Arun Arora examines how e-commerce investment is transforming growth in FMCG
A recent McKinsey report highlighted e-commerce as an area that is poised to experience significant growth. Revenues reached roughly $4 trillion in 2022, and could grow to between $14 trillion and $20 trillion by 2040, a CAGR of seven to nine percent.
Grabbing that growth will require FMCG companies to aggressively move into next-gen e-commerce, which calls for the integration of a wide-ranging set of functions – including R&D, logistics, warehousing, marketing and sales – into a coherent digital capability.
As might be expected, there are no shortcuts to next-gen e-commerce. No single investment or campaign can unlock growth and turn an FMCG business into a market leader. But new McKinsey research shines a light on what leaders – those companies growing at 10 percent more than the sector average – are doing to rewire their e-commerce capability to become engines for sustained growth. They’re investing in technology and talent, and expanding into new channels to find and retain new customers, with a particular focus on shopping events like Black Friday.
E-commerce tech is a core to value
While generative AI has dominated the headlines of late, a broad array of technologies is infusing every part of the business, from R&D and customer service.
For this reason, FCMG leaders are investing proactively in technology to fuel their strategy, rather than prioritising cost-cutting. This focus on investment is clear in the analysis. Among lagging businesses – those in the bottom decile in terms of growth – cutting costs is a top-three strategic e-commerce priority. For leaders, however, it doesn’t even crack the top ten.
Leading companies are putting that investment to work in a number of ways. For example, FMCG market leaders – as with their counterparts across industries – are investing significantly in gen AI. Almost 20 percent of consumer companies are making gen AI their number one priority in e-commerce, versus fewer than 5 percent of ‘laggards’. In fact, around 25 percent plan to allocate over 10 percent of their e-commerce budgets to generative AI in the coming year. This isn’t a speculative bet: leading companies are deriving real value from gen AI, particularly when it comes to software development and product recommendations.
Beyond new frontiers like generative AI, omnichannel strategies continue to receive strong investment from leaders too. Companies are growing the number of touchpoints they have with consumers to make for more meaningful interactions with them. Direct-to-customer sites and social selling are key areas where leading companies are out-investing their peers. Sixty percent of leaders are investing in D2C sites compared to 54 percent of laggards, and 56 percent of leaders are investing in social selling compared to 48 percent of laggards. Looking specifically at B2C brands, that gap widens: 70 percent of B2C leaders are growing their investment in social selling compared to just 56 percent of laggards.
In short, brands are growing their market share by establishing a strong backbone of digital interactions with their customers – particularly when they’re expanding into more emergent e-commerce platforms like social media apps. And it’s clear to see why: across all respondents, nearly 40 percent of consumer leaders report that their digital channels are ‘much more profitable’ than their offline channels.
Using shopping days to drive success
About 50 percent of consumer companies in our analysis receive a significant amount of their annual e-commerce revenues (more than 11 percent) from shopping event days like Black Friday (for 15 percent of those companies, it’s more than 20 percent).
While the nature of shopping events is shifting – Black Friday deals are happening earlier and companies are creating their own event days – they are part of an effort to build up and exploit digital channels. In fact, about 61 percent of consumer companies cite digital channels as being with somewhat or much profitable than offline ones, similar to rates in the retail and consumer electronics sectors.
The pervasion of technology has enabled more sophisticated ways to reach customers, but it has also created a great deal more complexity. Brands that execute shopping events well, for example, often deploy ‘war rooms’ so that the right decision-makers – marketers, pricing experts, data scientists, and engineers – can track opportunities in real time and make quick changes as they’re needed, whether that’s to the platform, prices, deals, or messaging.
A/B testing and rapid-response systems are other hallmarks of brands that excel with shopping events. By establishing the right analytics programs to track how customers are responding, they’re able to adjust offers, or even send out tailored messages via email or social media to compel customers to convert. The most diligent companies will even pre-plan and test different scenarios in advance, assessing the outcomes to maximise their potential on the day.
Why FMCGs are bringing tech talent in-house
We’ve learned that you can’t outsource your way to victory in the e-commerce world. The need to coordinate systems across channels and functions, and the importance of rapid adaptation to innovate means that companies need to build up their own internal capabilities. This reality helps explain why leading brands are investing in building up their in-house tech talent bench, and reducing their reliance on external vendors. About three times more consumer leaders than laggards, in fact, are upping their investment in hiring technical talent, including data engineers, data scientists, and software developers.
While finding strong tech talent is always a challenge, this issue is often exacerbated by the fact that company executives often don’t have a clear view of what skills they need and what constitutes “good”. Outsourcing the issue to HR many times leads to poor results for the same reason. To overcome this, top companies are deliberate in identifying the problem they’re solving or opportunity they’re going after, then focusing on the skills and proficiency levels needed to address it. During this process, they often look for people with experience in the identified area to help build up the skills profile (and target them for hiring).
Power forward with next gen e-commerce
E-commerce is undergoing a revolution, and leaders in the know are paying close attention. Top of their list of priorities is investing in technology and skills to enable agile, large-scale, cross-channel e-commerce strategies – unlocking the power of shopping events, and reaping the benefits of gen AI. Get it right, and FMCGs put themselves in good positions for sustainable mid-to-long-term growth.
Arun Arora is a Senior Partner at McKinsey
