The consumer products (CP) industry is facing a critical juncture according to a new report and research released today by the EY organization. "The EY State of Consumer Products" report, which surveyed more than 500 CP manufacturers and retailers, more than 20,000 consumers, 190 CPCEOs across the globe, and conversations with 24 industry executives (report). The report offers a detailed analysis of the challenges and opportunities facing the CP industry and offers a roadmap on where to focus investment and innovation in today's rapidly evolving market. The report calls for CP firms to act with urgency to build brand relevance with consumers, customers (retailers) and capital markets, and transition away from past reliance on pricing power strategies to drive growth.

Capital markets reset
In the evolving landscape of CP companies, investor expectations remain steadfast, seeking steady and reliable performance. However, confidence in the sector is waning, faced with cost-of-living pressures, many firms have focused on cutting costs, reducing innovation and honing tactical pricing strategies. Nearly two-thirds (65%) of CP leader respondents acknowledge that investor expectations are increasingly influencing their business strategies. With anemic volume performance in many firms and top-line growth challenged by difficult consumer pricing environment – CP leaders are looking for M&A to drive the next level of performance. Although 81% of CP leader respondents believe that growing valuation gaps will hinder widespread M&A recovery in the next few quarters, CP firms are accelerating M&A portfolio reviews and inorganic growth strategies to position themselves to capture new markets and segments. Acquisitions in CP often generate three-year higher growth, but lower shareholder returns and operating margins. While divestitures result with lower three-year and operating margins, but generate higher shareholder returns.  

To regain investor confidence, companies must prioritize a future-forward operating model fueled by technology, enhanced and granular commercial practices, and accelerated product innovation to capture and shape consumer trends. The sector can find opportunities to reinforce its defensive position to investors and adapt to the structural and cyclical challenges taking place in the sector, with a clear emphasis on sustainable performance and effective capital allocation.

Rob Holston, EY Global and EY Americas Consumer Products Sector Leader, says:
"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."

Retailer capability and confidence grows
The report reveals that competing pressures on shelf space are increasingly shifting the dynamic between CP firms and retailers. Retailers are gaining leverage over CP firms through private label expansion, control of consumer data and retail media networks. Seventy-eight percent of retailer respondents believe that, in the long run, only one mass-market brand will remain on shelves, with the remaining shelf space made up of private labels, premium or niche brands. A view shared by 65% of consumer-packaged goods (CPG) companies.

This signals that retailer confidence will likely become the catalyst for change, placing increased pressure on CP firms to define their relevance and profitability to maintain their place across physical and digital shelves. With retailer confidence growing, 76% of retailer respondents say shelf space is becoming a more significant tool in negotiations with CP firms. Seventy-eight percent of retailers plan to continue to expand into more premium and niche product categories, and 67% say they will prioritize the development of their own brands over the next three years.

Perceptions of how the industry is evolving vary widely across regions. CP leaders in the Americas are most likely to predict a retailer-dominated future (47%), leading the charge by consolidating power through platform models, acquisitions and logistics control, while leaders in Europe, Middle East, India and Africa (EMEIA) are most likely to forecast stronger retailer and CP collaboration (40%). Asia-Pacific (APAC) leaders (41%) also predict retailer dominance.

With retailers and CPs increasingly competing in the same spaces, the report reveals CPs face the potential of their influence eroding: 70% of CP leaders state the challenges they face now require new strategies. Challenger brands add further competition to shelf space with their ability to innovate and distribute new products quickly, often outpacing larger, more established brands with new technologies. Many CP leaders are doubling down on strategies such as reach, efficiency and control, but these, discussed in the report as "Defensive Scale" are no longer sufficient. Only one-third of very large companies (over $1billion in revenues), for example, prioritize selling through retailers; 67% want to build their own distribution channels to recapture power.

Innovation and collaboration
The report finds that despite a shift in the dynamics between CP firms and retailers, both agree collaboration is still essential:

• 75% of retailers say working effectively with manufacturers is vital to their success and CPs largely agree (77% say working effectively with retailer is vital to their success).

• Bolstering innovation capability is a primary driver of CP firms' M&A strategies.

• Retailers are increasingly prioritizing innovation as an area for collaboration, yet 21% of CP firms are still not engaging in joint innovation efforts.

• 76% of CP leaders agree that innovation is becoming more complex and increasingly requires analytics and artificial intelligence (AI) — but fewer than a third (32%) believe their AI, data and analytics capabilities give them a competitive edge.

• 65% of retailers say they rely on CP manufacturers to bring new and exciting products to stores to drive traffic.

• Yet, fewer than a third of CP leaders see themselves as highly effective at accelerating new product innovation (31%) and scaling it rapidly (29%).

An area fostering increasing collaboration between CPG companies and retailers is retail media, which allows retailers to monetize their first-party data from loyalty programs and e-commerce platforms, creating a valuable revenue stream. The report explores how retail media offers endless collaboration opportunities, such as identifying and engaging new audiences, which are crucial for maintaining brand relevance. Sixty-three percent of CP leader respondents say retail media is becoming more important in their negotiations with retailers, emphasizing its significance. Overall, retail media is set to drive a new common agenda for CPG and retailers, ensuring operational efficiency and alignment with growth agendas.

Holston says:
"CP firms continue to recognize retailers are increasingly calling the shots. 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."

Data and analytics
Advancements in AI technologies are helping CP companies keep their longstanding role in the market by overcoming extended product development cycles and determining the best investment opportunities. AI, data and analytics capabilities are a top priority for retailer respondents (52%) and CPs respondents (45%) to strengthen their business over the next three years. Seventy-six percent of CP manufacturer respondents are increasingly reliant on AI to overcome innovation complexity and both parties agree collaboration across integrating AI and automation (Retailers 64%, CPs 61%) is essential to deliver mutual value.

Holston says: "Commentators are too quick to say the CP industry is in the doldrums. The insurgent brands are thriving. The very largest CP companies seem in control of their own destiny. The challenge is for those in between."

The report outlines five strategies for CPG companies to enhance their relevance and profitability:

1. Portfolio innovation

2. M&A

3. Tech-enabled operating model

4. Commercial excellence

5. Marketing and AI

"The EY State of Consumer Products" report is available at: https://www.ey.com/en_gl/state-of-consumer-products-report