Beyond the Shelf. How CPGs Can Innovate to Bypass Distributors

Blog image Beyond the Shelf
May 22, 20246 min
Yaseen Burt photo
Yaseen Burt

The food and beverage (F&B) industry is in the midst of a distribution revolution. Traditional channels, dominated by powerful wholesalers and retailers, are squeezing profit margins for Consumer Packaged Goods (CPG) companies. In response, a growing number of CPG giants are exploring alternative routes to market, with a particular emphasis on leveraging the foodservice sector and direct-to-consumer (DTC) strategies.

This article discusses how the traditional distribution model for CPGs is being challenged by rising costs and the emergence of alternative methods of product distribution. It explores how CPGs can leverage the foodservice sector and implement direct-to-consumer strategies to bypass distributors to capture a greater share of the profit margin. We’ll also cover a few examples of how well-known CPGs are already implementing these strategies.

CPGs vs. Distributors: Navigating a complex partnership

Distributor relationship management is a persistent challenge for CPGs, often fraught with misaligned priorities and communication gaps. Distributors grapple with inventory management and logistics, while remaining unaware of market shifts and consumer preferences. This lack of alignment can result in ineffective product promotion and missed sales opportunities.

CPGs, on the other hand, struggle to maintain control over their brand message and ensure optimal product placement. They often lack visibility into distributor performance, making it difficult to identify and address issues promptly. This often leads to frustration and strained relationships.

To overcome these challenges, CPGs need to adopt a more collaborative approach with distributors on whom they rely as the last leg in a long and complex value chain. Regular communication, sharing of market insights, and joint development of pricing strategies are essential to fostering mutually beneficial, and profitable, partnerships.

The rising costs of traditional distribution methods

Beyond overcoming relationship challenges between CPGs and distributors, the prior also relies on a complex network of wholesalers and retailers to get their products onto shelves. This system comes with increasing financial and resource overheads. Distributors demand higher margins, retailers control shelf space and pricing, and the entire process is riddled with inefficiencies.

Further, the rise of smaller and far more agile companies is placing more pressure on CPGs to find new ways of reaching the consumer. Compounded, these challenges are forcing CPGs to rethink their distribution game plans. The goal? To bypass or reduce reliance on middlemen and capture a greater share of the profit pie.

Opportunities presented by the foodservice sector

The foodservice industry presents a compelling opportunity for CPGs to circumvent traditional distribution challenges. However, this in itself does not come without inherent obstacles, such as the need for robust e-commerce infrastructure and efficient supply chain management.

Yet, the potential benefits of bypassing distributors make it a worthwhile endeavour for CPGs looking for new and innovative avenues to reach the consumer. Here’s why:

  • Direct access to consumers: Foodservice establishments (restaurants, cafes, etc.) provide a direct line to consumers. CPGs can showcase their products in real-world settings, gather valuable feedback, and foster brand loyalty.
  • Menu innovation: Foodservice is a hotbed of culinary creativity. CPGs can partner with chefs and restaurants to develop innovative menu items featuring their products, driving demand and generating a buzz.
  • Increased visibility: CPG products used in popular dishes gain significant exposure. This can translate into increased sales in retail channels as consumers seek out familiar ingredients.
  • Control over brand experience: CPGs have more control over how their products are presented and served in foodservice settings, ensuring a positive brand experience.

Why foodservice loves CPG partnerships

For restaurants and cafes, CPG collaborations signal quality and trustworthiness to diners, boosting their reputation. Look no further than McCormick & Company, Nestlé, and PepsiCo, who have leveraged foodservice to expand their reach and drive innovation. These partnerships fuel menu innovation, tapping into culinary expertise to unlock new flavors and menu concepts previously out of reach.

CPG partnerships like these streamline operations, reduce costs, and ensure consistent quality across locations. By outsourcing select components, like Nestlé’s sauces or PepsiCo’s snacks, eateries can focus on crafting exceptional dining experiences. The result? A win-win scenario for both CPGs and foodservice businesses.

Direct-to-Consumer: The next frontier
CPGs are branching out into direct-to-consumer models beyond foodservice. This includes selling products directly to consumers via online platforms, subscription services, or branded retail stores. Gathering first-party data on consumer preferences and behaviors allows businesses to understand their target audience better and customize products and services accordingly.

CRM and other software platforms bridge the gap between CPGs and consumers. Engaging directly with customers fosters greater loyalty, trust, and stronger relationships, leading to increased customer lifetime value and larger profit shares. By engaging directly with customers, CPGs can quickly launch and test new products without relying on retailers.

The resulting data informs product development, marketing strategies, and customer engagement initiatives. Furthermore, CPGs can save money on slotting fees, promotional expenses, and inventory management by eliminating the middleman.

AI-powered innovation: The CPG shortcut to consumers

Artificial intelligence (AI) is emerging as a game-changer for CPGs navigating the complex landscape of foodservice and DTC distribution. AI-powered SaaS platforms are empowering brands to gather and analyze vast amounts of data, uncovering hidden patterns and insights that can drive innovation and growth.

Imagine a CPG brand using AI to analyze social media conversations about emerging food trends. Armed with this knowledge, they can partner with restaurants to co-create menu items that perfectly align with consumer cravings. AI can even help identify promising new ingredients or flavor combinations, sparking exciting product collaborations.

Beyond menu innovation, AI-powered platforms can optimize DTC operations, from inventory management to personalized marketing campaigns. By understanding individual consumer preferences, CPGs can tailor their offerings and messaging, fostering deeper connections and driving repeat purchases.

In the quest to bypass traditional distributors, AI is becoming the CPG’s secret weapon. By leveraging AI’s analytical prowess and predictive capabilities, brands can forge a direct path to consumers, unlocking new avenues for growth and profitability. The future of CPG distribution is here, and it’s powered by AI.

Charting a new course in distribution

The evolving landscape of CPG distribution demands a willingness to embrace change and explore new avenues. By strategically leveraging foodservice partnerships, DTC models, and AI-powered tools, CPGs can navigate the challenges of traditional distribution channels and forge a direct path to consumers. The result? Increased profitability, stronger brand loyalty, and a more resilient business model in the face of an ever-changing industry.

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