uncommon, with just ten per cent vs. an average of 24 per cent.On-line communication is available on two thirds of these sites but 23 per cent have noconsumer feedback function (average is 14 per cent). Promotions (excluding competitions,downloads and shops) feature on far fewer sites (13 per cent, against an average of 25 percent) but they have an above average number of home shops (ten per cent vs. eight per centaverage).

Coffee and tea: nine companies with23 web sites. This segment has a significant e-commerce presence with one thirdof all sites selling on-line. Retail locators are also offered on 30 per cent of sites,significantly above the average. Around four per cent of sites did not offer on-linecommunication facilities, and they also tended to offer more search facilities (four percent against the three per cent average). Far fewer coffee and tea sites used promotionalitems - four per cent against an average of 13 per cent. However, competitions and clubsare widely used (30 per cent of sites against the average of 23 per cent for competitions,and 13 per cent vs. the average of eight per cent for clubs) - but games use is belowaverage. There was variation in customer service facilities: 17 per cent of sites offeredvisitor guides, against an average of 23 per cent, but user instructions and recipes arevery popular (offered by 43 per cent).

Edible oils and fats: threecompanies and nine web sites. Nearly half the sites collected market data, whileseven provided usage instructions on their sites. Search facilities are common, with foursites hosting FAQs or search facilities. Three sites offered promotions, additionalinformation and site maps, but communications facilities are limited and few sites haveon-line/feedback options. Fewer of these sites offer entertainment and games (22 per centvs. average of 28 per cent) and fewer downloads (11 per cent vs. 25 per cent average).

Frozen and convenience food: sevencompanies and 13 web sites. These rely heavily on recipes and promotions (61 percent of sites offer recipes vs. an average of 39 per cent), while 46 per cent providepromotions against an average of 25 per cent. They have a higher than average penetrationof shops (15 per cent vs. eight per cent average), while the number of sites collectingconsumer data is high (38 per cent vs. an average of 29 per cent). Visitor guides areunder-used (15 per cent vs. an average of 23 per cent), as are FAQs (15 per cent vs. theaverage of 23 per cent) and on-line communication tools (69 per cent vs. 79 per centaverage). No retail locators were found and games with prizes are a feature (15 per centvs. an average of five per cent).

Health foods: four companies and 16web sites. Extensive availability of on-line communication gives visitors accessto personal consultation. Additional information provided by 62 per cent of sites (average23 per cent), while search tools for health information are provided by 37 per cent ofsites, vs. an average of 23 per cent. This segment is below average with on-line productoffers and retail locators (six per cent vs. an average of 14 per cent). Just one siteoffered promotional merchandise, and the segment was below average with games (22 per centvs. 28 per cent average) and competitions (12 per cent vs. 23 per cent average). Not onesite had a 'chat ' facility.

Ice cream: five companies and nineweb sites. These are sophisticated and feature-rich sites with on-linecommunication facilities. Half the sites had product-specific information, six publishedretail locators and two offered retail store search tools. Entertainment is popular, withnearly half the sites providing games or competitions as well as promotional merchandise.One site offered a restricted ice cream delivery service, and one third of sites usedShockwave technology.

Lemonades and spa water: 11companies and 46 web sites. These companies make below average use of market datacollection (22 per cent vs. 29 per cent average), but provision of chat facilities isslightly higher (17 per cent vs. 11 per cent). Customer service aspects, especially userinstructions, are also below average (11 per cent vs. 38 per cent average), as are on-linecommunications (65 per cent vs. 79 per cent average), search facilities (six per cent vs.24 per cent) and retail locators (four per cent vs. 14 per cent).

Cooked meats: six companies and 14web sites. Entertainment dominates over information or communication. Unilever'sPepperami site has no product information, while on-line communication is available atonly half of the sites. However, this segment has more on-line shops (29 per cent vs. 21per cent) and retail locators are found on 21 per cent of sites. Collectibles shops arepopular (21 per cent vs. 13 per cent average), while collecting market data is a priority(36 per cent of sites vs. average 29 per cent). Games offering prizes are also well used,as are competitions (36 per cent vs. average 27 per cent), downloads (36 per cent vs. 25per cent) and on-line clubs (14 per cent vs. the average of seven per cent).Understandably, recipes are strongly used (43 per cent vs. an average of 25 per cent).

Dairy products: four companies andfour web sites. All offered on-line communications, but none had an on-line shopor offered downloads, chat facilities, FAQs, games or clubs. Half the sites offeredvisitor guides, user instructions, additional information, competitions and otherpromotions.

Pasta products: two companies andseven web sites. Half the sites provided on-line communications, but there wereno FAQs, chat forums, message boards, games with prizes, on-line shops, web searchfacilities, retail locators or clubs, Recipes are very common (57 per cent vs. an averageof 38 per cent), but gathering consumer data is not that common with just 14 per cent ofsites doing so.

Sugar confectionery: ten companieswith 19 web sites. Entertainment dominates these sites which means thatservice-related functions, such as user instructions, extra information and on-linecommunication, were below average. Notable features were the prevalence of 'shocked' gameswithout prizes (42 per cent vs. 22 per cent average), competitions (47 per cent vs.average of 23 per cent), and promotional shops (21 per cent vs. 13 per cent average). Website search facilities were rare and no retail locators were found on any sites. They alsoshowed below average collection of consumer data (16 per cent vs. average of 29 per cent).

Sugar: four companies and five websites. None of the surveyed web sites offered chat facilities, games, downloads,on-line shops or clubs. They typically offer information about the company, via FAQs, anddirect communication is available.

Vinegar and sauces: three companiesand four web sites. Entertainment features strongly, with chat facilitiesavailable on half the sites. Recipes are published on all the web sites, with additionalinformation offered by three out of the four. Half also offer search facilities, and halfalso visibly capture consumer data. No home shops were noted, but on two sites, visitorscan order promotional merchandise.