Business leaders and consumers have adapted after the initial shock of the widespread lockdown that followed the outbreak of the COVID-19 pandemic. Demand patterns have started to normalize, supply chains are largely stable, and shelter-in-place orders are being lifted and replaced by physical distancing across the United States.
Although many consumer-packaged-goods (CPG) leaders have come to terms with the crisis, they are still challenged to know what comes next. Seventy-nine percent of the executives responding to a survey believed that the COVID-19 crisis would have a lasting impact on their customers’ needs in the next five years. But fewer than 30 percent of all executives felt that their companies were well equipped to address such changes. Even fewer—only 10 percent of all executives—believed that they were well equipped to pursue net new growth
Net new growth is growth delivered organically beyond the core, through new products, services, or business models. It does not cannibalize the existing product portfolio.
The foundation for profitable growth
We see a three-step predictive growth process as the foundation for profitable growth: first, predicting levels and areas of growth in consumer consumption and spending; then, transforming growth levers in response; and, finally, sustaining growth with operating-model changes. Consumer behavior and engagement with products, brands, and channels have changed so much that innovation must now be top of mind for CPG leaders.
A midcrisis answer to what’s next on the innovation agenda is crucial for delivering outsized performance. During the first five years after the Great Recession of 2008, CPG leaders that could answer this question outperformed the market by an average of 20 percent (Exhibit 1).
Most CPG companies reduced the pace of innovation back then; in fact, 2008 was the only year in the past 15 when innovation activity declined (Exhibit 2). Yet small brands and other innovators continued to develop disruptive offerings: new products, services, and business models paved the way for the gig-economy giants, direct-to-consumer (DTC) start-ups from eyewear to pet food, and other innovations across the consumer landscape. These innovators looked beyond the immediate challenges and into the next normal, and manufacturers hoping to emerge stronger from the pandemic must do the same. What does the future hold in store this time around?
In an April 2020 article, we identified six key consumer behaviors, ranging from price sensitivity to unprecedented channel shifting, during the first wave of COVID-19. In several ways, consumer behavior jumped forward by years in a few weeks. As the pandemic has unfolded, we’ve seen the texture of these consumer trends evolve even further. CPG companies and retailers that accommodate these changing behaviors will probably emerge from the crisis stronger, putting pressure on competitors to keep pace. Three behaviors are particularly germane to the innovation agenda:
As communities continue to reopen, economic and public-health realities will inform consumer behavior in the next normal. But it will also be shaped by the response of manufacturers that seize the opportunity by offering breakthrough products and using innovative business models.
How should CPG companies reimagine innovation for the next normal?
In this context, we see four imperatives for CPG companies as they anticipate the next normal: renovate the core using recent trials as a springboard, reset the innovation pipeline to help consumers thrive in their new reality, accelerate DTC evaluation and testing, and harness new ways of working—including digital—to accelerate the development process.
1. Renovate the core using recent trials as a springboard
With consumers slowly returning to public spaces, how can major brands continue to deliver new, powerful experiences that build upon trials of new products seen thus far in 2020?
With a period of economic uncertainty ahead, store brands are poised to take share. During the Great Recession and the time that followed it, private-label sales rose by 10 percent, versus only 2 percent for branded products.
Richard Clarke, “Private-label sales boom as recession digs in,” New Hope Network, April 1, 2009, newhope.com.
In the United States, private-label penetration now stands at only 18 percent across grocery categories. A look at Europe, where penetration stands at 32 percent, provides a view of the possibilities. In fact, 78 percent of retail buyers say they expect private-label growth to come at the expense of national and challenger brands.
McKinsey Retail Practice Survey, May 2020.
The next normal’s curve for private labels could very well be on the horizon.
This possibility means that branded manufacturers have a critical need to focus on their core brands and to simplify their efforts across the portfolio more broadly. The good news for large manufacturers is that the COVID-19 crisis has reestablished their market-leading position in many categories. In the 23 weeks ending August 8, 2020, such companies enjoyed 47 percent of all growth in the market, versus only 16 percent from 2015 to 2018.
McKinsey analysis of Nielsen POS data.
Although that represents a near-return to “fair share” for private-label brands, which had been growing in recent years, large brands should aim higher: they can build upon this momentum by redesigning their products to maximize things consumers value and to minimize costs for less relevant buying factors. To stave off the private-label threat, large manufacturers must amp up their renovation agendas for their core brands and rethink the approximately 75 percent of new-product development they now focus on line extensions.
Mintel Global New Products Database (GNPD), Mintel, 2019, mintel.com.
2. Reset the innovation pipeline to help consumers thrive in their new reality
Jessica Spaulding is now head of Cheetos marketing at Frito-Lay. In nearly 12 years of marketing at PepsiCo, she has seen consumer behavior change—but not as profoundly as it has during the COVID-19 pandemic. The disruption has created opportunities, particularly for market leaders, with “strong companies only getting stronger,” she says. But those opportunities do not come without challenges and big strategic questions.
New trials or reengagements have spanned categories. In food, this has meant that “consumers were definitely looking for comfort brands that are familiar to them,” at least initially, she says. But “health and wellness brands, now, have dramatically ticked up.” Where the dust will settle remains an open question, but marketers in every category are rapidly thinking through how to ride the tailwinds of new consumer engagement or, in some cases, to correct course.
The evolving channel landscape is also shaping how manufacturers think about innovation. E-commerce was once a “nice to have.” Now, in Spaulding’s mind, it is a “must-win battle” for all consumer-goods companies. Retailers and manufacturers alike are evolving to reflect that imperative. “It completely changes how you think about innovation, about investment, about your relationships.”
