Next in CPG: creating value amid disruption: PwC

The consumer packaged goods (CPG) industry has experienced a series of peaks and valleys in its growth cycles over the past two decades or so. Because the industry’s fortunes are closely tied to the overall health of the economy, consistently strong performance remained elusive for CPG companies during these boom-and-bust cycles:

2000-2009
Top-line revenue growth, fueled by M&A and global expansion, was steady until the 2008 recession. During this decade, CPG companies did not focus on managing costs.
2010-2016
Activist investors drove torrid cost-cutting programs to deliver margin expansion, sometimes at the cost of revenue growth. With digital options ascendant, smaller players benefited from the erosion of traditional barriers to scale as well as increasingly bifurcated demand between high-end and value offerings.
2017-2023
On the path to more consistent performance, CPG companies began to reinvest in the core capabilities that differentiated them from the competition—while continuing to manage costs. Then, a global pandemic blew up the playbook.

At the onset of the pandemic, when restaurant closures led to more grocery store spending, CPG companies struggled to meet surging demand for basic consumer goods. In light of this sometimes explosive demand, they doubled down on their core products and accelerated supply chain agility. In fact, PwC analysis of Capital IQ and World Bank data estimates CPG revenue will likely grow by 4.8% between 2020 and 2022, the highest rate in 20 years.

To succeed beyond the reactive mode of the pandemic environment, CPG leaders need to focus on the next horizon—how to counter emerging challenges, including a global economy rife with inflationary pressures, while creating value over the long term.

Tackling today's CPG challenges: six areas of focus

Consumer packaged goods companies have faced daunting challenges in recent years to sustain consistently strong performance. Over the last several decades, the sector has swung between periods of M&A-driven growth and cost-cutting margin expansion.

To succeed in this ever-changing landscape, incumbents need to leverage the advantage of scale while incorporating lessons from nimble new players. Given the relentless pace of change, taming the onslaught of disruptive forces can seem daunting. Every CPG company needs a concrete strategy to help address six challenges that the pandemic has created or accelerated:

1. Reclaim strategic differentiation
2. Devise a technology-enabled ESG strategy to help create value for all stakeholders
3. Target direct consumer relationships using the abundance of available data
4. Future-proof the supply chain
5. Rethink commercial operating models to help meet omnichannel consumer needs
6. Pursue digital transformation for the next wave of cost reduction

1. Reclaim strategic differentiation

During the chaos of the pandemic, CPG companies often found themselves reacting to external forces because they did not have time to pause and rethink their strategy. In fact, execution became their strategy.

Pandemic-induced disruption has pushed CPG companies deeper into reactionary mode, when they should be setting their own agenda to lead. Going forward, they need to balance long- and short-term perspectives while leading with strategy. It’s time to reclaim the strategic high ground.

2. Devise a technology-enabled ESG strategy to help create value for all stakeholders

Customers, investors, regulators and employees are increasingly demanding environmental, social and governance (ESG) values in action. As CPG companies navigate this new reality—compounded by the pandemic and evolving supply chain issues—they should:

Recognize the importance of crafting a strategy specific to their individual company’s needs.
Start with a clear-eyed view of the cost-benefit ratio of a robust ESG program.
Communicate ESG goals transparently to suppliers.
Glean verifiable data from their own and supplier sources.
Start small and build on successes.

For CPG companies, the path ahead is tech-enabled: They need to be more proactive about deploying technology across the board, from innovative technology-enabled packaging solutions to automated collection and reporting of ESG data. Meanwhile, the bar for ESG continues to rise as investor-grade ESG reporting is expected to be an SEC requirement by 2023.

We already know that customers are more likely to buy products and services from companies that illustrate ESG values. While CPG companies are beginning to address the issue, they are well-advised to take the long view: Devise a robust strategy that flips the challenge of ESG into an opportunity to create value for all stakeholders.

3. Target direct consumer relationships using the abundance of available data

In an age when retailers are gaining greater control of consumer relationships via digital channels that provide omnichannel interactions and a wealth of direct consumer data, the consumer relationship is at stake for CPG companies. To address the growing sophistication of retailers — and get closer to consumers—CPG companies need to combine the data they collect directly from consumers with third-party data to help drive privileged insights and personalization.

Consumer data offers a trove of insights for consumer engagement while protecting customer privacy. CPG companies are better positioned than ever before to connect directly with consumers, who are eager to hear from brands in a variety of digital channels.

Next-generation consumer engagement also allows brands to personalize products, as L’Oréal has demonstrated. Starting with individual consumer data, the cosmetics company uses automation, collaborative robots, AI and computer vision to produce haircare, skincare and cosmetics products customized to individual needs.

