The future is coming ... but still one day at a time

However, the industry—now more than ever—is hungry for a better understanding of the future of retail and consumer products. But there is no simple answer, as the forces affecting the sector—and thereby shaping the future—are incredibly complex and affect various sectors, companies, markets, and products differently. To pretend that there is a singular future—or answer—is, in our opinion, naïve at best.

So, we dug into our research to see if we could find a potentially better way to think about the future evolution path of the RCP industry. We took away from this analysis a framework of four disruptive forces—consumer preferences, technology advancement, economic pressures, and market forces. These forces, through their interplay, have given rise to seven trends shaping the future of the retail and consumer products industries. In this article, we delve into these forces and the resultant trends with the aim of informing go-forward decisions, strategy, and investments for retail and consumer products companies.

All disruptive changes appear first across these three dimensions, then emerge as a visible trend before growing to be a significant industry force. This is not to say that there aren’t disruptive forces at play—you simply have to know where to look, how to measure, and how to interpret the data for its predictive power.

For example, even though the data showed the economy was likely overdue for a recession, the negative economic impact of the COVID-19 pandemic still caught most companies by surprise.⁶ The pandemic has fundamentally impacted every step of the retail and consumer products value chain in ways that were unpredictable even a few months ago. While the global pandemic was certainly not foreseen by anyone, companies might have been better prepared for its impact had they been more proactive about regular downturn planning.

So, to draw into the predictive power of data and gain deep, actionable insights from our observations of the changes at work, we organized our research into a framework of four disruptive forces. The interplay of these forces has given rise to a set of seven broad yet distinct, measurable trends that we believe are shaping the future of the retail and consumer product sector.

The disruptive forces we identified aren’t new or unique to the current competitive environment in the United States. However, the way they manifest themselves is often unique. More importantly, it is the interplay of these tectonic forces that creates the threats and opportunities that retailers and consumer products makers must react to in order to navigate a disrupted environment. Here are the four disruptive forces:

Consumer preferences are changing

The truth is that the consumer is changing, but not necessarily in the ways we usually hear or think of. The changes occur at the confluence of cultural, social, economic, competitive, and technology options—and appear as choices. We must not confuse choice with change. Today’s consumer is a construct of the growing economic pressure and evolving environment around them.

Technology is advancing—at an accelerating rate

Moore’s Law, as first coined by Gordon Moore in 1965, defines the pace of technology advancement of computing power. Moore’s Law has been hotly debated and challenged, but to date, continues to hold true with respect to silicon computing chips. Others have expanded on Moore’s Law in an attempt to explain everything from bitcoin to DNA sequencing. Ultimately though, the law posits that technology is advancing at an advancing rate as measured by price/performance ratio of computing power. And, looking at technology advancement and its impact on the retail and consumer products market, it's hard to argue against the idea of the ever-faster rate of technology advancement and the disruptive force it creates.

Economic pressures abound

Although they’re often overlooked in the discussion on disruption, all competitive markets are subject to changing economic pressures and constraints. Economic factors such as consumer economic strength, health care costs, employment conditions, cost basis, cost of capital, and overall economic stability have the potential to bring about rapid change and come with significant disruptive potential.

Market forces are shifting

Markets are certainly shaped by consumers and technology, but perhaps of equal importance are the market forces that shape the competitive landscape. Changing barriers to entry, regulation, trade policy, or the threat of a global pandemic are all examples of market forces that have the potential to significantly disrupt status quo.

Our larger goal was to identify the critical trends shaping the RCP industry as well as the critical uncertainties that might have different plausible futures in the industry. In this report, we have highlighted the seven broad trends we determined, and how these undercurrents are fueling the evolution of RCP companies in the United States.

