The Gathering Storm: Strategies for Resilience and Renewal in Asia Pacific Consumer Markets

Considering the current economic climate, consumers across Asia Pacific are cutting back on non-essential spending

There do not seem to be any reliable indications that this pressure will dissipate soon. Inflation is elevated, with the Asian Development Bank predicting that inflation will increase from 3.1% to 4% in 2023, and pandemic-induced supply chain snarls continue to drive cost increases in creaky manufacturing and distribution structures. An inverted yield curve suggests pessimism, and tough times ahead. Monetary policy is changing after a long period of low interest rates, and unsustainable businesses (even innovative ones) will be punished.

Consumer Markets companies are now being squeezed by both rising cost pressures and a limited ability to pass these higher costs down to consumers through sharpened pricing. Our analysis suggests that costs have risen ~21-38% between 2020 and 2022, with Consumer Price Index covering only half of that increase during the same period - with some variability across categories. As the Martha Reeves song goes, “there is nowhere to run.”

Est. Change in Manufacturer Delivered Cost vs. Consumer Price Index (January 2020 – April 2022)

^{Source: IHS Markit, BLS, USDA, EIA, IRI, PwC/Strategy& Analysis}

Amid this straightened backdrop, however, consumer expectations for quality, choice and service remain steadfast. Appetites for seamless shopping experiences have not diminished despite challenges with product availability and longer delivery times. As a result, consumers are switching across channels (both in store and online) to get what they want, when they want it, at the best price - and we expect they will continue to do so in the new year.

More than 40% of consumers already shop at multiple retailers and 37% say they are willing to change retailers to get the products they want. Purchase decisions also appear to be increasingly driven by Environment, Social and Governance (ESG) factors, which influence more than 50% of consumers in emerging Asian economies such as India, Philippines and Vietnam. Whether these consumers are willing to pay more (or inconvenience themselves more) for access to ESG-friendly products remains a question however - and businesses will need to decide where to deploy precious investment dollars to build advantage.

In an environment of uncertainty and volatility, businesses would likely be best served by advancing capabilities that strengthen adaptability and resilience. This involves doubling down on levers that drive revenue growth while simultaneously managing cost prudently, in order to defend margins and market relevance as the landscape oscillates and normalises. This would involve a sharpened commercial strategy and operations excellence toolkit.

When it comes to fostering revenue growth, Consumer Markets businesses have already been working on pricing - for instance, Unilever recorded a 13% price increase in the third quarter of 2022, and Mondelez a 7% price increase early in 2022. However, businesses will need to review a broader set of revenue growth management capabilities and levers to approach this in a disciplined manner, that accounts for purchase elasticities, in a tricky time. In our experience, this graded approach can take several forms - often working in tandem:

• Review product portfolios: making decisions on what categories (and markets) to play in - and which to exit - will become key. This will require renewed perspectives on consumer behaviors, occasions and expectations. In addition, companies will need to take a harder look at innovation and category management across both premium and value tiers, as a means to support premiumisation and cater to a more value-conscious and discerning consumer. For instance, Kimberly-Clark’s approach in China has been to deliver price increases through innovation in value-added features for their diaper consumers.
  

• Refine price pack architecture (PPA) and promotions: companies can take a sharper look at PPA as a way to drive trial and retention, in addition to delivering better margins. This may involve smoothening ‘kinks’ in the price curves across pack sizes or exploring ‘down counts’ of the volume of pieces per pack, while accounting for anticipated price elasticities and implications on retailer incentives. An aligned promotions strategy that encourages switching and supports profitable volume growth will also be a helpful tool.
  

• Renew channel mix and strategy: understanding shifts in shopper behaviors and mobility patterns across channels will be important to serve existing consumers and capture new ones. This will involve a closer look at the optimal assortment (categories, pack sizes, etc.) to carry in each channel - with clarity on the role a particular channel will play for a target consumer segment or occasion. Within this, leaning into growing channels such as Direct-to-Consumer (D2C), and even the Metaverse, will become an important arrow in corporate quivers. For instance, Procter & Gamble launched experiential shopping sites across Southeast Asia to simulate a household, and showcase their products digitally.

