2013 Outlook on Consumer Products Interview with Pat Conroy

Every so often conventional wisdom of the past does not prove to be the right approach for the future. Strategic issues facing consumer product (CP) companies today require new approaches in this evolving marketplace. 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 can help your company manage and innovate through the current climate of uncertainty.

What are key issues facing the consumer product industry in 2013?

Consumer product companies are struggling to drive profitable growth amidst an uncertain global economic environment. They face a myriad of issues today, some of which the industry has struggled with for some time, while others are new issues resulting from rapidly changing technologies and consumers:

• Impact of technology and proliferation of data: Rapid advances in technology are changing how consumers shop. Mobile applications, social networks and e-commerce empower shoppers with instantaneous information, influencing buying decisions. Organizations are able to collect consumer data through mobile interactions, purchasing decisions and social interactions, allowing CP companies to be more targeted and personalized with their product and marketing strategies.¹ However, CP companies will be challenged to make sense of the massive amounts of data being collected – to drive the right product and marketing strategies for each consumer group and address the cyber risks associated with managing personal information.
  
  
• Legacy operating models: Outdated business operations are affecting how consumer product companies manage their business. Many organizations are optimized to serve the traditional grocery and supermarket channel, while demographic shifts and changing consumer preferences have reduced the importance of these channels. Furthermore, many companies are organized based on more traditional product development and marketing channels, without adapting to the technologies that are shaping the future consumer. Continued marketplace success requires consumer product companies to evaluate their operating structures, becoming more nimble and responsive to shifts in the environment.
  
  
• Growth of nontraditional channels: Consumer shopping habits are driving changes in the retail marketplace and increasing cross-channel conflict. The treasure hunt atmosphere in warehouse clubs attracts affluent consumers, while more budget-conscious consumers are taking notice of the broader assortments and improved food offerings in the multi-price-point dollar channel.² Consumers are also purchasing more products via e-commerce from online-only and brick-and-mortar retailers, as well as directly from consumer product companies.
  
  
• Multidimensional innovation: Concurrently increasing revenue, margin and market share is an age-old issue that all companies struggle with. Combined with commodity price volatility that appears to be enduring and a continuous need for product differentiation, the challenge for CP companies is to develop new products that are less costly to produce and more sustainable or healthier.
  
  
• Serving multiple price points, while building strong household brands and a global presence: Consumer product companies are challenged with serving an increasingly price-aware consumer across a range of incomes with products at multiple price points. Additionally, they are challenged with building and expanding their footprints across regions with different tastes and price points. Providing and positioning products to serve this spectrum of consumer needs and wallets challenges profitability. Some premium products have performed well recently, but margins remain under pressure as lower income consumers find more value in economy brands and private labels.

What are some steps consumer product companies can take to manage through the current climate of economic uncertainty?

Actions may include:

• Employing digital strategies to influence consumers’ purchase decisions: Advances in technology, including data analytics, provide consumer product manufacturers the opportunity to communicate more effectively with target consumer segments and influence shopping behaviors. Detailed demographics, Web browsing information and consumer feedback allow companies to create customized offers (and in some cases, new products) that resonate with consumers. Many consumer product companies are developing mobile applications to help consumers research products and share reviews.³
  
  
• Capitalizing on the growth of nontraditional formats: Success in the dollar channel has varied depending on the ability to formulate a clear strategy. Successful companies have closely partnered with dollar retailers so their inbound shipments are very efficient, comprising a limited assortment for multiple product categories and resulting in relatively consistent and predictable demand. Yet, other companies are challenged due to the limited assortment of product categories and volume to efficiently keep dollar store shelves stocked.⁴ CP companies are deploying direct-to-consumer capabilities to meet changing consumer shopping habits and provide specific products not broadly available in traditional retail outlets.
  
  
• Getting simple and streamlining efforts: Increasingly, consumer product companies are identifying ways to increase margins while simultaneously addressing issues such as sustainability and health preferences with reduced packaging and fewer ingredients. Research and development (R&D) investment is shifting toward initiatives that bundle multiple innovations to both improve product appeal and reduce cost.
  
  
• Streamlining the organization structure: Leading consumer product companies are evaluating their company structures to focus on being more flexible and responsive, creating more lean operations, evolving their product and marketing strategies, and breaking down layers of bureaucracy to respond to market demands. Some consumer product companies are splitting up their companies to target high-growth markets and consumer segments, while others are looking at vertical integration to manage costs and create more agility in pricing.
  
  
• Customizing portfolios to shifting consumer segments: The continued divergence in consumer needs is leading many companies to evaluate their product portfolios. Beyond major operational changes, companies are adapting product portfolios that address value-oriented needs of budget- stretched shoppers, while also creating more premium offerings that are less susceptible to margin pressures associated with commodity volatility.
  
  
• Looking for growth across all consumer touch points: As competition continues to be fierce, companies should think about ways they can get creative around how to expand “must have” brands across all consumer touch points. They should look horizontally as well as vertically and identify synergies that may help target their consumer base in new areas. Starbucks and Disney represent companies that have had success in achieving their vision of how to connect a consumer brand and experience across retail, travel and leisure.

What are high-performing companies doing to foster innovation and growth?

Many leading companies are adapting their product portfolio and business operation strategies to profitably serve both affluent and low-income consumers across evolving retail channels and geographies. Some high-performing brands are also altering their mix of marketing spend toward digital technologies, sometimes with the help of data analytics to more successfully (and cost effectively) engage with different consumer groups. For nontraditional, but fast growing channels like e-commerce, dollar and club, consumer product companies are increasingly creating channel and retailer-specific products and packaging. Finally, some leaders are embracing simplification and sustainability to meet evolving consumer preferences. Cloud based technologies have the potential to help companies simplify infrastructure and rapidly grow in new markets.⁵ Each of these growth strategies are causing some consumer product companies to challenge how they organize and operate.

Endnotes

1. Pat Conroy and Anupam Narula, "I Have Not Yet Begun to Shop … or Have I?," Deloitte Development LLC, 2011
2. "Dollar store strategies for national brands," Deloitte Development LLC, 2012
3. John Lucker, “Know what your customers want before they do,” Harvard Business Review
4. "Dollar store strategies for national brands," Deloitte Development LLC, 2012
5. Pat Conroy and Anupam Narula , “Rethinking the role of IT for CPG companies: Using cloud computing to help escape the constraints of existing business economics,” Deloitte Development LLC, 2012

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