Trend 1: Commoditization and premiumization of products

Technology advancements have struck down entry barriers to markets, increasing access to and for consumers. The resulting explosion of choices is visible in the ever-expanding range of products, brands, companies, and channels on the market. For example, grocery stores today stock five times as many products as they did in the 1990s.⁷ And these products are being purchased via multiple channels, with 73% of consumers using a mix of physical stores, e-commerce, digital apps, social commerce, and marketplace platforms to buy products, adding to the competitive mix and complexity.⁸

For product-makers, it’s become easier to reach out directly to consumers and build a brand, thanks to e-commerce and social media platforms. They can also offer a wider product range, given the broader options available to them for sourcing and manufacturing globally. Today, there are a total of 153,000 new companies compared to 10 years ago.⁹

Amid the increasing number of products, brands, and ways to access them, another development is underway: Brand loyalty, for the most part, is falling to the wayside¹⁰ as consumers, inundated by products that seem increasingly commoditized, are tuning out brands.

This commoditization is having a huge impact on the retail marketplace. On one hand, commoditization of products has led to fierce price competition, creating a downward pressure on the price brands can command for their products.¹¹ On the other hand, higher operational, infrastructural, and labor expenses are raising the cost of producing the very same products.¹² Furthermore, the options through which consumers access these products continue to squeeze margins. What’s left, then, are squeezed margins, curtailed profitability, and reduced capital returns on businesses. Since 2017, there has been a 40 basis-point average decrease in operating margins across retail (figure 1).¹³

In reaction to commoditization and squeezed margins, retailers such as mass merchants, grocers, and even department stores are focusing on selling their own private label brands. These brands offer 25–30% higher margins and more control in production, branding, pricing, and promotion—all at the expense of traditional branded consumer product-makers.¹⁴

Spanning across multiple retail categories and channels, private label products have outpaced the growth of their traditional counterparts by three times since 2015.¹⁵ Within this category, mass-retail private label segment sales have increased by 41% over the past five years—about four times higher than overall private label growth.¹⁶

In any discussion on private labels, it would be remiss not to acknowledge the changing positive attitude of and growing acceptance from consumers toward store brands. The days when consumers considered private label brands cheap, generic, and low-quality are gone. The percentage of consumers willing to pay the same or more for private labels over brand-name products rose from 34% in 2014 to 40% in 2019.¹⁸

Simultaneously, there’s been a move toward premiumization of private labels. Although discount products still represent the majority of private label sales, the share of premium private labels continues to rise, having climbed from 15.7% to 19% over the past three years.¹⁹ Meanwhile, retailers and consumer products companies have begun to leverage the greater control that private labels afford them to offer differentiated products that are better suited to their customers’ needs.

Takeaway: Today, consumers have more choices, competition is increasing, and convergence across industries has changed business dynamics. To remain competitive, many retailers have shifted toward private labels—and even their premiumization—and are driving profitability, customer loyalty, and growth.

The significant shift to mobile and its influence on in-store sales have had a profoundly negative impact on traditional key business metrics. The conversion and average order value on mobile are significantly lower than desktop (1.7% vs. 4.3% and US$86 vs. US$127, respectively).³¹ Combining these metrics shows that revenue per visit on mobile is 3.8 times lower than on desktop-based ecommerce.³² This shift significantly reduces the return on investment needed to drive digital growth.

Meanwhile, companies are pouring money into digital advertising. The domain has grown at a CAGR of 20% over the past five years, resulting in a US$103 billion increase in digital ad spend over the past decade.³³ But most of this created incremental total ad spend as only US$16 billion of the US$103 billion (about 15%) was offset with a corresponding reduction in nondigital ad spend (figure 3). As a result, total ad spending is growing at a significantly faster rate than overall retail and consumer products industry sales.

Digital ad spending per consumer is also skyrocketing. Digital ad spend per internet user has tripled in the last nine years, increasing from US$138 to US$456 since 2011.³⁶ Over that same period, TV ad spend per viewer has increased by about 22%. Further, the increase in ad spend is not just a function of the number of ads as digital ad cost is also up 12% on average across channels and is rising five times faster than inflation.³⁷

The rise of social media has added a layer of incremental complexity to digital success. Although social has not yet become a mass channel for transactions (generating less than 1% of US retail sales in 2019 ), it is becoming increasingly more important as a source of digital traffic, roughly tripling from 3.1% of referrals in 2016 to 9.1% in 2019.³⁸ However, social has a lower conversion rate (1%)³⁹ compared to other digital channels (2.5%), and social spending per hour per consumer (US$0.42) is double that of the average digital spend per hour per consumer (US$0.21).⁴⁰ Social’s rising prevalence requires investment but it has a low return on investment, creating even more pressure on profitability.

