As the consumer products sector navigates the post-Covid era, how can incumbents get ahead of the curve? At The Consumer Goods Forum’s flagship Global Summit event in Dublin, Ireland in June, 2022, the conversation focused on how best to manage the immediate challenges of the macroeconomic environment (inflation, the threat of recession, deglobalisation, and the long-term costs of decarbonisation) and opportunities for investments in the strategic opportunities of the future, including the Metaverse, sustainability, and health and wellness.
All that said, it’s worth remembering that the consumer goods sector was already facing headwinds before Covid emerged. Though consumer companies had enjoyed stellar growth in shareholder returns for decades, easily outpacing the S&P 500, the sector slowed dramatically after the 2008 crisis and even more so after 2016. Based on research conducted by Innosight that looked back at the past five years of financial data on publicly held consumer staples companies, if an investor bought $100 worth of shares in a consumer staples index and $100 in a broader market index in 2016, the broader market index would have returned $136 by the end of 2021, compared to just $43 for the consumer staples index. We attribute the slowdown to three inter-related disruptions:
Disintermediation in the value chain. From upstream in supply chains to downstream at retail points of sale, new entrants have interrupted legacy relationships. A range of companies have quickly captured value by focusing on discrete activities that were previously bundled into integrated consumer experiences. These include companies such as Block, with its mobile payments platform Square, and delivery platforms like DoorDash and Grab, as well as digital merchandisers like Amazon and the startup Dollar Shave Club.
Erosion of the traditional advantages of scale. Thanks to their global manufacturing and distribution networks and their huge advertising and marketing budgets, incumbents enjoyed lower costs and greater reach than upstart competitors; would-be disruptors faced daunting barriers to entry and often could not compete on price. Today’s technologies allow capital-light startups to outsource critical functions. Sophisticated data analytics allow them to identify and respond to changing customer preferences more nimbly and target their markets more precisely.
Changing consumer demographics and preferences. Consumers, especially the younger generations, increasingly base their purchasing decisions on brands’ perceived purposes, ethics, and environmental and social impacts, up and down their supply and value chains. While there is still a meaningful gap between consumers’ stated preferences and their actual purchasing behavior, the risk of being out of step is real. Some customers really will pay a premium to ensure that their laundry detergent not only smells good but won’t harm the environment, and that the people who grew, harvested, and roasted the beans that went into their morning coffee aren’t being exploited.
Our research also identified a handful of companies that successfully dealt with and capitalised on these disruptive forces to deliver solid growth in shareholder returns. These include CGF members Amazon, Nestlé, Shiseido, Ocado, Walmart, and Woolworths Australia. Some found success because they were selling goods and services that boomed during the pandemic –household cleaning and hygiene products, for example, and online ordering and rapid delivery. But most companies had deliberately seized the initiative and disrupted themselves long before by, in part, doing these four things:
- Finding a New North Star
Each zeroed in on an engaging purpose both internally and externally, establishing a strategic “North Star” and a plan to achieve it, whether expanding into new geographies, for example, or focusing on a different consumer segment by offering higher-priced, premium products. Walmart, for example, announced its commitment to e-commerce in 2016, and then embarked on an aggressive acquisition and investment strategy, spending $15 billion to acquire 15 e-commerce firms. In 2018, it spent $16 billion to purchase the Indian e-commerce firm Flipkart. Nestlé expanded its direct-to-consumer capabilities.
- Rebalancing or Refreshing Their Portfolios
All of them made the difficult decision to jettison businesses that were either declining or had plateaued due to commoditisation, changing needs, or competitive pressure. Some, like Ocado, were able to transform internal functions, like their capabilities in logistics and fulfillment, into new products and services. Ocado, for example, has repositioned itself as a software and robotics business. Others acquired new brands or repositioned old ones. Nestlé shed its water and confectionery businesses in the United States and is growing Nespresso and its baby formula and pet care divisions. Lily’s Kitchen, for example, is a healthy pet food brand—a new market segment that has been enjoying 10 percent year over year growth.
- Improving Their Digital Connections With their Customers
Between 2015 and 2021, roughly 85 percent of venture capital funding in the consumer sector has gone into new retail, e-commerce, and logistics platforms. And consumers value companies that are easier to transact with and that provide added value via effective communications and customer service. Estée Lauder, for example, now offers virtual skin care consultations and a one-platform approach for customer experiences on its 1,700 e-commerce sites in 50-plus countries. Making sense of the proliferation of consumer data can also point the way for companies to win in novel spaces and with new business models. Walmart, for example, has leveraged data to launch digitally focused businesses such as Walmart Connect, a growing advertising business.
- Fostering a Culture that Embraces Continuous Change
To prepare for a future that is new and different, companies must first envision what they must change to thrive in it, and then create and deploy a strategy to achieve it. But they can’t do either unless their culture encourages and rewards innovation.
What’s critical is that leaders recognise that the changes they are experiencing are real and lasting, and that the biggest risk they face by far is not taking risks.
Of course, supply chains need to be unclogged, cash flows must be managed, and difficult questions like how much of the burden of inflation can be passed onto consumers in the form of higher prices must be addressed. But short-term uncertainty makes it even more important to have a clear and compelling vision of the future. A clear vision highlights once-in-a-lifetime opportunities to double down on growth while competitors are on their heels, to acquire assets that would otherwise be unaffordable, to strengthen the capabilities that are needed to realise tomorrow’s business model, and to shed the encumbrances that stand in the way of change.
Kristen Colella, Brian Hindo and Claudia Pardo are Partners at Innosight, a strategy and innovation consulting firm that helps organisations navigate disruptive change and manage strategic transformation. It is a member of the Huron Consulting Group.