The consumer-packaged-goods industry, has struggled to grow in the past decade after about 40 years of strong growth. A look back at recent decades of developed-market based CPG companies shows that, they have consistently managed to grow, but not always profitably. Its recent struggles are because of a confluence of large-scale trends, many of which have seen an acceleration during the COVID-19 crisis.
There has been the need for markets across board to evolve to meet the needs of the modern consumer, and Consumer Packaged Goods industry (CPG) is no exception.
With Millennials especially entering the phase of their lives where their spending ability is peaking, they are reshaping the trends that had seen the CPG industry so profitable in the past and in the process, creating an evolution.
Modern Internet technology has had an enormous and ongoing impact on the consumer goods sector. The ways products are manufactured, distributed, marketed, and sold have all evolved dramatically over the past few decades.
Performance in the consumer goods sector depends heavily on consumer behaviour. Developing new flavours, fashions, and styles and marketing them to consumers is a priority.
The Consumer-Packaged Goods industry
The CPG industry has relatively low-cost commodities that are consumed and replenished on a frequent basis. CPG products are typically packaged individually or in small quantities and are not designed for long-term use.
These goods can be considered as fast moving consumer goods, which are packaged goods with high sales volume, rapid inventory turnover, and often short shelf lives, such as foods and beverages, cosmetics, tobacco, apparels, cleaning supplies, toiletries amongst others.
The old model alone works no more
The Consumer-packaged goods industry has had an unusually, very stable model for a very long time, which most industry players used. This was as a result of five well documented elements.
First, these players were focused on mass-market, brand building and product innovation. That helped them generate stable growth and also gross margins that were usually about 25 percentage points above their non-branded peers. Many consumer goods sector companies are faced with a range of close competitors, substitute goods, and potential rivals. Competition on price and quality is often fierce, so brand identification and differentiation were critical to consumer goods sector companies' performance.
It was also about partnering closely with retailers and other elements of the mass channels in order to gain broad distribution. These companies also really thrived in developing markets by building brands and distribution as consumers became more-able to pay for consumer goods.
It was also about driving cost out of the operating model. And finally, it was about using Mergers and Acquisitions (M&A) to consolidate markets and generate more organic growth.
The Millennial Effect
Millennials are different from older generations in many ways. They prefer authentic, special, difference and sustainability is important to them. They tend to be more conscious eaters and are four times more likely than older consumers to say that, they resist buying from established brands.
GlobalData, a recognized leader in providing business information and analytics, found out in a study that, the older we get, the less likely we are to want to experiment with novel flavours and fragrances whiles millennials are more open to new and innovative concepts, indicative of wider exposure to foreign cultures and products from an early age.
Millennials are also importantly, entering the phase of their lives in which their spending is peaking. Yet, studies indicate, only 7 percent of them would consider themselves loyal to brands. Many of the 1.8 billion millennials worldwide today associate consumption with higher motives: they are more keenly aware of their health, value the local origin of products, and support the sharing economy.
This is emphasized by recent studies that concluded that 64% of consumers are now belief-driven buyers who want brands to deliver on societal issues, as well as products. This means that millennials will switch, choose, avoid or even boycott a brand based entirely on its stance on social issues. Therefore, you need to provide more than a great product to win them over and can lose them with just one small slip up.
Millennials also look out for more than a functional definition of a value proposition of a product. For instance, we all know that we should drink two litres of water every day. A value proposition will be for a water company to indicate something on the cap of a mineral-water bottle that shows the number of bottles needed to complete the drinking of two litters of water in a day. That moves the hand because this is what millennials are looking for and can subsequently lead to brand loyalty.
The concept of products having ‘badge value’ is most applicable to Millennials. This is a generation of consumers that value having differentiated products that they can show off via social media or help them get noticed at a party. Studies also indicate that 63 percent of millennials follow brands on social-media channels. These and other market trends bring fundamental changes that the internal structures of many companies fail to adequately reflect.
GlobalData sums this up perfectly, “Millennials are digital natives with a curiosity easily piqued by unusual things seen online and in social media. They are less loyal and more easily swayed by influences such as the media or recommendations by friends.”
From a convenience perspective, Millennials tend to live a very ‘on-the-fly’ lifestyle. Products that fit into their lifestyles can be considered winners with them, whether it’s a recloseable drink package or a travel size product that fits into a purse, wallet or bag.
This is a generation that is much more willing to try new things as compared to their predecessors. The wine segment gives a prime example of the difference between the two generations. A decade ago, wine in a non-glass package would have never worked, consumers just weren’t willing to accept the change. Now, you can look at the store shelves to see the success of wine in a box, wine in cans, and now wine in aluminium bottles. These success stories have been driven by the willingness of Millennials to experiment with new products and new formats.
Millennials cover a wide age range, and with many going into family formation, this can generally and substantially change what consumers want and demand as well as the core of the Consumer-Packaged Goods Industry.
Rise of e-market places
The growth of e-marketplaces also factors into the evolution of the Consumer-Packaged Goods industry with companies like Amazon, Alibaba, JD.com and Pinduoduo making up to 65 percent of revenue growth over the past five years. This growth has been accelerated by the COVID-19 pandemic as there was a notable growth in online demand as customers stayed at home during the pandemic, resulting in a trend of shopping for food on the internet rather than in stores.
During the crisis, Amazon surged by 65 percent in grocery categories in the United States and 80 percent in major European markets. Tesco, Britain's largest supermarket chain, also announced that before the pandemic, around 9% of its sales were online, a figure that has grown to more than 16%. The retailer now serves nearly 1.5 million customers online each week, up from around 600,000 at the start of the pandemic.
It was surveyed that, approximately 15 percent of US consumers tried grocery delivery for the first time during the COVID-19 crisis. Among those first timers, more than 80 percent say they were satisfied with the ease and safety of the experience; 70 percent even found it enjoyable and 40 percent intend to continue getting their groceries delivered after the crisis, suggesting that they have abandoned any previously held beliefs about grocery delivery being unreliable or inconvenient, instead, being surprised and delighted by the benefits of delivery.
Consumer-goods industry players therefore need to be abreast with the rising importance of e-marketplaces in many markets around the world to strategize accordingly.
Brands that are successful with Millennials today, truly understand that the package should be considered an important part in the production of Consumer Packaged Goods. Packaging is the first thing the consumer sees when they pick up the product off the shelf.
According to Nielsen, a leading global information and measurement company, approximately 60% of decision making happens at the shelf. No other marketing spend can impact a buyer at the moment of truth in the store and throughout the life of a product.
Nielsen indicates that, “Perceptions of a product begin as soon as consumers lay eyes on it. Packaging helps brands get noticed and, more importantly, can significantly elevate perceptions of a product.”
LRCFF Clear Coffee, for example, a coffee product recently launched in Slovakia and the UK, gained traction and stands out from rivals thanks to its eye-catching clear colour and packaging. The brand claims the colour addresses teeth staining concerns associated with traditional coffee drinking, while also offering something surprising and unique.
The CPG industry is evolving and will look very different in a few years. It is fast becoming a much bigger industry, with larger global players and more competition from up and-coming companies in emerging markets especially as millennials do not have a problem with switching to new brands.
Already, these changes are compelling CPG companies to rethink how they do business and pursue growth. Companies that fail to adapt to these changes or that make suboptimal choices will most likely be left behind by more strategic and action-oriented competitors.