If the growing cost of digital advertising were matched by commensurate sales growth, then higher digital ad spend would pose no problem. But the reality is quite different: While digital spending is becoming more expensive, it is generally not becoming more effective. For example, even though advertisers have increased their total spending on search by 42%, the number of visits to advertisers’ websites resulting from those ads has increased by just 11%, indicating that the cost of driving traffic is increasing and further impacting margins.⁴¹

To make matters more difficult, the rising variable costs of shipping and higher warehouse labor costs are putting profound pressure on overall margins. In many ways, the shift to digital commerce is a move from a higher fixed-cost model (where stores are the major fixed-cost component) to a higher variable-cost model (where each order comes with incremental shipping and fulfillment costs).

In addition to costs increasing due to the rising volume of orders being shipped, the cost of shipping is increasing in absolute terms as well. Between 2010 and 2020, ground shipping rates of major carriers increased 75.8%, while air shipping rates soared by 80%.⁴²

Besides shipping, labor is also eating into margins with demand rising for workers to fulfill digital orders, and RCP companies have been hit with higher warehouse labor costs. The mean hourly labor wage for transportation and materials moving is about 10% higher than retail sales wages.⁴³ Further, since 2014, warehouse wages have climbed by 22.6% and are expected to continue to rise, as workers are in short supply and high demand.⁴⁴

Takeaway: The increased demand for digital advertising is resulting in increased costs for companies to drive traffic and engage with and acquire customers. Coupled with the incremental—and rising—costs of shipping and labor in fulfillment, companies are experiencing a deterioration in already thin (or even nonexistent) margins for digital sales. The net effect is that while the allure of digital growth remains strong, the ability to profitably pursue and satisfy that growth remains under tremendous—and ever-growing—pressure.

While the store count has increased in the past 10 years from 244,000 stores to 270,000 stores, square footage at US retail stores has dropped by 4.4% (figure 5). The growth of small-format stores such as convenience, drug, and dollar stores has been a driving force in the long-term decline in store sizes.⁴⁸

The vast majority of stores that opened in the last 10 years were dollar stores (46%), convenience stores (25%), and drug stores (16%).⁴⁹ One common trend among these smaller stores is that they’re moving closer—both in terms of location and inventories—to the consumer.

But this doesn’t mean warehouse clubs and mass-merchant stores have become passé. These traditional big box retailers are also unleashing their own small-store formats and making themselves more accessible to consumers.⁵⁰ And while the mass-merchant retailers accounted for only 5% of store openings in the past 10 years, they have been massive drivers of retail sales, which grew by 9% between 2017 and 2019.⁵¹ In both small and big format, there is one commonly overlooked value proposition that’s not in line with the predictions on “showrooming”—that these retailers are actually deploying products closer to the consumer.

Perhaps surprisingly, e-commerce has helped propel the evolving role of physical stores in bringing inventory closer to the end customer. In-store fulfillment of online sales drove one-third of e-commerce growth between 2015 and 2019 and has quadrupled in the past five years.⁵²

Takeaway: Physical retail stores are not dead, but they are certainly changing. They’re getting smaller and coming closer to the consumer. However, it would be shortsighted to only consider the size and location of the stores without analyzing their role. A major value proposition of both big and small successful retailers is their ability to position inventory close to the consumer and become accessible both physically and digitally through stores.

