Consumer products sector banking on volume and agility

By: Melissa Delgado

LAST month, a popular fast-food chain found itself in a bit of a pickle after announcing that it would invest millions of dollars in rolling out digital menu boards as well as test "dynamic pricing." Unfortunately, many news stories interpreted the move as surge pricing, i.e., charging customers more for certain items during times of the day when demand is at its peak.

Following the backlash, the chain clarified that it would not use the digital menu boards to raise prices during high-traffic times but instead push offerings that reflect what data shows would resonate most with customers, such as discounts during slower times of the day or menu items that may be more appealing based on factors such as weather.

PR fumble aside, this development reflects the growing capacity of organizations to capture and analyze data with a granularity and speed that allows them to make real-time decisions about what will "sell" — an approach that Deloitte is seeing in the consumer products sector as well.

For the past few years, consumer product companies in the food and beverage, household goods, personal care, and apparel segments have taken to hiking prices to manage their rising input costs. It's a strategy that appears to have worked for several: taking a look at the global top 100 companies in the consumer products sector, some of the highest revenue performers were able to raise prices as much as — if not more than — other competitors. But continuing with this approach may no longer be possible in an uncertain economy where consumers are unwilling to pay more.

According to the Bangko Sentral ng Pilipinas' latest consumer expectations survey, Filipinos ended 2023 with an even more pessimistic outlook. The confidence index fell to -19 percent in Q4 from -9.6 percent in Q3 due to the following concerns: faster increase in the prices of goods, lower income, fewer available jobs, and the effectiveness of government policies on, among other things, inflation management. Indeed, inflation was slightly up in February 2024 after four straight months of deceleration.

In this environment, companies in the consumer products sector are shifting away from price as a source of growth and turning instead to the profitable volume playbook — they are looking for ways to grow volume through an innovative and more profitable product mix. Based on Deloitte's global survey of 250 consumer products executives, 72 percent said they must increase unit volume to meet their 2024 performance goals, while six in 10 have already made a significant expansion in production capacity.

To support this volume increase, Deloitte expects consumer products companies to pull the following levers in an effort to spread the cost.

Targeted advertising and promotion
Deloitte expects these companies to spend more on marketing in 2024. Sixty-eight percent of the executives polled said their companies would increase advertising and marketing spending as a percentage of revenue, with 66 percent planning to emphasize existing core brands instead of new brand introductions to maintain pricing power. Majority plan to spend more on digital mediums as they look toward highly personalized digital marketing and promotion for a higher return on investment.

Precision growth management
Deloitte's analysis of earnings calls and documents of the top 100 consumer products companies by revenue found that the mention of revenue growth management (RGM) doubled in the period from 2021 to 2023, which suggests that consumer products companies intend to lean heavily on this tool moving forward.

RGM uses advanced analytics on a large volume of data to give companies capabilities such as price setting in the context of competitors on the shelf, targeted promotion strategies, and retailer profitability management. One of the challenges with using RGM, though, is that insights may not be generated at the speed and accuracy that users would like because of the volume and messiness of the data the system has to work through. Generative AI (Gen AI) can address that chink.

Almost six in 10 executives Deloitte surveyed have improved their company's RGM capabilities over the past three years, while 37 percent believe that one of the use cases with the highest potential for Gen AI is an RGM assistant. This is likely the capability that will enable the beleaguered fast-food chain I referenced earlier to switch up its offerings depending on factors as changeable as the weather.

For corporations operating in an inflationary market and dealing with fast-changing consumer preferences, this kind of capability could be revolutionary and is further proof that the consumer products sector is transitioning its operations and decision-making from human-centric to machine intelligence-centric. So, if you belong to the camp that was not too happy with that fast-food chain's decision to try more flexible pricing and offerings, buckle up because it looks like you're about to see this trend ramp up in your everyday shopping experience.

As published in The Manila Times on 11 March 2024. The author is an Audit & Assurance Partner and the Clients & Markets Leader of Deloitte Philippines.