Underpinning these is the importance of a strong data foundation, and an aligned analytics capability, that supports greater visibility into the shape of demand and the applicability of various revenue management levers - and drive more effective commercial decision-making.

The other side of the equation calls for a steady hand in driving operational efficiencies, and keeping the lid on cost escalations. This will be doubly challenging during a period of rising (and volatile) logistics, energy and commodity costs - in addition to services and wage inflation. Greater rigour on execution discipline, and focused investment will become central.

• Optimise supply chains: resilience on the supply chain side is linked with clarity on demand planning and network design. Businesses might invest in connected supply chain models to support labour and to optimise inventory purchase costs and working capital. The improved visibility and flexibility of supply chains will require marked investment - but can support efficiencies and resilience to volatility. More advanced markets, such as Hong Kong SAR and South Korea, are already taking steps to position as regional supply chain hubs. For instance, in early 2020, Hong Kong SAR launched a USD $44.5 million programme to subsidise third-party logistics service providers to adopt new technologies.

• Tighten commodity management: the spate of global uncertainties, both economic and geopolitical, have been harshest in their impact on commodity prices. In the Refinitiv CoreCommodity CRB Index, a composite measure of commodity prices, we saw an increase by 46% just at the start of 2022. Coffee prices soared 91%, and aluminium 53%. But the issue extends beyond a rise in prices, to steep volatility swings across the board. It does not appear that there will be any material relief from this reality in 2023 either. We see businesses leaning on familiar levers, such as hedging, but also investing in more advanced demand planning capabilities to keep a tighter control on input costs.
• Love thy labour: inflation has pushed demands for higher wages among the workforce, even in historically lower-cost parts of Asia Pacific, driving up total delivered cost for most companies. According to PwC’s latest Asia Pacific Workforce survey, a striking number of employees plan to ask their managers for a raise. The emphasis is equally on meaningful work, authentic management interactions and wellbeing in the workplace. An economic ‘cooling’ may offer some respite from attrition, but is not a longer-term solution. We see businesses exploring a wider array of employee recognition and retention measures, and investing in productivity and engagement through Key Performance Indicator (KPI) structures, training and wellbeing.

In Asia Pacific’s new reality, we see focus, flexibility and foresight as the guiding forces for Consumer Markets businesses during a spell of uncertainty, volatility and disruption. A sharper position on one’s differentiating capabilities will need to intersect with insight and demand patterns across shoppers and channels, planning and forecasting processes, supply chain realities and the workforce and digital infrastructure that girds it all together.

Cutting costs then becomes a more surgical exercise that eliminates ‘fat’ while preserving and strengthening the ‘muscles’ that reinforces competitive advantage - and leads to a more fit-for-purpose operating model that is agile enough to respond to the environment and ward off risks to longer-term strategic agendas - such as cyber security and ESG.

49% of Asia Pacific CEOs perceive cyber risks as a pressing concern. 60+% of companies in Asia Pacific say they are making progress on a net-zero or carbon-neutral commitment. It would not be prudent for a blunt cost exercise that compromises this. Rather, the need is for bolder transformations that go ‘beyond digital’ to revisit operating model choices and challenge long-held beliefs to maintain progress, minimise risk and maximize flexibility.

Winning companies in the Asia Pacific Consumer Markets landscape will be ones who are unafraid of moving away from the straitjacket of staid ways of working (‘this is how we have always done things’) and incremental change projects that pander to the status quo. They will instead push for more fundamental rethinking that challenges what success means in their context, and rewire their organisations through bold transformations - with a real sense of urgency and purpose.

Indeed, this is a journey - and not an easy one at that (nor one that many have yet contemplated) - but tomorrow’s heroes likely have this on their list of 2023 resolutions.