4. Future-proof the supply chain

In a fast-changing omnichannel landscape, CPG companies need to prioritize the supply chain as an investment in resilient growth. Many are already:

Diversifying suppliers and manufacturers across geographies to bolster inventory.
Keeping tax implications in mind when making changes to their global supply chain while optimizing tax benefits.
Designing and implementing a connected, autonomous supply chain.
Gaining greater end-to-end supply chain visibility.
Analyzing data to drive more responsive supply chains.

Concepts of supply chain value continue to evolve. Explosive demand for omnichannel experiences offering convenience and variety, coupled with unprecedented supply constraints and labor volatility have added complexity to how CPG companies serve both retail customers and ultimate consumers.

Today, the supply chain is often the last function to interact with the consumer in an omnichannel environment. At large retailers, teams that support physical and digital channels continue to integrate with the goal of providing consumers with a seamless omnichannel experience. CPG companies will need to do the same; leading companies are already making progress.

For example, a luxury apparel and accessories manufacturer achieved 400% to 500% e-commerce growth during the pandemic—which exacerbated both human and system errors across order management, inventory and warehouse management and transportation. The company overhauled key processes and systems to enable end-to-end supply chain visibility at scale while digital tools helped increase efficiency and reduce errors.

5. Rethink commercial operating models to help meet omnichannel consumer needs

Changing consumer preferences and behaviors, accelerated by the pandemic, continue to render current operating models obsolete in an omnichannel consumer environment. CPG companies need to rethink their commercial operating models for sales, marketing, innovation and new product development—with a view to meeting consumers in the channels they prefer.

For example:

Should a CPG company have an Instacart account team within the overall sales team?
How should media planning and buying change to accommodate increasingly demanding retailers and digital marketing platforms?
How best should a CPG company go about building an omnichannel account team, now that retailers are starting to integrate digital and physical operations?

CPG companies have been slow to respond to these changes, causing friction and impeding organizational agility. Preparing the organization for an omnichannel world should be a priority.

6. Pursue digital transformation for the next wave of cost reduction

Buffeted by economic forces over the last several decades, many CPG companies have adopted a continuing cost-reduction mindset. This approach is not sustainable.

The next wave of cost reduction required to unlock value will likely hinge on digital transformation, enabled by a systematic, factory-like approach that produces products, a reimagined experience, streamlined ways of working and enhanced productivity. This type of holistic transformation employs new ways of working to enable real and accelerated impact: a production hub—complete with playbook—as well as standard tools and repeatable solutions to build, automate and optimize processes.

At a global CPG company, PwC built a bespoke digital hub: an end-to-end ecosystem of experience, design, development and service teams to identify opportunities, design products and reconstruct the value chain for various front-, middle- and back-office functions. The change management component accelerated digital adoption among customers and employees. Outcomes included increased headcount efficiency, streamlined processes and an uptick in revenue.

How to win: four imperatives to shape success

Over the next decade, you can expect significant disruptive forces to transform the future of the CPG sector, from environmental and technological advances to social and human capital developments. Rather than cede control to external economic forces, CPG companies are well-positioned to help steer the future of the industry.

From our work across all segments of the CPG industry, we’ve analyzed a variety of companies. The most successful are taking control of the future by planning ahead. Here are some of their key strategies for success:

1. Choose interlocking capabilities that play to your strengths
2. Deploy deals and divestitures to configure your portfolio
3. Unleash the power of cloud and data analytics within a robust technology ecosystem
4. Infuse your culture with a sense of purpose

1. Choose interlocking capabilities that play to your strengths

You don’t have to excel at everything. Rather, make well-thought-out choices about which five or six capabilities represent your particular strengths—those that set you apart from competitors—then reinforce those strengths to scale up.

Choose carefully to ensure that the capabilities you land on span commercial, supply chain and supporting functions. Working in concert, this capability system can represent your strategy in action. In some instances, forging alliances with other companies that offer complementary strengths can help accelerate development of a seamless ecosystem that best serves customers.

2. Deploy deals and divestitures to configure your portfolio

Assess your overall portfolio to uncover gaps and redundancies. With low interest rates powering a sustained M&A boom, a PwC analysis illustrates that opportunities abound for capability-enhancement deals that generate robust shareholder returns.

As you fill gaps in your overall portfolio with strategic acquisitions, continue assessing your overall portfolio for products—or participation in certain categories—that don’t support your core capabilities. These slow-growing or “misfit” offerings are ripe for divestiture, which will allow you to focus on a leaner, more cohesive growth portfolio.

