The “No Middleman” Middlemen

Soap.com debuted last month, becoming the latest entry in the burgeoning segment of online consumer packaged goods retailing.

Co-founded by thirty-something entrepreneurs Marc Lore and Vinit Bharara, Soap.com debuted with about 25,000 products from 900 brands — everything from paper towels to detergent and batteries to body lotion. The proposition: prices that are on a par with or lower than those of the store up the street; speedy, straight-to-your-door delivery; and free two-day shipping on orders over $49.

By the end of the year, Soap.com expects to offer more than 40,000 items and is targeting 100,000 by the end of 2011.

Lore and Bharara are no strangers to the e-commerce arena. The two cut their teeth at Diapers.com, building that business from the ground up beginning in 2005. Annual sales tallied $182 million in 2009, and that site expects to sell $300 million in diapers, baby wipes, bottles, formula and more this year. In less than five years it has established itself as a customer service frontrunner, ranking second only to Zappos.com, according to independent rating agency StellaService.

Convinced they can leverage the success and goodwill they’ve nurtured at Diapers.com, the two executives — friends since the fifth grade — are wading further into the sea of CPG. “We’re listening to our customers,” says Lore, CEO of Quidsi, the parent company of Diapers.com and Soap.com. “Moms have been nudging us to grow with them and their families.”

Larry Joseloff, vice president of content for Shop.org, the online division of NRF, acknowledges the strength of the subscription business. “Small, pure-play retailers that have great customer service and can do great things on a small budget could make a real impact.”

Efficiency makes the difference
Truth be told, Lore and Bharara take great pride in the hands-on approach they’ve applied to the business and the systems they’ve developed to support it. “We’ve built an iron-clad infrastructure consisting of a sophisticated back-end and logistics network,” Lore says. “Service and selection are our value proposition and we believe the opportunities for growth with Soap.com are considerable.”

A lot of companies “start on the front end and then do the back end,” Bharara says. “We did the opposite. We built proprietary systems to assure inventory management efficiencies and we’ve installed robotic technology in the warehouses to speed picking and packing.”

Lore and Bharara insist that the space is crying out for competition, with only a handful of players making noise: the Subscribe & Save program from Amazon.com; Alice.com, which debuted a little over a year ago; and Procter & Gamble’s pgestore.com which opened for business earlier this year. Of those, they consider Amazon.com to be their most “concerning” competitor.

The Subscribe & Save program offers members discounts of up to 15 percent and free shipping on items they routinely purchase. Products are shipped every one, two, three or six months, depending on shoppers’ needs. “Amazon has a sizable share of every market they’re in — so that alone makes them a force to be reckoned with,” Lore says.

Alice.com bills itself as a marketplace and an e-commerce storefront rather than a retailer, but such a distinction is doubtless lost on shoppers. Consumers sign up to use the service, then gain access to an ever-growing list of direct-to-consumer manufacturer websites that feed into a shared cart and single checkout. Manufacturers set their own prices and receive sales proceeds; Alice.com handles order fulfillment, shipping and the customer experience.

The more often someone shops with Alice.com, “the more adept our systems become at managing the household spend, to the point where we know to send a new container of detergent out every month to one customer and every six weeks to another,” says Alice.com CEO Brian Wiegand.

Proctor & Gamble executives say they’re using pgestore.com as a laboratory to study consumer buying habits rather than as a direct source of sales. Since the online store opened in mid-January, compete.com (a website that tracks e-commerce metrics) reports that pgestore.com has averaged 56,000 unique visitors monthly.

Targeting the established online shopper
For years it seemed consumer package goods were an e-commerce non-starter. Despite being among the biggest potential categories of business, online companies struggled to make the economics work. Sure, it made sense that shoppers didn’t need to squeeze the Charmin or sample the toothpaste before buying, but online retailers wrestled with the shipping costs associated with these often bulky items and with pricing, given that margins on CPG items are razor thin.

What changed? The customer, for starters. The generation of young people who grew up with the Internet at its collective fingertips is now coming into its key spending years – buying their first homes and starting families – and are “waking up to the value and time-savings derived from buying online,” says Compete managing director of retail and consumer products Matt Pace.

“Price and shipping were the two hurdles that prevented shoppers from buying these items online in the past, but if someone is able to get rid of the shipping costs and get the products into the hands of the consumer when they need them, their attitude is, ‘Why not?’”

Research indicates that shoppers living in urban areas are more inclined than their suburban counterparts to purchase CPG items online, says Pace, who believes Lore and Bharara have tapped into precisely the right life stage. “The company is growing along with its customer base,” he says. “That goes a long way to cultivating a loyal customer. Typically, you’d say diapers are — at best — a three-year selling window: When the kids are out of diapers and formula, it’s time for the Moms to move on. With Soap.com, they’re able to cross-promote and continue to extract value.”

Sucharita Mulpuru, vice president and principal retail eBusiness analyst for Forrester Research, believes the potential for growth in this segment “should be higher than [for] e-commerce overall because it’s a small base.” She describes price and shipping metrics as “extremely important” to achieving success — while emphasizing that they also represent the “fundamental challenge with this category.

“Consumer packaged goods are often loss leaders for physical stores,” she says. “To take those low margins and then to subsidize shipping and handling is what makes the economics of this category so challenging.”

Lore and Bharara insist they’re able to offer lower costs, free shipping and swift delivery because of the time they’ve spent perfecting inventory management, warehousing – even developing efficiencies related to packing and shipping. “The difference between success and non-success is about five margin points,” says Bharara. ‘We’ve honed every aspect of logistics to gain that edge. That’s the difference.”