One of the few constants of the consumer industry is change. The sector has always evolved, especially in the years leading up to the COVID-19 pandemic. Consumer preferences have been shifting for several reasons: e-commerce has gained momentum, established players have been leveraging scale and reach to unseat mom-and-pop stores, and shopping malls have lost relevance as a primary shopping destination. The pandemic not only accelerated these trends but also added new layers of complexity. Consumers today expect increased convenience, higher cost competitiveness, and fast delivery to complement their omnichannel buying journey.
So what does this mean for consumer product and retail companies today? All aspire to provide the right products sustainably and delivered at lowest cost possible, at the right speed, and with a great consumer experience. However, to succeed in the omnichannel world, the conventional one-size-fits-all approach will no longer be sufficient. The key to winning in today’s environment lies in a segmented approach that clearly distinguishes offerings across consumer segments based on their respective requirements, product preferences, and locations, and that adjusts the supply chain structure to enable a differentiated strategy. And this segmented approach must extend beyond consumers. Any consumer product and retail company that owns brick-and-mortar stores or works with wholesale and marketplace partners must include these channels and customers in the segmentation to serve the end consumer in a holistic, omnichannel way.
In this article, we articulate a three-step approach to creating and implementing this consumer-back segmentation:
- Define the target consumer-back segments for the future supply chain as a combination of consumer requirements, product characteristics, and supply chain structure.
- Define the consumer-centric “North Star” vision and dimensions of differentiation for each segment.
- Create a differentiatied supply chain strategy, including the right network strategy, world-class planning and allocation muscle, omnichannel-fulfillment capabilities, and the right omnichannel operating model to enable each consumer-back segment.
1. Define the target consumer-back segments
The anchor of a consumer-centric strategy is a deep understanding of consumers. However, to create the right differentiated strategy, organizations need to understand not only consumer requirements and preferences but also how those factors intersect with product characteristics and supply chain structure.
Consumer requirements and preferences
Crafting a segmentation strategy begins with a clear understanding of who the relevant consumers are, including whether they are digital end-consumers, stores, or wholesale partners. It’s also important to understand factors such as their demographics, geographic location, and product preferences (Exhibit 1).
Companies then need to consider what consumers are demanding. Are they cost-conscious or premium shoppers? Do they prioritize speed of delivery or care more about sustainability? For example, consumers looking for a sustainably produced, organic-cotton garment are likely to value sustainability over speed of delivery. This could be supported by promising a slower but low-carbon-footprint mode of transportation and efficient packaging.
Once there is a clear understanding of consumer requirements and preferences, it is important to understand how these intersect with core product characteristics. The characteristics to consider are the velocity of sales and volatility (for example, demand ebbs and flows with seasonal products); the product type and availability, including how the product flows and how it is replenished; and how demand tracks with different consumer segments.
Supply chain structure
Based on consumer requirements and preferences and on product characteristics, the final element in understanding consumer-back segmentation is the current supply chain structure. Given the existing structure, including node structure and fulfillment methods, which consumer requirements can you deliver, and which consumer-back segments can you satisfy without changing the supply chain? Does this match your priority consumer-back segments for the business?
Providing optimal value in the omnichannel world will require tailored strategies for each part of this structure. That’s the core of the segmented supply chain strategy.
2. Define the ‘North Star’ vision and dimensions of differentiation for each segment
Once consumer product and retail companies have a clear understanding of the consumer-back segments, they need to define the vision and dimensions of differentiation for each priority segment. In today’s environment, it is critical to define which expectations to deliver to which customers to avoid common and costly mistakes, such as providing speed at a premium to consumers who value price, or building offerings that quickly become outdated and irrelevant. For example, the conventional model of promising free seven-day shipping across a wide variety of products and channels may drive consumers away from certain product types that they need more quickly.
Companies therefore need to tailor the promise to each product segment. Four dimensions of differentiation are typically considered in this process.
The proliferation of comparable products across channels and brands makes the retail experience a critical dimension for differentiation. Three key factors of service should be considered and carefully defined. Each has “hygiene” elements—those that must be included in the offering—as well as elements that are opportunities to drive competitive differentiation (Exhibit 2):
- Speed. While many companies are moving toward a standard of three- to five-day delivery in the United States and two-day delivery in the European Union, there is an opportunity to further differentiate on this dimension. For select products and geographies, for example, consumers with Amazon Prime can receive one- to two-day delivery (along with other members-only perks). As another example, Gorillas, a start-up based in Germany that is expanding into the United States, is offering ultrafast delivery (15 minutes or less) for groceries and convenience goods as a point of differentiation.
