The eB2B opportunity for consumer-packaged-goods manufacturers

The route to market (RTM) has rapidly evolved for fragmented retailers such as small independent grocers, restaurants, and bars. Technology and e-commerce have reshaped consumer-facing business models and engagement through channels such as online ordering.¹“Next on the menu for food delivery,” McKinsey, March 29, 2022. And, in B2B, opportunity has emerged in the form of “eB2B” players²“Digital disruption: The rise of eB2B in fragmented retail,” McKinsey, January 14, 2022.—marketplaces offering independent businesses integrated solutions including a multicategory portfolio and a set of value-added services (VAS) that simplify the way they acquire products for resale in their stores.

This also presents an opportunity for consumer-packaged-goods (CPG) manufacturers, which can sell to marketplaces and reach fragmented retailers in the eB2B space. There are three principal archetypes shared by eB2B platforms:

• CPG manufacturers building digital platforms to sell their own products and those of others before expanding into VAS
• digital start-ups leveraging their speed and capabilities to anchor their value proposition on VAS, using CPG products as a hook to enter this space
• wholesalers, distributors, and retailers embracing digital to move their business model beyond brick-and-mortar locations

There are also multiple strategic postures CPG manufacturers can take. Should they lead by owning an eB2B RTM? Partner with other CPGs or wholesalers and distributors to co-own a platform? Or simply participate without ownership, coworking with eB2B platforms and selling directly to them? And because these strategic approaches are not mutually exclusive, what combination of options is optimal?

We’ve identified five components for determining the best eB2B strategy, starting with understanding the options and fit with current RTMs and then identifying what the platform brings to independent businesses, their approach to negotiation, and the capabilities they have and need to develop. Because the eB2B market is still relatively immature in many markets, there’s a window of opportunity: the faster decisions can be made, the better the terms may be.

A rapidly expanding eB2B market

EB2B platforms emerged in China around 2016, but their growth was accelerated by the COVID-19 pandemic, which limited in-person sales activity while demand for goods remained strong. Latin America and Asia are the most advanced eB2B markets, and the Middle East is ahead of Europe and North America. For example, in Latin America, BEES by Anheuser-Busch InBev has accessed about three million stores and is now expanding to the United States and Europe. In China, Alibaba LST and JD XTL penetrated more than 30 percent of mom-and-pop stores. And in Europe, METRO Markets directly supplies fragmented outlets through a digital platform (Exhibit 1).

1

These eB2B ecosystems are attractive to independent businesses such as fragmented retailers, end consumers, and CPG manufacturers because they present options that are broader and more comprehensive than what have traditionally been available.

For fragmented retailers, eB2B platforms allow them to develop a stronger value proposition, integrating elements such as loyalty plans, promotions, in-store execution, financial services (such as loans and insurance), and multicategory one-stop shopping. Many of these opportunities address long-standing pain points and issues of competitive disadvantage for fragmented-retail outlet owners.

CPG manufacturers and consumers similarly have access to features not previously available to them, such as live transactional data and live business-to-business-to-consumer (B2B2C) promotions to end consumers. Today, eB2B enables large and small CPGs alike to execute promotions to final consumers at an affordable cost and faster time to market (Exhibit 2).

2

Selecting a strategic posture

CPG manufacturers have three interrelated potential strategic postures they can adopt in eB2B RTM:

• Leading: owning an eB2B platform
• Partnering: joining with other CPGs or wholesalers and distributors to co-own an eB2B platform
• Participating: forgoing ownership of a platform but working with and selling directly to an eB2B platform (for example, a CPG manufacturer may tap opportunities in underpenetrated geographies by creating a commercial agreement with a global eB2B player)

These three strategic postures are interrelated because they can coexist in the same geography or channel and even with current RTM models; for example, a company with its own RTM model could leverage eB2B to reach customers that would otherwise be too costly to serve. But only a few companies are by default positioned to develop an eB2B platform because of the existing breadth of their client relationships, depth of distribution network, and coverage of a store’s share of wallet.