For instance, as of 2019, as food-away-from-home expenditures surpasses food-at-home expenditures,⁵⁵ nontraditional models such as ghost kitchens and food delivery are accelerating. Ghost kitchens and virtual restaurants are expected to grow at a 17.2% CAGR through 2026,⁵⁶ while food delivery growth is expected to hit US$23.4 billion, with 8.7% growth in the United States by 2020.⁵⁷

This goes beyond just the food sector, with the growing number of “direct-to-consumer” (DTC) brands estimated at around 400 today, and rising.⁵⁸ Online trends suggest web traffic for these DTC brands has roughly doubled, while advertising has increased by 50% over the past year.⁵⁹ Meanwhile, the total revenue for subscription businesses grew about five times faster than US retail sales (18.1% versus 3.8%) from 2012 to 2019.⁶⁰ In apparel, secondhand market resale grew at 15.6% CAGR for the past three years, with more than 1,000 outlets—both pure digital and now traditional retailers—now offering rental services.⁶¹

By no means are these alternative business models exclusively attributed or limited to certain sectors or products. They are a broad industry reality, impacting retail and consumer products—from grocery to apparel and from pet food to beverages.

When viewed individually, these new models and companies still have a small share of overall category sales within the industry. Further, each individual company’s ability to survive may be in question. However, in aggregate, these models are creating significant disruption for incumbent retail and consumer products companies by amassing material market share. For example, the combined alternative business models in apparel (such as rental, resale, subscription, and flash sales) gained 1.4% of incremental market share between 2016 and 2018 (figure 6); they are projected to continue to amass an additional 1% of US apparel market share annually each year through 2023.⁶²

Takeaway: Individually, new models may seem like insignificant specks in the sea of traditional business models, and it is unclear which models are going to be fully viable and successful in the future. However, the aggregation of new models is collectively gaining ground, accelerating, and becoming a much bigger and more material competitor for market share—and RCP companies need to pay attention to this trend.

In particular, US convenience stores, with 153,000 stores serving 165 million customers daily, saw a 16th straight year of record in-store sales (excluding fuel and gas), growing at 1.8% CAGR to achieve US$242 billion in sales.⁶⁸ This growth was seen in store footprints as well—for each convenience store chain that had a net closing of stores, there were 30 convenience store chains that saw net openings of stores in 2019.⁶⁹ A net increase of 5,230 stores over the past three years shows the importance of growing the retail footprint to ensure accessibility to customers; 93% of urban shoppers and 86% of rural shoppers have a convenience store located within 10 minutes of their homes.⁷⁰

Although as of 2019, consumers still made over 85% of their purchases at brick and mortar, e-commerce-only companies had driven approximately 47% of the incremental growth in retail spend of the past three years.⁷¹ And convenience is the main factor driving online growth: It is the primary reason 43% of US consumers make purchases online.⁷² Consumers said it is the No. 1 reason they shop with the largest online retailer—that commands 37% of digital sales in the United States.⁷³

Among all product categories, grocery has risen to the forefront as the most desired area for convenience, as 63% of consumers find it very important when it comes to selecting a grocery option.⁷⁴ However, consumer preference for convenience appears to be fairly consistent across all retail segments,⁷⁵ and retailers offering and prioritizing convenience as a major component of their strategy have largely driven incremental growth in the market.

Takeaway: While many espouse the “experiential” aspects of store retailing, winning in convenience seems to be more important for growth in retail. As retailers continue to raise the bar for convenience, consumer expectations are likely to grow as a result. A retailer does not need to exemplify every aspect of convenience to be considered as “convenient.” But in building a strategy, it appears to be critical to understand the target consumer and the type of convenience your consumer craves.

Moreover, this trend of health-conscious foods also plays out at the actual locations where consumers shop. High-income consumers, who generally place greater emphasis on eating healthy, tend to shop for “healthy” and/or “organic” products in smaller, traditional grocery stores and establishments where fresh produce and other healthy and sustainable items are sold. However, the traditional grocery channel has lost more than half of its food retail market share over the past 30 years to nontraditional grocery stores such as convenience stores and dollar stores, which are less likely to sell these types of products.⁸⁶ Lower-income consumers, on the other hand, tend to place less emphasis on eating “healthy,” more often shopping at convenience stores than high-income consumers. Convenience stores and dollar stores have a higher proportion of consumers with lower household incomes, with 42% and 46% of total consumers, respectively.⁸⁷

Income disparity is not only pronounced in terms of product marketing and purchase, but also evident when we examine the actual state of consumers’ health. Ironically, while there’s been a significant increase in health-focused spending, the overall health of US consumers has relatively declined lately. For example, life expectancy fell from 78.9 years in 2014 to 78.6 in 2017 for the first time since 1959, then rose to 78.7 in 2018, but still falls short of the 78.9 years reached previously.⁸⁸ Not surprisingly, the biggest decrease in life expectancy rates is seen in the low- and middle-income population, who are also at the greatest risk of obesity (and subsequently diabetes).⁸⁹ Obesity has almost doubled in the last 20 years in the United States with no sign of improvement.

