Using traditional product packaging in e-commerce can hurt the bottom line. For many companies, the practice triggers unnecessary, counterproductive costs several percent of their total cost of goods sold (COGS).
This is a growing problem, with e-commerce rapidly becoming a much bigger slice of the business pie. U.S. online sales grew approximately 14% in 2017, while traditional sales climbed by 6%. Yet few companies have fully adapted their product packaging to e-commerce.
What might your company be sacrificing in terms of current and future product profitability? Likely far more than you have imagined.
Packaging designed for product presentation in stores is very wasteful in e-commerce. For example:
- Costly printed cardboard to display attention-grabbing graphics, which have no utility in e-commerce
- Excess headspace
- Air in boxes
- Need for popcorn, bubble wrap, or other inserts and components
- Blister packaging to prevent in-store theft
These wasteful elements also tend to frustrate e-commerce consumers, who must dispose of the excess materials and deal with the hassle of cutting through blister packaging — which is completely unnecessary when product is delivered directly to the consumer, rather than presented on a store shelf.
What does packaging tailored for e-commerce look like? For a couple of examples, see the images below.
Poor consumer experience with packaging can negatively impact consumer loyalty and market share. That hurts the top line and further erodes earnings.
As important, in e-commerce packages must move through many more touch points on the way to the consumer than is common in traditional retail. If a company’s product packaging was designed for stores, rather than for parcel and less-than-truckload shipping, the company is probably bleeding off profits on each step of the journey, from product damage and retailer chargebacks for noncompliance.
20% of 20%
The overall cost of packaging varies greatly by product and application, but it typically accounts for 10% to 30% of COGS. Meanwhile, costs incurred by failing to adapt packaging for e-commerce typically amount to 20% or more of a company’s total packaging costs.
Hence, 20% (approximate average packaging component of COGS) of 20% (waste within packaging spend) equals 4% of COGS. That is a ballpark figure, of course, but it is undoubtedly substantial. Why not shift it to earnings?
Readily available sources of e-commerce cost savings include:
Material costs. Packaging designed for e-commerce requires less packaging material per unit, fewer packaging components, and far less print.
Standardization and scale. Packaging SKUs can be standardized, allowing higher average order quantities on fewer package SKUs, while greatly speeding up and simplifying shipping prep.
Supply chain. Packages expressly designed for e-commerce tend to be smaller, yielding higher trucking utilization and reduced handling and labor costs. You will also cut damage losses during parcel and LTL, and minimize returns and e-retailer chargebacks.
Questions CFOs Should Ask
In the context of optimizing packaging, here are some things finance chiefs should consider:
“How rapidly is our e-commerce platform growing? What proportion of total sales do we expect will be online by 2025?”
“What are our current damage rates from online shipping? Total annual cost?”
“Can we use same box to ship multiple SKUs?”
“Have we explored doing away with traditional packaging altogether?” (For example, replace inner corrugated boxes/paperboard cartons with innovative containers designed specifically for the purpose.)
“How much cost from chargebacks by online retailers are we incurring for non-compliance with their packaging requirements?”
“Are we actively exploring ways to reduce e-commerce packaging and supply chain costs while enhancing consumer experience?”
For CFOs who want to champion investment in innovation that benefits both the consumer and the bottom line, packaging for e-commerce is uniquely fertile ground.
Vijay Kasi is a vice president and Tom Gildersleeve an analytics manager with global management consulting firm A.T. Kearney.