2016 Consumer Products Industry Outlook
Interview with Barb Renner
Consumer product (CP) companies face an unprecedented confluence of changes such as declining brand loyalty, rapidly evolving technologies, changing demographics and consumer preferences, and economic uncertainty. Barb Renner, vice chairman and US Consumer Products leader, Deloitte LLP, shares her 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 is the biggest challenge facing the industry in the coming year?
The four biggest challenges the industry will face include:
Decline in brand loyalty
A recent Deloitte survey found that consumers consider only 30 percent of the brands they buy to be “must have” brands—brands they will buy at the retail price even if other products are on sale.1 Furthermore, the survey found that three out of four packaged goods categories have seen a decline in “must have” brand loyalty since 2011.2 Our research indicates that many consumers are basing purchase decisions on attributes beyond product taste, performance, and price. For instance, almost half of US consumers strongly prefer brands and products that align to drivers such as health and wellness, safety, corporate citizenship, and transparency.3
Uncertainty about consumer spending
Deloitte’s US Economic Forecast expects US consumer spending to remain relatively restrained due to factors such as low wage growth as well as rising income and wealth inequality.4 Additional headwinds might arise due to the lackluster economic performance of markets such as Brazil, China, Russia, and Europe, as described in Deloitte’s Global Economic Outlook.5 Overall, CP companies will likely have to contend with uncertainty about consumer spending in both US and key international markets in 2016.
Ineffective innovation capabilities
While most CP companies seek to more rapidly commercialize ideas and foster a culture of innovation, they face several challenges.6 First, keeping up with the frantic pace of innovation to maintain near-term performance of existing categories while also building the breakthrough new businesses of the future. Second, competing against a proliferation of nimble new entrants that are unencumbered by traditional assets and have access to an ecosystem that allows them to rapidly scale. Third, creating the right conditions to build and nurture breakthrough innovation.
Increased regulatory scrutiny
In recent years, regulators in the United States as well as international markets seem to increasingly focus on issues such as product safety, sustainability, and transparency. For instance, agribusinesses and food manufacturers will soon have to comply with the Food Safety Modernization Act, as the US Food and Drug Administration (FDA) recently finalized several rules to implement this act.7 In apparel and footwear, new labor codes are indicative of expected increased scrutiny on both voluntary actions and requirements.
Not only do CP companies likely have to contend with uncertainty about consumer spending in both US and key international markets in 2016, but also the challenge of keeping up with the frantic pace of innovation to maintain near-term performance of existing categories while also building the breakthrough new businesses of the future.
What trends might disrupt "business as usual" in 2016?
Potentially disruptive trends include:
Further consolidation of the CP landscape
After bottoming out in 2009, the CP industry experienced a resurgence in merger and acquisition (M&A) activity in subsequent years.8 A recent Deloitte study listed consumer products as one of the top five areas most likely to experience consolidation in 2015.9 We have already witnessed several transformative mergers in the consumer products industry this year. Global and US CP M&A volume increased 65 percent and 42 percent respectively, year to date from November 2014 to November 2015.10 Additional large-scale deals would not be surprising, given the low-growth environment and pressure from activist investors to deliver better returns on investment.
Digitization of the path to purchase
Today’s consumers are leveraging digital technology, including websites, social media, and mobile apps, to research products, compare prices, make purchases, and even provide feedback to peers and brands. A recent Deloitte study projects that 64 percent of all in-store retail sales will be influenced by digital technology in 2015, up from 49 percent in 2014.11 However, many CP companies are ill prepared to capitalize on the digital opportunity. Fewer than one in seven CP executives self-assessed their company’s digital commerce capabilities as “advanced” across 15 capabilities that are important for digital commerce success.12
Breach of confidential enterprise data including trade secrets
In this age of big data and digital marketing, data privacy and security breaches is about much more than protecting consumer data from external nefarious hackers. CP companies are also at risk for intellectual property theft including trade secrets, formulations, ingredients, and supply chain data–often from current and former employees, third-party vendors, and supply chain partners. One breach can result in disclosure of proprietary ingredients and processes, resulting in a negative brand reputation or competitors acquiring trade secrets.
Evolving definition of health and wellness
Several CP executives at the Consumer Analyst Group of New York Conference in 2015 acknowledged that consumers seem to be reevaluating their definition of healthy food and are modifying their food choices.13 According to a recent Deloitte study, an increased percentage of consumers describe themselves as “health conscious” or “ingredient sensitive,” pay very close attention to the nutritional content of the foods they buy, prefer products with fewer ingredients, and try to avoid preservatives and other chemicals in the food they buy.14 The study also found that consumers’ health and wellness requirements vary from category to category.15 Aligning with the evolving definition of healthy food will become increasingly important in the coming year.
