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, 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.
This article first appeared in www.mckinsey.com
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