- Optionality and flexibility. In the omnichannel world, there are many ways to receive and return products—for instance, delivery to door, curbside pickup, or buying online and picking up in-store or from a locker. The opportunity to choose from a menu of options and the flexibility to change that decision can also be a key differentiating factor. Target, for example, quickly instituted curbside pickup during the pandemic. It offers this option for many in-store categories and also maintains an easy system for changing pickup dates and times based on consumer preference.1
- Convenience. Increasing consumer convenience through incremental offerings is another potential point of differentiation. One major home-goods retailer offers white-glove service and instructions for assembly or installation at different price points. Instacart offers the convenience of precision in delivery windows, including the option to pay for faster delivery times; conversely, DoorDash—which recently partnered with Safeway for grocery delivery—dictates an estimated delivery time without the option of selecting a precise time window. For some consumers, this level of differentiation is key in choosing one service over the other.
A deep understanding of consumers and their core products offers savings by allowing for a conscious adjustment of availability and supply. While world-class planning and allocation muscle will help companies furnish different stores with select SKUs based on geospatial demand data (rather than keeping every SKU in every store), additional options for differentiating from competitors include the following:
- End-of-life availability. What do you do with a product at the end of its life cycle? Do you cater to loyal customers by maintaining availability, or do you stop producing it to reduce supply chain costs and complexity?
- Limited access. This entails providing different levels of access to limited-supply products based on the expected long-term value of customers. Luxury-goods retailers have long been experts at this, deliberately limiting supply of high-demand products and offering them exclusively to established customers first.
As consumers have become increasingly accustomed to near-instant gratification, as well as high degrees of flexibility, optionality, and convenience when shopping online, consumer product and retail companies know well the costs associated with these decisions. Offering same- or next-day delivery and free returns (which consumers are also now used to), fragmenting the flow of products to allow optionality, and providing incremental convenience factors all take a toll on overall cost efficiency and profitability. As companies define their strategies for differentiation, they need to take a holistic view and understand the fully loaded cost of delivering the strategy.
The extent to which a company acknowledges environmental, social, and governance (ESG) issues is an increasingly important dimension of differentiation. Of the respondents to our 2020 pulse survey on consumer sentiment on sustainability in fashion, 57 percent have made significant changes to their lifestyles to lessen their environmental impact, and more than 60 percent report going out of their way to recycle and to purchase products in environmentally friendly packaging.2 As consumers increasingly emphasize social and environmental commitments, we are also seeing companies more publicly declare their dedication to ESG issues. Companies can choose to pursue sustainable options for products (for example, glass packaging or multiuse materials) rather than less expensive one-time options (such as nonrecyclable plastic). Similarly, consumer product and retail companies may choose to partner only with sustainable or socially responsible suppliers, even if that increases the cost of goods and demands deeper supply chain tracking.
3. Create a differentiated supply chain strategy
The third and final dimension of this segmented approach for consumer product and retail companies is creating a differentiated supply chain strategy (Exhibit 3). There are four critical enablers to consider.
Creating the right network and ecosystem strategy to support the supply chain strategy and necessary inventory flows
The location of your manufacturers, vendors, and distribution nodes will be critical in enabling a differentiated, multispeed supply chain strategy. For example, ensuring you have the right nodes in the right locations (for example, warehouses, stores, or dark stores) is fundamental to achieving the speed and flexibility you may seek.
Developing world-class planning and allocation muscle
In addition to the right node placement, the right inventory must be allocated to and placed in these nodes based on the segmented inventory product flow. These two enablers must work in tandem to successfully deliver speed, flexibility, and convenience options at the lowest cost for consumers and the company.
Enabling omnichannel fulfillment capabilities
As consumers engage with companies in a more omnichannel manner—such as by buying online and picking up in the store—it is critical for companies to enable the right omnichannel fulfillment capabilities to deliver the right product to the consumer via their desired fulfillment method. In addition, the complexity of fulfilling order profiles—ranging from single units for e-commerce consumers with millions of ship-to locations to full cases or even full pallets for wholesalers and distributors with only a few ship-to locations— requires new capabilities in warehousing and transportation.
Integrating the right omnichannel operating model
Finally, as with all transformations, ensuring the organization is rooted in the right omnichannel operating model is critical. Using apparel as an example, the traditional model separating wholesale and e-commerce business is no longer relevant; consumer product and retail companies need to take a combined, coordinated view to maintain sufficient fluidity and visibility across channels and throughout the business.
Consumer expectations have changed dramatically. To succeed in the omnichannel world, the conventional one-size-fits-all method will no longer be sufficient. Consumer product and retail companies first need to define what their consumers are looking for and align on a clear vision for serving them through a differentiated strategy. Only after doing a data-backed exercise to define these service models and trade-offs can they reap the full benefit of building and optimizing a differentiated, omnichannel supply chain.