The consumer sector in 2030: Trends and questions
to consider
In light of dramatic changes
in the consumer landscape, how can retail and packaged-goods executives prepare
for the future?
What can happen in 15 years?
A look back at 2000 shows how much the world can change in
just a decade and a half. Back then, about 30 percent of people in developing
countries lived in extreme poverty, compared with less than 15 percent
today. Only 12 percent of people owned a mobile phone; now, more than 60
percent do. Facebook, which today has almost 1.5 billion users, hadn’t launched
yet. These and other developments have changed how consumers live, think, and
shop—and the changes are only going to accelerate. What’s going on in the world
economy is “no ordinary disruption,” as our colleagues have explained at
length.
Disruptive
forces can cause dramatic reversals. The retail and consumer-packaged-goods
(CPG) sectors have seen such reversals in the past 15 years. In 2000, Kmart was
the third-largest US retailer, with $36 billion in sales; by 2014, its annual
revenues had declined by two-thirds. Over the same period, Amazon’s annual
sales grew to $89 billion from about $2.8 billion. Alibaba, the market leader
in China’s booming e-commerce business, was only a 15-year-old company when in
2014 it filed the largest IPO ever, valued at $25 billion. Anheuser-Busch was
the world’s largest brewer in 2000; today, it no longer operates as an
independent company, having been taken over by formerly smaller players.
The
next 15 years, too, will bring their share of industry upheavals. We believe
companies that want to be on top in 2030 must study emerging trends and begin
preparing for them now. Certain trends will follow a pattern of predictable growth;
others may take more surprising paths. In this article, we cite examples of
both types of trends and some of their high-level implications for the consumer
sector. We then recommend a set of actions that retail and CPG executives can
take now to position themselves for success in the next decade and beyond.
Which trends will matter most?
Drawing
on our research, expert interviews, and extensive experience working with
consumer-facing companies worldwide, we have identified and analyzed the main
trends that have begun—and will most likely continue—to affect the consumer
industry. Some of them are already top of mind among executives, others less
so. The trends can be divided into five categories: the changing face of the
consumer, evolving geopolitical dynamics, new patterns of personal consumption,
technological advancements, and structural industry shifts (Exhibit 1).
There
is some level of consensus among industry observers as to how a few of these
trends will evolve in the next 15 years. For example, it appears fairly certain
that spending among middle-class consumers globally will almost triple by 2030
(as emerging-market growth more than offsets stagnation in developed markets)
and that more than 75 percent of the world’s population will own a mobile
phone.
Other
trends, however, don’t yet give clear indications of their medium- and
long-term trajectory. Some trends could experience explosive growth while
others simply peter out in a few years. One example is 3-D printing for
personal use: although 3-D printers for the consumer market are now available
for less than $1,000, experts are divided on whether the hype surrounding this
new technology will translate into widespread consumer adoption.
Each
trend will also have a different level of impact on the consumer industry. Some
will affect more geographic regions and a greater percentage of the world
population; some will cause bigger shifts in consumer spending. Mapping the
trends on a matrix—with level of predictability on one axis and potential consumer-sector
impact on another—can give consumer companies a starting point for
understanding which trends could have the greatest effect on their businesses.
By
looking across the high-predictability, high-impact trends (those in the
upper-right quadrant of the matrix), we can develop a base case for 2030—a
picture of what the consumer industry will probably look like in 15 years. With
the number of city dwellers increasing at a rate of 65 million each year, the
majority of the consuming population will be urban. The average consumer will
be slightly older, since growth among aging populations in developed markets is
outpacing growth in the younger demographic in emerging markets—although age
profiles will of course vary by market. About 75 percent of the 8.5 billion
people projected to be alive in 2030 will have both mobile and Internet access.
The middle class in emerging markets will be substantially bigger and its
members better off than their parents (average wages in China, for instance,
are likely to be approximately 45 percent of those in the United States, up
from 15 percent today). On the business side, consolidation will continue,
owners and investors will become more interventionist, and companies will make
better use of digitization, big data, and analytics.
The
trends won’t affect all consumer markets and product categories equally. For
instance, advanced robotics is making headway in Asia but is yet to take off in
South America or Africa. Companies should bear such nuances in mind when
determining which trends are most relevant to their own situations.
