The consumer products market is currently at a critical crossroads. Confidence within the industry continues to decline given the cost of living, the volatile nature of the economy and an uncertain political landscape. And now, even the ultra-wealthy who have been the primary drivers of luxury spending despite the slump, are losing interest.
EY’s recently published inaugural State of Consumer Products report looks at the challenges the consumer products industry faces and how doubling down on investment and innovation is the path forward in this fast-paced market. One main takeaway from EY’s report is that retail firms must build resilience by reclaiming their brand relevance to survive the ultra-competitive and turmoil-riddled market of today.
The study surveyed more than 500 consumer product manufacturers and retailers, more than 20,000 consumers and 190 global consumer product chief executive officers. The report also spoke at length with 24 key industry executives.
The report’s authors noted that the consumer products industry has had massive shifts in three core relationships. Consumers expect “sharper value from brands,” distinction and innovation. Consumers are expecting personalized marketing that makes them feel seen and heard. For the retailers, they are looking for valuable partners to grow in their respective categories across various channels. From their partners, retailers are looking for those who can “execute excellence” and use data to drive growth. For capital markets, the investment community is looking for consumer product companies to showcase their strategic focus, operational capabilities, performance and cash flow to be a desired asset.
With the evolving landscape that consumer products brands now find themselves in, investors and their expectations are seeking out those with steady and reliable performance. Sixty-five percent of consumer product executives said that investor expectations are becoming a larger influence on their business strategies. Now, more than ever, leaders are looking to M&A to help drive their next phase.
While 81 percent of consumer products leaders polled hold the belief that valuation gaps will hinder M&A recovery over the next quarters, consumer product firms are accelerating their review of their M&A portfolios and their growth strategies to better position themselves to capture new markets and segmentations.
EY’s report authors suggest that companies need to regain the confidence of their investors by prioritizing a more future-thinking model — with advanced technology, “enhanced and granular commercial practices” and innovation in their product to help shape and capture consumer trends.
“The companies that are adapting have sustained investor confidence by delivering what matters,” said Rob Holston, consumer products sector leader at EY Global and EY Americas. “Earnings-led growth is being rewarded: companies growing through operational performance are significantly outperforming those reliant on M&A or financial engineering.”
Moreover, the report states that the new reality major companies find themselves in calls for new strategies — especially for established players who are facing the uncomfortable new reality of a changing market. While their distribution power once gave them longstanding market protection, the report calls for “more sophisticated go-to-market capabilities” for them to survive. Making investments in creativity and innovation rather than continuing their “slow and outdated” brand development will help the companies continue to be competitive in the marketplace.
Another notable takeaway from the report is that competition for shelves has vastly changed the dynamic between consumer product companies and their retailers. Retailers have now gained more leverage over consumer product firms through the expansion of their private labels, having control over consumer data and retail media networks.
Seventy-eight percent of retailers said that in the long run, only one mass-market brand will remain on the shelves, with the rest of the space taken up by private labels and premium or niche brands — a sentiment also shared by 65 percent of consumer goods companies.
Furthermore, EY said this forecasts that retailers will be the primary drivers of change. Hence, consumer product firms will have to further define their relevancy and profitability to maintain space on both physical and digital shelves. Seventy-six percent of retailer respondents said shelf space has also become an important tool in negotiations with consumer product firms.
According to the survey, 47 percent of consumer product leaders in the Americas predict a retailer-dominated future; they are leading the charge by consolidating power through platform models, acquisitions and logistics controls. Meanwhile, 40 percent of leaders from Europe, the Middle East, India and Africa, or EMEIA, forecast a stronger retailer relationship with consumer product companies. Forty-one percent of Asia-Pacific, or APAC, leaders also predict retailer dominance.
“CP firms continue to recognize retailers are increasingly calling the shots,” Holston said. “To strengthen the retail relationship and secure relevance with consumers, CP brands must collaborate to compete. By embracing what we call ‘Disruptive Optimism,’ showing up with conviction with real-time consumer insights and how they can grow the total category, CPs will have every opportunity to be recognized as a category leader, strategic partner and source of shared value.”
While retailers are prioritizing innovation on the collaboration front, 21 percent of consumer product firms are still not joining in on their innovation efforts. Despite 76 percent of consumer product leaders noting that innovation is complex and requires tapping into analytics and artificial intelligence, only 32 percent of them see AI, data and analytical capabilities as being able to give them a competitive edge.
With retailers and consumer product firms steadily competing in the same spaces more and more, EY’s report sees that the consumer product companies’ influence is eroding. With these challenges, they require new strategies to face them head-on. And despite consumer product leaders doubling down on strategies for reach, efficiency and control, these are no longer viable. Notably, only one-third of companies boasting $1 billion in revenue are prioritizing selling through retailers — 67 percent have said are “building their own distribution channels to recapture power.”
“The scale and reach of big CP companies historically conferred a clear advantage,” Holston continued. “With strong distribution, familiar brands, adjacent innovation, well-placed marketing investment and finely tuned pricing strategies, their performance was steady and predictable. Even through periods of disruption, including the COVID-19 pandemic, that model largely held. But its foundations have gradually been eroding. Revenue growth, whether organic or supplemented through an acquisition, has been stalling in recent years. Despite efforts to grow sales through incremental initiatives like product line extensions and pricing optimization, large players have generally begun to stall as an array of macroeconomic challenges has emerged.”
But not all hope is lost on the consumer product company and retailer relationship — 75 percent of retailers said that working with manufacturers as efficiently as possible is vital to their success. The same goes for consumer product firms — 77 percent of them said that working with retailers is key to their success.
When examining what consumers actually want, they still value brands but expect more than ever before: better quality, better value and a sense of community or connection from the brands they purchase from. Eighty-three percent of consumers polled said they are looking for better quality from brands, 78 percent are looking for better value and 67 percent said they expect brands to offer something new.
While many consumers still see the role of brands as notable, EY’s report authors note that loyalty only goes so far if brands can’t deliver meaningful benefits to the consumer. It’s not a total rejection of brands but a “reset of expectations.” While brand loyalty was primarily driven by brand recognition, nowadays, loyalty is more fluid. Consumers are willing to try something new and can be easily swayed to switch — but trust needs to be earned in more impactful ways.
“For CP companies, willing to adapt and assess their portfolios, the opportunity is clear: stay ahead of demand and shape consumer behavior to be the brand of choice for these high-value consumer groups,” Holston explained.
The report also outlines that five key strategies for consumer product companies need to use to enhance their relevancy and profitability are portfolio innovation, M&A, tech-enabled operating models, commercial excellence and marketing and AI.
“Our findings present a roadmap for CP firms to reclaim relevance, restore belief in the power of brands and thrive in a changing world. 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,” Holston concluded.