This does not necessarily mean that low-income consumers are not concerned about the values of health and sustainability; indeed, surveys of consumers would seem to indicate they are. But while consumers “will repeatedly say ‘yes’ on surveys that they are willing to pay more for environmentally friendly products,” when presented with having to make a choice on spending their dollars, such values become relative and they’re less likely to follow those sentiments.⁹⁰ This is because purchasing decisions are shaped by economic constraints.

Takeaway: While it’s true to an extent that the consumer is becoming more “health conscious” and “sustainability seeking,” viewing consumers through a single lens and believing they’re behaving alike would be misleading. The trend toward improved health and sustainability has implications on consumers’ wallets, welfare, and shopping destinations—presenting challenges and opportunities for retailers and consumer products players alike.

This growing trend of market share concentration is not unique to any specific retail sector, from apparel to grocery. However, the pace of the concentration trend differs, as consolidation in apparel is four times faster than consolidation in grocery.⁹⁷

On the other hand, when we look at consumer products, we see a very different story—in fact, exactly the opposite. Fragmentation, which can be described as “death by a thousand paper cuts,” is manifesting itself in this space. Even as reduction in barriers to entry unleashes an onslaught of new competitors in the market, ease of consumer access through digital channels and marketplaces is enabling smaller brands to grab market share. It is worth noting that 58% of the sales of the biggest marketplace retailer in the United States is generated by third-party sellers.⁹⁸ When we look at packaged foods, for instance, we see smaller competitors are eating away market share with a 25 basis points yearly average, and this is only accelerating over time (figure 11).⁹⁹ In the beverage sector, the top three behemoths in alcoholic drinks and soft drinks lost 280 basis points and 120 basis points of their market share respectively over the last three years.¹⁰⁰

Takeaway: On one hand, the market share of US retailers is being consolidated with large, at-scale players. On the other, both new players and incumbents in consumer products are experiencing market share fragmentation, driven by an increasing number of options and the explosion of brands. Frankly, both trends—consolidation and fragmentation—can be considered as disruptive but in different ways, as they are creating unique challenges and opportunities for RCP companies.

While many may want to prioritize technology change as pre-eminent, the data tells us that the consumer economics of time and money is of the highest order. Further, as the wallet of many consumers is pressured, RCP companies need to open the aperture and recognize that they’re competing for share of wallet, not just share of category. In this context, they need to understand that rising health care costs is as big a threat to an apparel retailer as the growth of a brand competitor. Similarly, the shift to food-away-from-home expenditure is as important to a grocery retailer as is the growth of home delivery of groceries.

With this in mind, RCP companies need to embrace scenario-planning, but in a broader way where data drives potential outcomes. Here’s how they can do this:

• Instead of relying on prophecy-based predictions, seek to understand and measure the trends that impact your business, utilizing internal and external data from traditional and nontraditional sources. This likely means forming partnerships in order to have access to data sources produced outside your organization.
• Pay special attention to trends emerging on the horizon, because reaction time has become a strategic differentiator.
• Avoid gadget-chasing, and instead define opportunities in the context of consumer economics of time and money.

These activities, in tandem, will help retail and consumer products companies to move beyond the shortcomings of a prophecy-based approach to a new, more concrete way of assessing the potential future evolution of the industry. This approach, which is more pragmatic, data-centric, and focused on consumer trends and economic opportunities we can observe and measure, will also enable them to better inform their decisions, strategy, and investments and chart their own future growth in a disruptive market.