For everyone else, the investment for this type of platform is significant when infrastructure, promotions to drive engagement and activation, and inventory are considered. For that reason, only top CPG manufacturers, wholesalers, and distributors in a given market—or digital natives with significant funding—are expected to be capable of leading this disruption.

And because our experience shows it usually takes around five years to break even, we expect only a handful of platforms will succeed in most markets, along with potentially a few small, specialized players (such as those focused on cold chain, the management of perishable goods that require temperature-controlled environments).

One final consideration: given the nature of this business, eB2B platform builders look for multicategory portfolios from inception. And while negotiations to reach commercial agreements with a seller typically take time, eB2B platforms tend to buy other manufacturers’ products through wholesalers or distributors (even sacrificing margins) to ensure they have a compelling portfolio to offer their clients.

This means that whether manufacturers want it or not, their products will most likely be available through eB2B platforms. The best response is to be proactive in defining a strategy to become a direct seller to eB2B players, which gives CPG manufacturers a say on the product offering, strategy, and promotional activities, while potentially getting access to additional benefits such as data, in-app product placement, and in-store execution.

Key considerations for successful participation with eB2B marketplaces

CPG manufacturers should prioritize five considerations when developing a winning eB2B seller strategy:

1. Understand the options. Scan the market to understand the differences in the value propositions of existing eB2B platforms, identifying those with the features and engagement that best complement your objectives. There will be different profiles that produce potential trade-offs for CPG manufacturers, such as eB2B platforms with wider distribution versus those with greater share of wallet in a specific segment, platforms with great engagement features (such as loyalty plans) but lacking logistics or financial capabilities, or successful platforms that could develop a private-label portfolio in the same CPG manufacturer’s category.
2. Fit with the current RTM. Considering the available eB2B platforms and their capabilities, manufacturers will need to redefine their overall RTM strategy, including the potential implications of existing distribution channels. While the eB2B space is expected to keep growing, existing distribution channels will still dominate in the medium term. That is why it is critical to align expectations, clarify roles, complement reach, and avoid promotional distortions to amplify the impact of eB2B and minimize cannibalization. The potential evolution of this new RTM should be analyzed to design a long-term plan under different scenarios, such as the concentration of the market around one player, the potential bankruptcy of a current distributor, or the merger of an eB2B company and a distributor.
3. Manufacturer value proposition. Manufacturers should also identify what they have to offer eB2B platforms to understand how much value they can add and in what dimensions. This value proposition should be assessed mainly around the manufacturer’s assets (for example, market share, strength of brands, B2C digital marketing channels, in-store materials, and consumer knowledge); operational attractiveness (such as high value per kilogram or cubic meter); and capabilities (such as processes for understanding consumers, A/B testing, and in-store execution). It is recommended that CPGs map these elements and benchmark them against the industry to understand their competitive advantage and market power to prepare them for negotiation.
4. Negotiation approach. CPG manufacturers should develop a “give and get” approach that incorporates their leverage and objectives with the value proposition of eB2B platforms. This approach can consider dimensions including commercial, marketing, execution, operations, data, talent, and finance. The negotiations can then be informed by the CPG manufacturer’s objective (get) and clear offering (give) toward the eB2B platform (such as exclusive SKUs or support in digital marketing channels) based on the platform’s value proposition and the existing and expected eB2B services.
5. Capabilities for working with the channel. The growth of eB2B platforms is expected to grant both platform owners and sellers access to new data sets. CPG manufacturers will need to develop an “eB2B channel management” capability to get the most out of platforms today and in the future, with a focus on talent, data, and logistics. For example, CPG manufacturers will need people who can manage large amounts of data, convert data into insights and actions at trade and consumer levels, and orchestrate channels while operating with more agility and financial acumen.

In developing their strategies, CPG manufacturers will want to consider potential risks such as eB2B private-label portfolios, volume concentration, higher fees compared with wholesalers, and disruptions to current distribution partners.

While the eB2B market remains relatively immature in most geographies, we predict that exponential growth will redefine the landscape in the years ahead. That is why CPG manufacturers should act quickly. There is a window of opportunity for them to define their strategies, start engaging with eB2B platforms, and adapt their RTM and organizations on potentially better terms than if they wait until the environment is more mature.