According to a new report and research released today by EY, the consumer products (CP) industry is “facing a critical juncture.”
The firm’s State of Consumer Products report surveyed more than 500 CP manufacturers and retailers, over 20,000 consumers, 190 consumer product business CEOs across the globe, and held conversations with 24 industry executives to create an analysis of the challenges and opportunities facing the industry.
Act with urgency to build brand relevance
The report says that consumer product businesses need to “act with urgency to build brand relevance with consumers, retailers and capital markets, and transition away from reliance on pricing power strategies to drive growth.”
Nearly two-thirds (65%) of consumer product industry leader respondents said that investor expectations are increasingly influencing their business strategies. With poor volume performance in many firms and top-line growth challenged by difficult consumer pricing environment.
Many companies were looking for mergers and acquisitions to drive the next level of performance.
EY said that acquisitions in consumer products often generated three-year higher growth, but lower shareholder returns and operating margins. While divestitures resulted with lower three-year and operating margins, but generate higher shareholder returns.
EY also said that to regain investor confidence, consumer product companies must prioritise a future-forward operating model fuelled by technology, enhanced and granular commercial practices, and accelerated product innovation to capture and shape consumer trends.
“By understanding the critical shifts in consumer expectations, retailer dynamics and capital market demands, leaders can act boldly to rebuild relevance to lead with confidence,” said Rob Holston, EY Global and EY Americas consumer products sector leader.
Shifting dynamic between brands and retailers
The report highlighted how competing pressures on shelf space are increasingly shifting the dynamic between consumer product businesses and retailers.
Retailers are gaining leverage over CP firms through private label expansion, control of consumer data and retail media networks.
Seventy-eight percent of retailer respondents believed that only one mass-market brand would remain on shelves in the long term, with the remaining shelf space made up of private labels, premium or niche brands. This was a view shared by 65% of consumer-packaged goods (CPG) companies.
It appears that retailer confidence will likely become the catalyst for change, placing increased pressure on CP firms to define their relevance and profitability to keep their shelf space.
Meanwhile, 78% of retailers planned to continue to expand into more premium and niche product categories, and 67% said they will prioritise the development of their own brands over the next three years.
With retailers and consumer product companies increasingly competing in the same spaces, the report reveals that these companies face the potential of their influence eroding.
A focus on retail media
An area seeing increasing collaboration between CPG companies and retailers is retail media, which allows retailers to monetise their first-party data from loyalty programme and e-commerce platforms, creating a valuable revenue stream.
The report says that retail media offers “endless collaboration opportunities,” such as identifying and engaging new audiences, which are crucial for maintaining brand relevance.
In total, 63% of consumer products leader respondents said retail media is becoming more important in their negotiations with retailers, emphasising its significance.
Holston says: “CP firms continue to recognise retailers are increasingly calling the shots. To strengthen the retail relationship and secure relevance with consumers, CP brands must collaborate to compete.”
He continued: “By embracing what we call ‘Disruptive Optimism,’ showing up with conviction with real-time consumer insights and how they can grow the total category, consumer products will have every opportunity to be recognised as a category leader, strategic partner and source of shared value.”
Advancements in AI tech is also helping consumer product companies keep their role in the market by overcoming long NPD cycles and identifying the best investment opportunities.
AI, data and analytics capabilities were a top priority for retailer respondents (52%) and consumer product respondents (45%) to strengthen their business over the next three years.
Despite the concerns mentioned in the report, Holston was still positive about the future for consumer brands.
“The insurgent brands are thriving,” he said. “The very largest CP companies seem in control of their own destiny. The challenge is for those in between.”