2014 Outlook on Consumer Products
Interview with Pat Conroy
The tacit acceptance of sluggish market growth in developed markets among consumer product (CP) companies has been countered with expectations that developing market sales would more than compensate. However, recent economic headwinds in major developing economies require companies to work harder in their quest for profitable growth – especially as many developed-market consumers still maintain a recessionary mindset. With consumers increasingly embracing technology to shop, digital commerce has the potential to transform the industry. Pat Conroy, vice chairman and U.S. Consumer Products leader, Deloitte LLP, shares his perspective on the year ahead, as well as some tips that may help companies grow in the current climate of uncertainty.
What is the biggest challenge facing your industry in the coming year?
The confluence of eroding brand loyalty, enduring recessionary consumer attitudes, rising digital influence on the shopping path to purchase and cross-channel conflict create a challenging environment for CP companies.
- Eroding brand loyalty: For the third year in a row, brand loyalty in the food, beverage and household goods product categories has declined, according to the 2013 American Pantry Study.1 The percentage of “must have” brands – those brands consumers will purchase whether on sale or not – slipped from 33 percent in 2010 to 29 percent in 2012 due to sales on competing national brands, less expensive brands and private label offerings. The threat from private labels remains as many U.S. consumers (88 percent) have found several private labels they feel are just as good as national brands. Moreover, relatively few consumers (27 percent) plan to switch back to national brands from private labels when the economy improves.
- Consumers’ prolonged recessionary mindset: Economic uncertainty and the severity of the last recession have left U.S. consumers cautious, frugal and resourceful.2 Many consumers are embracing savings tactics like retailer loyalty cards, store brands, shopping lists, coupons and delaying purchases for sales. Frugal behaviors are likely to endure in the coming year, as 94 percent of consumers plan to keep their spending on food, beverage and household goods at its current level even if the economy improves. Seventy-nine percent of consumers still believe the U.S. economy is in a recession, and consumer cautiousness is weighing on domestic CP industry growth.
- Rising digital influence on consumer shopping: Digital technology has permeated the path to purchase as websites, social media and mobile apps are used by consumers for product research, price comparison and even product purchase. In a recent survey by Deloitte, 92 percent of consumer packaged goods (CPG) executive respondents agreed that e-commerce is a strategic sales channel; however, only 43 percent believed their company had a clear, well-understood digital commerce strategy.3
- Increasing cross-channel conflict: Consumer shopping preferences are driving CPG sales growth in some retail channels (e.g., online, club, dollar) at the expense of traditional channels (e.g., grocery, mass merchandise) and increasing cross-channel conflict.4 On average, across 28 food, beverage and household goods product categories, U.S. consumers consider 2.5 channels for their CPG purchases.5
What trends might disrupt “business as usual” in 2014?
Disrupting trends include:
- Continued sluggish economic growth, particularly in emerging markets: Many CP companies consider emerging markets as opportunities to drive growth. While emerging market economies are still growing faster than developed markets, the pace has reduced considerably. As a result, CP companies are likely to experience weaker demand in some markets in the short-term than previously expected. Deloitte’s recent Global Economic Outlook notes that the global economy is growing at a modest pace as Europe remains in recession, the U.S. is on a path of moderate growth and key emerging markets face slower growth.6
- Accelerated merger and acquisition (M&A) activity: The CP industry is likely to witness more M&A activity as large CPG companies and private equity firms take advantage of sizable cash reserves, low interest rates and easy access to credit to increase exposure to faster-growing markets, consumer segments or product categories. On the flipside of acquisitions, CP companies are likely to continue to divest non-core or underperforming businesses to fund acquisitions or improve growth prospects.
- Rapid adoption of digital commerce: Over a decade after online shopping was first launched, shopping online for groceries is arriving. The proliferation of smart phones and online shopping and the rising digital influence on consumer shopping has made digital commerce a fast-growing retail channel. CPG company digital commerce capabilities are still nascent when it comes to driving product trial and encouraging repeat purchase.
- Rise in digital marketing effectiveness: As consumers increasingly embrace technology to shop, the effectiveness of digital marketing, while burgeoning, has improved. Consumers are more interested in using smart phones to pull up mobile coupons, identify sales and compare prices – even for food, beverage and household goods. CPG companies are beginning to use social media to better connect with consumers, and many are now able to measure the return on investment (ROI) in digital media marketing.
- Increased regulatory focus on consumer health in developed as well as developing markets: Regulators across the world are monitoring the impact of products on consumers’ health and wellbeing. Many regulators are trying to levy higher taxes on products that are considered unhealthy, introducing measures to improve product safety, scrutinizing product claims and labels, and discouraging marketing to children.
What are some steps companies can take to foster innovation and/or growth?
Companies may want to consider the following steps on their pathway to innovation and growth:
- Accelerate the build out of digital commerce capabilities: CP companies should prepare for the coming surge in digital commerce (e.g., mobile, social, digital marketing) to better understand consumer behaviors, enhance the consumer experience and increase sales. Digital capabilities can help companies to better identify consumer preferences and trends, optimize their product assortment, deliver personalized marketing messages, refine pricing and promotional strategies and connect with target consumers. Cloud computing and complementary technologies like analytics may shorten the digital innovation cycle, rapidly scale IT infrastructure and sales capabilities in new markets, and deepen relationships with both retailers and consumers at a lower cost.7
- Rethink brand and product portfolio for the new normal: In the 2013 American Pantry Study, 76 percent of U.S. consumers surveyed believed that, “Going through these economic times has caused me to realize which brands I really care about and which ones are less important to me.”8 Those brands with the highest loyalty outperform other brands on perceived product performance, experience and trust. As consumers are re-evaluating their brand relationships, CP companies also need to rethink their product portfolio in light of the widening gap between the affluent and lower-income households. CP companies may need to have distinct strategies (e.g., brands, product offering, pricing) to target affluent and lower-income consumers.
- Connect with the Millennial generation, but don’t forget about Baby Boomers: As you turn your focus to the Millennial generation, remember that Baby Boomers are a large and relatively affluent segment. The Millennial generation is accustomed to an always-connected world, and more likely to use online and mobile technology across the shopping lifecycle. In the 2013 American Pantry Study, the Millennial generation ranked highest in their interest in mobile shopping technology, however, Baby Boomer interest in mobile technology grew at a faster rate in the past year.
- Refine go-to-market strategies and align with emerging retail channels: Many CPG companies are still organized to primarily sell through traditional retailers (e.g., grocery and mass merchandisers). Companies that adapt their structures to tap into emerging channels (e.g., e-commerce, dollar and club) may be able to respond faster to the shifts in the consumer and retail environment. Succeeding in these channels may include a pricing and trade promotion strategy that acknowledges potential channel conflict by providing unique product-price value propositions.
1. 2013 American Pantry Study, Deloitte, 2013. Unless otherwise designated, all consumer survey data results listed are from this research report.
3. Digital Commerce in the Supermarket Aisle: Strategies for CPG Brands, Deloitte, 2013
4. Club Store Strategies for National Brands, Deloitte, 2013, Dollar Store Strategies for National Brands, Deloitte, 2012
5. 2013 American Pantry Study, Deloitte, 2013
6. Global Economic Outlook 3rd Quarter 2013, Deloitte, 2013
7. Rethinking the role of IT for CPG companies: Using cloud computing to help escape the constraints of existing business economics, Deloitte, 2012
8. 2013 American Pantry Study, Deloitte, 2013. Unless otherwise designated, all consumer survey data results listed are from this research report.