CHALLENGES AND TRENDS
In Costco, Target, Walgreen and Trader Joe’s stores across the world there is a silent but intense struggle to win the consumer. The struggle is between the retailers and their CPG partners. The good part is that this is a battle where no one has to come out a loser. This conflict can end in a win-win-win for all—CPG organizations, their retail partners and the consumer.
The key trends driving the shift in relationship between CPG organizations, retailers and consumers are interesting and they point us in the direction that CPG organizations must head in order to solidify their relevance to the consumer:
1. Changing consumer buying behavior, thinking and actions:
A new breed of Gen Y (Millennials) and Gen Z (Centennials) buyers are shaping the retail industry. Never before has there been a more racially and ethnically diverse generation than this. They are unique in their lifestyle choices and well-informed with a high degree of awareness around environment, sustainability, health and authenticity. This has given birth to new buying patterns. For example, this generation will willingly buy eco-friendly products over current ones. A recent Nielsen study found that 48% of US consumers would change their consumption habits to reduce their impact on the environment, indicating that the rewards of changing products are high.
Consumers also hold a new power over CPG organizations. They have the ability to research, find, shop, buy and receive products at will using online and offline channels. As a result, the only way to gain their loyalty is by feeding their hunger for information, personalization and great experiences.
In parallel, social media is creating an army of micro-influencers who are impacting product sales. This is creating new opportunities and threats for traditional brands. Old and trusted brands are now looking to find a way to recruit influencers and turn them into brand champions. Without this they risk losing the vast amount of trust they have painstakingly built.
2. Technology advancements and growing channels:
With the advent of social media, video content, Augmented Reality (AR)/Virtual Reality (VR) and 4G/ LTE mobile networks, consumers have richer and faster access to information across channels. In this industry, information and choice spell power. Simultaneously, technologies such as IoT, Artificial Intelligence (AI), data and analytics are providing retailers and CPG organizations with superior consumer insights and the ability to create sophisticated, personalized and memorable consumer experiences. A year ago, said the report, 46% of retailers had planned to deploy either AR or VR solutions to meet customer experience requirements. The stores of tomorrow will not look like the stores of today. It is easy to see that without adding these matching technological capabilities to their business core, CPG organizations will ultimately be left floundering.
The heartening news is that the industry has woken up to the need for technology. There are signs that it is leveraging technologies such as in-store beacon platforms and video analytics, it is deploying new POS systems that help bust checkout lines, and it is pressing QR codes, bar codes, digital displays and even AI-powered autonomous shopping carts into service to make shopping more convenient.
3. Change in retail and CPG industry dynamics and competitive landscape:
Traditionally, CPG organizations built their sales through trusted retailers and distributors. Now, the cracks in the model are showing. Retailers are ramping up sales with their own low-cost private label products and the success of the strategy is reflected in a recent Nielsen study that showed private label dollar volumes had increased by 41% over the last five years .
By contrast, 30 years ago, product development was a “push” phenomenon. Companies like Procter & Gamble were creating demand for new innovations like toothpaste with fluoride, disposable diapers, and potato chips in a can. Today, these CPG organizations are faced with competition from their retail partners who are adjusting their private label product features and mix in real time. The advantage they have is proximity to the consumer which allows them to spot and respond to consumer trends in a flash. Accelerating this trend is the fact that developing and manufacturing products has also become simpler for retailers. Finally, retailers are able to tilt the balance in their favor by providing premium shelf space to their products, thus catching the customer’s eye and boosting sales.
The industry knows that while online sales continue to lead growth, brick and mortar retail is far from dead. If anything, it is evolving into a highly sophisticated science. A leading example of this evolution is the Amazon Go store equipped with cameras, sensors and monitors that enable cashless checkouts .
Innovation is taking retail to new levels of consumer engagement. Stores are becoming available on WhatsApp in other parts of the world, bringing m-commerce, live video interaction, automated chatbots and customer support to the instant messaging environment.
It is difficult to predict what the next big innovation will be, but CPG organizations must be prepared to absorb and leverage the change at all times.
In summary, the pressure on CPG organizations is relentless. They must, however, think of ways to improve efficiencies across their value chain and boost productivity to unlock savings. These savings can then be channelized towards business transformation and experimenting with new products, technologies and business models.
4. Business models are transforming radically:
The industry’s new drive is to ‘own’ the consumer and grow wallet share. This philosophy departs from traditional product performance (margin, volume) as stand-alone measures. Amazon cares only about owning as much of the consumer as it can. The company is not fixated on inward-facing measurements like product margins. Instead, attributes such as frequency of buyer touch, niche exploitations and the power to cross and upsell have become important to growth. As wallet share becomes important, being present where the consumer is becomes critical. That is why omnichannel strategies have become important, allowing consumers to buy any product, anytime, anywhere, anyway.
Omnichannel, in turn, has also raised the bar on consumer expectations. So the online and physical worlds are moving closer to each other at a rapid pace in what is being referred to as phygitization.
There are new business models that are redefining differentiators such as the `Sharing Economy’ (example: renting apparel rather than buying) and the ‘Subscription Economy’ (example: autoreplenishment of household goods). Omnichannel innovation has become table stakes as “the whole is now the goal.” Beauty companies like L’Oreal, and Estee Lauder use omnichannel and e-commerce to enhance brand allegiance. Gillette has a subscription service that sends shaving blades to consumers at set frequencies offering great price and convenience. From washing machine detergents to coffee pods, every CPG company is trying to offer subscriptions and same day delivery.
Business models are getting another twist at the hands of a new breed of gazelle and micro brands. These brands are silent, super agile and hyper social. They are establishing new benchmarks in D2C models by cutting out middlemen, lowering costs and opening the battle for CPG organizations on yet another front . CPG organizations are practically helpless, and unable to compete. Their higher cost of customer acquisition, lack of technological dexterity, rising production costs and increased mergers and acquisitions is a key concern. There is an urgent need to challenge gazelle and micro brands and to move into high volume selling. But many CPG organizations don’t know where to begin.
However, the challenges and opportunities make this an exciting period for CPG. We can expect to witness unprecedented product innovations, brilliant new business models and smart strategies that build customer intimacy. The CPG industry, once caught flatfooted, is now ready to regain control of the new industry landscape.
Download Point of View to read more