Having assessed their portfolios and made the right deals to strengthen core capabilities, CPG companies are exploring new tech-savvy options to configure their portfolios and evolve their operating models. These new measures often require a CPG company to help modernize its approach to the market—for example, leverage its capabilities in a new or different way—to unlock new sources of competitive advantage and revenue, via models such as these:

Super distributor—Developed direct store distribution (DSD) capabilities to support its own business expanded to other CPG companies who lacked the scale for this level of distribution.
Lifestyle platform—Extended brand strength in specific categories such as cosmetics to adjacent categories such as beauty solutions that include both products and services, in response to consumer needs.
Consumer connector—Analyzed consumer data gathered from a broad portfolio to forecast behavior and trends that other CPG companies can purchase.
Meal solution provider—Created healthy, customized home-delivery meals by combining the best elements of meal kits, restaurant delivery and home-cooking.

3. Unleash the power of cloud and data analytics within a robust technology ecosystem

The possibilities inherent in a robust technology ecosystem powered by cloud and data analytics are substantial: CPG companies can better combine the synergies of cloud transformation with advanced data analytics and AI to expand their reach into direct-to-consumer e-commerce channels as well as to generate new brand loyalty.

They can gather and analyze internal and external data sources for audience management, personalization and real-time decision-making, allowing them to pivot in response to changes in the economic landscape. More holistically, cloud technology—within a robust technology ecosystem that encompasses data analytics—can transform operational and business initiatives to drive consistent innovation and bottom-line growth.

So why isn’t this happening? A PwC analysis finds that the top two reported barriers are a lack of alignment and clarity on roles and responsibilities within the organization, as well as a lack of tech talent. Other obstacles include governance, value measurement and stakeholder engagement.

Ultimately, this transformation starts with a unified executive team supported by new metrics, governance and organizational structures. Done well, these measures can engage and align executives, attract tech talent and help the business choose solutions that truly support revenue growth.

4. Infuse your culture with a sense of purpose

PwC analysis over the past decade has found that companies with a distinctive corporate culture engendering a sense of purpose are twice as likely to outperform industry peers on revenue and profitability. Dedication to a common cause can energize the workforce.

Procter & Gamble has reinvigorated its 180-year-old company culture by adopting a start-up mindset that prioritizes research and innovation, funded with an annual R&D budget of $2 billion. This mindset has helped P&G maintain competitive advantage while researching ways to mitigate environmental impact and enhance sustainability. More than 150 small, cross-functional R&D teams work in fast cycles on innovative ideas to increase the chances of success.

Looking ahead, leading companies will likely continue future-proofing their cultures for tomorrow’s workforce. Here are five keys to help getting it done:

Embrace new ways of working
Learn from cultural changes that emerged during the pandemic, ranging from a more connected organization to new communication channels.
Accelerate your digital journey
Scale innovation enterprise-wide by doubling down on automation and accelerating investment in upskilling.
Cultivate operational agility
Capitalize on pandemic-enforced flexibility to devise workforce strategies that better align product portfolios with consumer needs.
Inspire commitment
Center policies on empathy to inspire commitment. Maintain open channels of communication that link employees to top management.
Reimagine the physical space
Harness remote work options for a reduced physical footprint that promotes scalable growth and long-term cost savings.

Spotlight on tax

From a new corporate profits minimum tax based on book income to a surcharge on certain stock buybacks to sweeping reforms in international taxation, US and global lawmakers and standard-setters are proposing a wide array of tax changes that could have far-reaching impacts for consumer-facing companies.

As companies in the consumer markets industry determine how best to prepare for these tax changes, they should consider potential actions in the context of broader business challenges. These include supply-chain disruptions, corporate responsibility and sustainability expectations — encompassing environmental, social and governance (ESG) considerations — and global operating model inefficiencies.

Consumer markets companies choosing to re-evaluate core business strategies related to supply chains, ESG initiatives and operating models in the context of an evolving tax and business landscape will be best positioned for future success. Using a data-driven approach — supported by technology — they can harness the insights necessary to make sound decisions, despite uncertainty and complexity.

Learn more about the new tax environment

Are you ready for the challenge?

This self-diagnostic checklist can help assess your organization’s preparedness for the next industry cycle:

1. Capabilities

Can we prioritize five or six capabilities that play to our differentiated strengths in our segment?
Taken together, can these capabilities represent our corporate strategy in action?

2. Configuration

Are our businesses and brands aligned with our strategy and differentiating capabilities?
What kinds of deals and divestitures could strengthen our portfolio?

3. Cloud, data analytics and technology

How will technology investments enable us to achieve clear, differentiated outcomes, such as customer acquisition and retention?
What metrics, governance and organizational structures do we need to put in place to gain the most value from our cloud architecture?

4. Culture

Do our culture and purpose inspire commitment from our workforce?
How do we measure and communicate our ESG principles in action?

Once you assess your current state, you can use these four dimensions to help reposition your business for lasting growth. It’s time to take charge of your own agenda. Regardless of unforeseen disruptions, you can succeed in the next industry cycle if you configure the right alchemy of capabilities for a cloud-enabled digital ecosystem, powered by a culture that inspires your workforce to commit to your purpose.