By Shiv Iyer, Accenture managing director, consumer goods consulting
For many years, CPG companies were able to make the most out of macroeconomics waves and market opportunities and were generally outperforming the markets. The industry saw fast growth thanks to premiumization in developed markets, relatively easy expansion and consolidation in emerging markets, net new consumers, and globalizing brands.
Against the background of the greatest economic downturn in decades and slower than anticipated recovery, CPG companies have shifted focus to cutting costs. In addition to increased competition, CPG companies also have the challenge of shifting consumer preferences—people are demanding value and specialized products, and they are spending across channels.
CPG companies have been targeting their cost base as a means to shore up profitability with programs that include restructuring, de-layering, zero-based budgeting and supply chain optimization through to manufacturing rationalization to reduce costs.
Reducing costs is a critical activity—but it isn’t the only way to build an offensive edge in today’s competitive marketplace. To stay relevant, stable and strong in the changing consumer/channel landscape, businesses must pivot their focus to reinvesting savings to drive growth.
So what is happening in today’s market place? At Accenture we are seeing forces across consumers, channels and products that are exacerbating the already challenging CPG market and adding complexity to the industry.
Diverging consumer segments.
Middle class buying power is eroding, shifting to affluent consumers. Household incomes have fallen steadily since the mid-2000s, while the wealthy have seen their share of overall income increase. This income gap has driven an upmarket segment focused on premium offerings while also producing a lower-market segment focused on low-cost products and discount stores.
Increasing demand for healthy ingredients.
Rising demand for healthier products is forcing CPGs to revamp entire product lines. CPG companies are trying to respond and protect their prominent categories by reformulating ingredients, adjusting marketing messages and shifting trade spend. As an example, cereal sales are eroding as consumers now want higher-protein dairy offerings. In response, CPG companies that offer cereals are now infusing products such as added protein and increasing yogurt exposure.
Convergence across categories and industries.
Consumer preference for healthy foods has given rise to a number of new product-related innovations. For example, upmarket baby food companies have broadened their focus and tout their product’s ability to appeal to both moms and babies, while multiple CPGs have begun to highlight the restaurant-like qualities of their product lines. All of this suggests that delineations between products, and even industry sectors, are rapidly becoming a thing of the past.
Push to more convenient packaging.
Today’s on-the-go consumers want packaging that can satisfy their busy lifestyles. Specifically, they have a hunger for re-sealable packaging, “speed scratch” cooking options and global experiences. Many grocery manufacturers are striving to appeal to such consumer preferences through products which are stored in convenient, eco-friendly pouches and come in a variety of flavors.
Rise of new channels.
Today’s on-the-go nature of consumers has influenced shifts in channel preferences. Consumers are migrating away from traditional grocers and toward one-stop supercenters. High-income buyers and millennials are making more online and club purchases for food and beverages. Mass-market buyers are shifting as well, increasingly spending at discount stores and small-format grocers. CPGs are modifying their product lines to help these channels generate demand, providing exclusive SKUs.
In the wake of consumer, channel and product shifts, Accenture research and analysis hints that two key axes will likely drive the market’s evolution. The first is consumer characteristics. More specifically, the preferences and demographics of shoppers that drive CPG spend. Along this consumer axis, one of two futures could emerge. “Middle market dominance” -- the mass-market consumer segment grows and emerges as the key place for CPGs to “win,” or “Consumer polarization,” whereby unique consumer groups, differentiated by income, ethnicity or age, control the market.
The second axis is channel preferences, where consumers choose to make their CPG purchases across categories. Again, two extremes could materialize. “Basket convergence” -- consumers select “primary” channels for the vast majority of their consumables needs, and turn to alternate channels for “niche” buys only, or “Basket divergence,” whereby consumers spread grocery purchases across a range of traditional and emerging channels by category. There is no single dominant channel.
The shifts in the CPG market toward greater consumer polarization and basket selection divergence suggest a more fragmented, more competitive landscape than today with different types of consumers spending across a variety of channels.
Only a handful of companies will target the broad middle. The majority of CPG companies will sell across channels, and they will compete to be category leaders based on mass channel preferences, such as convenience, health and wellness.
Due to divergence, CPG companies will be compelled to decide how to specialize—which consumer, which channel, which segments? Sales forces will shift focus in accordance.
CPG product lines will evolve based on which channel reigns dominant. There will be a renewed focus on value to appeal to consumer demand and to counter private labels that deliver exclusive products.
Marketing capabilities will need to be robust in order to garner attention in dominant primary channels and to appeal to divergent consumer segments.
At Accenture, our research shows that Distributed Preferences is the most likely to occur. Consumer preferences have already begun to diverge across multiple axes, including income, race and age. At the same time, we see dominant channels emerging for particular categories—ecommerce wins for apparel, for example, while specialty grocers drive most organic purchases.
Accenture hosted a CEO panel discussion at the Grocery Manufacturers Association Forum in August 2015, and we're in general agreement on the evolution of the industry. One panelist summed it up succinctly when he said, “There’s no better time to be working in consumer products than today, except for the future,”