To prepare for low-predictability trends—those on the far-left
side of Exhibit 2—the most forward-thinking companies consider and debate a
range of scenarios for how the trends might unfold. They define a set of
markers that indicate the likelihood of each scenario materializing (examples
of markers might include a major change in the number of SKUs in a product
category, or the amount of investment in a particular technology among
start-ups). They then explore how the industry structure, value chain, and
competitive landscape might change in each scenario; prepare a portfolio of
options; and scale investments up or down as new information becomes available.
Five questions to consider
For most companies—regardless of geographic or category mix—the
base-case trends will almost certainly result in financial pressures. In fact,
our analysis indicates that close to 20 percent of companies in the consumer
sector are already in financial distress today.4
Companies
that are active primarily in mature, low-growth markets are particularly
vulnerable. Spikes in input costs, even if partially offset by factors such as
lower oil prices, could increase cost of goods sold and depress gross margins
(in some categories, by as much as ten percentage points). Greater product
complexity and rising labor costs could push up operating expenses by three to
five percentage points. And investments in automation and digitization could
increase depreciation on capital expenditures by two to three percentage
points, even as they enable efficiency gains over time.
Leaders
would do well to consider the following five questions. Formulating thoughtful
answers to these questions will help equip them for what lies ahead.
What makes us distinctive?
In an
environment of heightened competition, continued industry consolidation, and
deeper involvement from private-equity owners and activist investors,
“challenge everything” could be one mantra of consumer and retail companies.
They ought to be willing to evaluate and rethink every part of their business
system, zero in on what makes them different and what truly confers competitive
advantage, and drive out all superfluous costs. Companies that have made moves
in this direction include The Coca-Cola Company, which has been divesting its
US distribution assets over the past two years, and P&G, which shed more
than 100 brands so that it could focus on approximately 70 core brands.
Rigorous cost reduction is an essential part of such an
undertaking. The most disciplined companies make cost-structure improvements
part of the annual strategic agenda, conduct detailed internal and external
benchmarking, and instill a cost-conscious mind-set at all levels of the
organization through individual targets and incentives. Many companies should
seek to drive out at least 20 percent of operating costs, through initiatives
such as lean transformations, outsourcing of business functions, or
zero-base budgeting.
It’s likely that ambitious cost programs—such as those
recently undertaken by Best Buy and Levi Strauss & Co.—will become much
more common.
How can we engage consumers in an ongoing dialogue?
Especially
in an era of fast-changing consumer profiles and behaviors, companies must
strive for a thorough understanding of what consumers want and are willing to
pay for, and systematically use those insights to inform the evolution of
products and brands.
Are we paying enough attention to social media? Recent
research proves yet again that social media has a strong influence on purchase
decisions: across product categories, 26 percent of purchases on average were spurred
by recommendations on social media.7 As
smartphones get smarter and social networks become more sophisticated, it will
become even easier for consumers to share their opinions about products and
services. Companies can’t afford to ignore these conversations. They should
consider investing in ways to listen in on—and, just as important, generate—social-media
buzz.
How can we involve consumers in brand innovation? Many
companies—LEGO, Pepsi, and Unilever, to name a few—already use crowdsourcing in
one form or another to develop and test new products. The advent of 3-D
printing and rapid-prototyping techniques has made it easier and cheaper for
companies to test and continuously improve their new-product ideas.
What new consumer touchpoints can we offer? Companies
must meet consumers’ rising expectations for being able to buy what they want,
when and how they want it—which means providing a seamless omnichannel
experience. They must ensure that consumers have every opportunity to interact
with the brand, be it through online or offline channels.
For example, Nordstrom customers can buy products not just
in stores and on the web, but also on a mobile app, on Instagram, or via text
message—and they can pick up, return, or exchange their online purchases at
Nordstrom stores.
Are we set up to reallocate resources swiftly and at scale?
The
rapid pace of change requires companies to nimbly move capital, talent, and
leadership to the consumer segments, geographic markets, and business models
with the greatest growth potential. A disproportionately large investment in
developed markets, for instance, may be shortsighted, as it reflects a bias
toward markets that are currently the largest rather than those with the
greatest growth potential. (This bias may be part of the reason that, in almost
every emerging economy, multinational CPG players are losing share to local
champions.)
Furthermore,
the skill sets that CPG companies and retailers will need to win in the future,
such as serving emerging-market consumers and managing new technologies, are
different from the skills they’ve traditionally valued. A company’s talent must
align with its long-term market needs. Companies might consider doubling their
people investment (with regard to both staff size and skill levels) in
long-term growth areas, particularly in critical functions such as advanced
analytics and R&D.