Manufacturers are left with open questions, says Spaulding. “How do you simplify the experience? How do you offer value to consumers? How do you evolve your products to address new occasions? COVID-19 has completely changed how you have to think about each of those. Where do you place your big bets?”
Healthy innovation pipelines are developed with a multiyear view in mind. Of course, many projects currently being contemplated—or even developed—started before the COVID-19 crisis and therefore take no account of it or of the next normal to follow. Certainly, the heightened brand opportunity wasn’t fully reflected in pre-COVID times (see sidebar, “A brand marketer speaks her mind”). With the new context in mind, consumer-goods manufacturers should review their project portfolios with an eye to the following (Exhibit 4):
Where might the opportunity spaces be most pronounced? The nesting behavior that the COVID-19 pandemic has prompted will create a new array of possibilities and challenges, especially in foodservice. According to Slackline, Amazon has grown its grocery business by 45 percent in the United States and by 80 percent in the United Kingdom. With this growth only set to accelerate as Amazon moves into brick-and-mortar stores, consumer-goods manufacturers should take a hard look at brands and packs that are most likely to succeed online and reevaluate the role that e-commerce can play in new product launches.
Foodservice also presents challenges for consumer-goods manufacturers. For restaurants, this has meant evolving from the traditional foodservice focus to everything from groceries to destination shopping. Consumers, for their part, have been surprised to see local restaurants offering grocery boxes containing everything from personal-care products to artisanal home goods. They seem primed to continue seeking out this new form of distribution. Looking to fill the void created by the closing of so many restaurants, consumers have also purchased meals through grocery retailers.
Manufacturers must consider the role they can play in supporting this evolution of consumer needs. Cash-constrained operators looking to reduce waste and inventory will want their suppliers to provide more “bespoke” packages of raw ingredients that help manage cash flows. Restaurants optimizing their delivery services will look for ways to enhance the customer experience with new product formats of packaged accompaniments, such as single-use condiments. Others, particularly scale operators, may look to CPG companies for thought partnerships to raise sales of high-margin add-ons, particularly beverages. CPG companies have an opportunity to help consumers find what they need for today’s reality.
3. Accelerate DTC evaluation and testing
In the face of the Great Recession, entrepreneurs successfully pivoted to generation-altering innovations—ideas ranging from online pure plays to the sharing economy. How will the collision of consumer behavior and technology during the COVID-19 pandemic set the stage for the next disruptors?
The innovations have already started. Although 60 percent of CPG executives do not feel prepared to pursue DTC opportunities,
McKinsey live poll during webinar “COVID-19: Implications and considerations for CPG e-commerce,” June 2, 2020.
signs are emerging that many are taking bold steps—for instance, launching new DTC sites focusing on snacks, pantry items, condiments, and alternative meats, among other things. For some companies, particularly those in high-engagement categories with differentiated products, these offerings may very well stick in a commercially viable way. Certainly, that’s what the companies launching them hope. For others, DTC forays will provide valuable direct connections to consumers, rich data, and opportunities to test and learn quickly.
The challenging economics of DTC persist, so while it should be on the agenda of every CPG leader, it requires a hard look. Customer-acquisition costs spiked before and during the pandemic and that is likely to persist. Given the high churn rates associated with the channel, its customer lifetime value—at gross margin—must cover that acquisition cost just to break even and must then reach approximately five times the acquisition cost for a DTC venture to scale up successfully.
To achieve this goal, CPG companies must consider DTC’s full omnichannel value (sales, insights, testing); embrace a distinctive value proposition; focus deeply, from day one, on unit economics; and get ahead of the operating model and tech stack early to support scale if it can be reached. Given the many pieces that must fall into place, the right starting point will probably be an iterative venture capital–like model to surface insights rapidly, develop concepts, and build business cases. Further investment should follow only if the initial sprint yields promising results.
4. Harness new ways of working, including digital, to accelerate the development process
To weather the COVID-19 pandemic,
many CPG companies stood up new ways
of working in weeks—things that would
normally have taken years.
To weather the COVID-19 pandemic, many CPG companies stood up new ways of working in weeks—things that would normally have taken years. From restructuring teams to put them outside old reporting lines to implementing scenario-tested response plans, many CPG companies now have new proof points for how to operate an agile organization. These can now be leveraged to improve product development. The nerve centers that have buoyed operations during the pandemic can be carefully redeployed in the form of sprint teams focused on integrating consumer, competitive (including private-label), technological, and supply-chain insights. These teams can rapidly collide them to identify specific brand and product changes that meet consumer needs and preferences.
The evolving landscape also gives companies new opportunities to digitize their development process. Use cases for digital can address the needs of employees and consumers alike. For R&D teams, digital tools can help track project portfolios and the critical drivers of business cases. This approach, which we call “assumption-based development,” dramatically improves a CPG company’s innovation performance. As projects progress toward commercialization, the rising prominence of e-commerce and, for some CPG companies, of their own DTC sites can enable and accelerate the test-and-learn process, to improve both speed to market and innovation outcomes.
Many CPG companies have already started to act. Some manufacturers have announced that they will trim their innovation pipelines by 50 percent or more to focus on the most promising projects. Others have rapidly launched DTC websites. Large brands are celebrating falling times to market—to just eight weeks, from a year. Yet many more companies are still flat-footed, wondering what to do. The race has already begun, and in the next normal, as in the Great Recession, companies that fail to innovate will probably be left behind.