Increasing distrust of large-company corporate responsibility resulting in greater appeal of smaller companies
The brand loyalty data we saw earlier clearly indicate that the days when most large companies in the food and beverage industry enjoyed unquestioned consumer trust in their brands are behind us. Industry analysts estimate that overall food and beverage sales increased 2.9 percent annually between 2009 and 2013. However, in this period, the 25 biggest manufacturers grew 1.0 percent annually, while smaller brands and private label manufacturers grew faster, at 4.9 percent and 4.0 percent, respectively.16 There appears to be rising skepticism among consumers about the values of large companies. According to Deloitte’s 2014 Social Media Survey, when compared with the average across industries, consumers are 3.4 times more likely to harbor negative sentiment about food companies.17
Today’s consumers are leveraging digital technology to research products, compare prices, make purchases, and even provide feedback to peers and brands. However, many CP companies are ill prepared to capitalize on the digital opportunity.
What are some steps companies can take to foster innovation and/or growth?
Companies could consider the following steps to drive innovation and growth:
Look beyond product for innovations
CP companies need to be explicit and realistic about innovation ambitions and organize and execute accordingly.18 They should refocus innovation activities to look beyond product and achieve balanced breakthroughs across service and business model dimensions.19 They should also build a distinct breakthrough innovation capability. CP companies need to anticipate and respond to the evolving consumer attitudes and behaviors. For example, as perceptions of health and wellness seem to increasing influence purchasing decisions of many consumers, CP companies should work to align their offerings and engagement strategies around consumer interests and values.20
Explore new business models
A recent Deloitte analysis revealed that while CP companies with sales over $10 billion do enjoy a higher return on assets, smaller companies, particularly in the food, beverage, tobacco, and household and personal products subsectors, are slowly beginning to narrow that gap.21 The emergence of several small CP companies with nontraditional business models (such as direct to consumer and online subscription based) in recent years indicates that there is merit to focusing on a niche market rather than the mass market. These success stories also highlight the importance of leveraging digital and social media for a more personal and “recurring” connection with consumers. As traditional marketing and channel economies of scale decrease due to digital pathways to the consumer, CP companies should consider evaluating their operating structures and aim to become more responsive to the changing market.
Consider M&A for portfolio optimization and reconfiguration
Deloitte’s 2015 Consumer Food Value Equation Survey revealed that 51 percent of consumers weigh evolving value drivers (health and wellness, food safety, social impact, experience, and transparency) more heavily in purchase decisions than they do the traditional value drivers of taste, price, and convenience.22 The call to action is evident when these findings are viewed in the context of diminishing brand loyalty and the faster growth of smaller brands. In general, CP companies may need to reevaluate the strength of their brand and product portfolios and consider M&A to reshape their brand portfolio.
The emergence of several small CP companies with nontraditional business models in recent years indicates that there is merit to focusing on a niche market rather than the mass market. CP companies should consider evaluating their operating structures and aim to become more responsive to the changing market.
1 Deloitte LLP, The 2015 American Pantry Study, June 2015.
3 Consumer product trends: Navigating 2020, Deloitte University Press, June 2015.
4 Daniel Bachman, United States Economic Forecast: Volume 3 Issue 4, Deloitte University Press, December 2015.
5 Global Economic Outlook Q3 2015, Deloitte University Press, July 2015.
6 Doblin, Deloitte Consulting LLP, New Rules, Old Game: How to Innovate More Effectively in CPG, March 2015
7 FDA, “Food Safety Modernization Act (FSMA): Frequently asked questions,”http://www.fda.gov/Food/GuidanceRegulation/FSMA/ucm247559.html, accessed October 12, 2015.
8 Deloitte Touche Tohmatsu Limited, Global powers of consumer products 2015, April 2015.
9 Deloitte LLP, M&A trends report 2015, April 2015.
10 Based on analysis of Thomas Reuters data.
11 Deloitte Consulting LLP, Navigating the new digital divide, May 13, 2015.
12 Digital commerce in the supermarket aisle: Strategies for CPG brands, Deloitte University Press, December 2013.
13 Food Business News, Clean label goes mainstream, March 1, 2015 (Link accessed October 19, 2015)
14 Deloitte LLP, The 2015 American pantry study, June 2015.
16 Credit Suisse, “Top 25 food and beverage analysis: Benefits of scale keep declining,” February 2014.
17 Deloitte Consulting LLP, Capitalizing on the shifting consumer food value equation, January 2016.
18 Doblin, Deloitte Consulting LLP, New Rules, Old Game: How to Innovate More Effectively in CPG, March 2015.
19 Monitor Deloitte, The Ten Types of Innovation: The Discipline of Building Breakthroughs, April 15, 2013.
20 Consumer product trends: Navigating 2020, Deloitte University Press, June 2015.
21 Backyards without fences: Carving out territory in the changing consumer products terrain, Deloitte University Press, January 2015.
22 Deloitte Consulting LLP, Capitalizing on the shifting consumer food value equation, January 2016