Indeed, research suggests that companies that more actively
reallocate investments deliver, on average, 30 percent higher total returns to
shareholders annually than companies with more static budgets.
Yet agility in resource allocation is still rare. At most
organizations, the current year’s allocation serves as the basis for the next
year’s, with only marginal changes.
How can companies get away from the “stickiness” of historical
resource allocation? Best-practice companies agree on and continually monitor a
set of metrics (such as underlying market growth in a category) that serves as
the basis for dynamic resource allocation. Reallocation is on the agenda at
annual top-management workshops and regional strategy sessions. The management
team has transparent decision-making mechanisms and a clear sense of priorities
to guide investment and divestment.
What strategic relationships should we seek out and nurture?
In an
uncertain and rapidly changing world, partnerships and acquisitions can be
especially critical in two areas: better managing the supply chain and coming
up with new ideas.
Are there opportunities to integrate up or down the value chain? Partly
as a hedge against rising input costs, and more broadly as a means of exerting
greater control over the supply chain, some companies are pursuing backward
integration. Mexican bottling company Arca Continental, for instance, already
has a stake in a sugar mill and is looking to expand its position.
Who is in our ‘innovation ecosystem’? The
most innovative companies regularly tap into external sources of skills and
expertise, particularly in areas outside their core competencies. Partners
might include “connected home” vendors, research providers, or academic
institutions. Today, for instance, CPG companies are working with
strategic-design firms to identify unmet consumer needs and develop consumer
empathy. Retailers are collaborating with telecommunications providers to
create cutting-edge in-store tracking systems and shopping apps. For example,
discount chain Target, seeking to grow its grocery business, is partnering with
design firm IDEO and the MIT Media Lab to study food trends.
How can we use technology to differentiate, not just enable?
The leading consumer companies of the future will also be
technology leaders. Many
companies have acknowledged this reality, as evidenced by their recent openings
of “labs” in Silicon Valley and other technology hubs. @WalmartLabs employs
more than 3,000 people. The Home Depot acquired Austin-based tech start-up
BlackLocus and turned it into an in-house lab. Coca-Cola, The Hershey Company,
and Lowe’s have invested in SU Labs, a program at Silicon Valley’s Singularity
University that, according to its website, helps companies “experiment with
emerging technologies . . . before they’re ubiquitous.”
Have we digitized both our front and back end? Companies
must take a disciplined approach to thinking through and managing large digital
initiatives.
And they must digitize not only back-office functions, but
consumer-facing functions as well. By 2030, we expect retailers will be able to
create new retail “worlds”—virtual stores that use augmented reality to give
customers the experience of walking down a store aisle, for instance, or
personalization engines that link to real-time biometric data to recommend
meals with optimal nutritional content.
Have we adopted a ‘mobile first’ mind-set? Given
the massive shift to mobile shopping, companies will need to develop a mobile-led
omnichannel strategy rooted in a “mobile first” mind-set. Already, leading
consumer companies are allowing customers to “scan to buy” products from home
or to use mobile-linked features to navigate a store without the help of sales
staff. For retailers, a mobile and loyalty platform—available on any mobile
device and featuring all the functionality and information that customers need
in order to make buying decisions and digital payments—will be table stakes.
For CPG companies, a robust mobile strategy will involve not only developing
their own digital assets but also optimizing their brands’ presence on the
mobile apps of Amazon and other multichannel retailers.
Are we advancing with analytics? To
fully exploit data and analytics, companies must be able to choose and manage
data from multiple sources, build models that turn the data into insights, and
translate the insights into effective action. All
this requires deep analytical skills that typically need to be brought in from
outside. Companies must be willing to invest in new talent. We’ve found that a
small but expert analytics team, equipped with cutting-edge tools, can
accomplish much more than an army of unqualified employees.
In our
view, the future of the consumer industry is neither as unknowable nor as
predictable as some suggest. The smartest retailers and CPG companies will study
and begin to act on the known factors, while also ensuring they are nimble
enough to respond to unexpected developments. By deliberating—and executing—on
their answers to these five questions, companies will be well positioned to
become the winners of tomorrow.
Richard Benson-Armer
http://www.mckinsey.com/insights/consumer_and_retail/The_consumer_sector_in_2030_Trends_and_questions_to_consider?cid=other-eml-alt-mip-mck-oth-1512
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