The Elephant In The Room: CPG on the Cusp of DTC

The Elepahnt in the RoomWith emerging risks rapidly approaching—unexpected consumer attitudes, upheaval in the retail industry, channel conflicts, product customization, dynamic pricing and an e-commerce-fueled direct-to-consumer (DTC) shift, CPG companies are scrambling for answers. Can consultants provide them?

By Eric Krell

Deloitte LLP Vice Chairman and U.S. Consumer Products Leader Pat Conroy spends a lot of time peering into the future with senior executives at consumer packaged goods (CPG) companies. The most productive meetings occur when Conroy and his clients “flatten the corner.”

“Nobody can see completely around the corner,” he explains. “But if you can flatten that corner to get a slightly better angle of vision, you can make out what’s coming. And those insights can give you a huge advantage in the market.”

Those glimpses are incredibly valuable—in part, because CPG leaders are all too familiar with the problems staring them in the face. They know that recession-bruised consumers are spending less and that economic growth in most markets remains sluggish. These evident challenges explain why the industry has been heavily fixated on cost reduction in recent years, and perilously light on game-changing innovation.

It’s the emerging risks—the threats and opportunities that they do not recognize and have not planned for—that Conroy wants to help them discern. “That’s where the real value is,” he adds. “When they know more about the disruptive forces that are approaching, they can gain a significant advantage over competitors” who possess less visibility.

These disruptive forces are huge, and rapidly approaching: unexpected consumer attitudes, upheaval in the closely linked retail industry, channel conflicts, an e-commerce-fueled direct-to-consumer (DTC) shift, product customization and dynamic pricing to name few.

What’s more, innovation with a capital “I” has been lacking in the CPG industry in recent years, says Dan Wald, a Partner at The Boston Consulting Group (BCG) and a core member of the firm’s CPG group. “The industry’s traditional model of innovation that worked so well in the past 20 years is proving not to work so well lately,” Wald reports. “It’s difficult to point to real groundbreaking innovation in consumer packaged goods. In the past five years, the industry has been much, much more focused on the supply and cost side.”

That focus appears poised for a dramatic shift to more ambitious, truly game-changing work as a phalanx of disruptive forces barrel around the corner and collide with CPG companies.

‘Foundational’ Changes and ‘Duped’ Consumers
These forces take several forms, the most evident of which is technology in the form of customer analytics and e-commerce.

Point B Principal Peter Weiss, who leads his firm’s marketing and product management practice, says that one of the most notable changes CPG companies face is “the massive amount of consumer data available in real-time through social media and on-line channels combined with business intelligence tools for quantitative analysis and visualization.” The challenge, Weiss continues, is to leverage these powerful and evolving tools to develop more robust consumer insights and customer segmentation.

The promise and peril (particularly on bricks-and-mortar retailers) of e-commerce also looms for many CPG companies. E-commerce raises a host of questions for CPGs. “Channel conflict is the number-one issue that many CPG companies face right now,” notes Kurt Salmon Partner and Director, Hard Lines Practice, Tony Ward.

“E-commerce is coming in a whole bunch of different categories,” BCG’s Wald adds. “There’s speculation that it’s basically coming to all [CPG] categories, and I can’t disagree with that. It really is a foundational change.”

Other drivers of fundamental industry change include: