Moving Faster than Disruption

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The immediate outlook remains challenging. Many consumer staples companies have passed on price increases in certain categories. They’ve also avoided the worst of the global supply chain issues. Yet three interrelated disruptive forces that have created headwinds for the industry are still with us: value chain disintermediation; the erosion of scale advantages; and rapidly changing global consumer demographics and preferences (See Exhibit 1).

These forces threaten to intensify. They will pose both big problems and big opportunities for consumer staples companies. And they can open doors wide to innovators that usher in novel product and service offerings, and new ways to buy and receive them.

Here’s how disruptive forces are manifesting across the consumer staples ecosystem:

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Disintermediation in the Value Chain

At multiple points across the industry value chain — from upstream in supply chain to downstream at retail — new entrants are interrupting legacy relationships. Companies like Square and DoorDash in payments and delivery, respectively, as well as digital merchandisers from behemoth Amazon to fast-moving startups such as Dollar Shave Club, have captured massive amounts of value in a short amount of time by focusing on discrete activities that have previously been bundled into integrated consumer experiences. Their value propositions to consumers and customers and suppliers are novel, and they are not necessarily aligned with the success of legacy consumer staples players.

Erosion of Traditional Scale Advantages

Consumer staples companies have long enjoyed the advantages of scale. One has been managing large manufacturing and complex global distribution networks. Another has been the power to influence the retail experience. And a third is the ability to speak to many consumers at once through mass marketing. New technologies, however, have made it easier than ever for capital-light startups to enter the market at all points in the value chain and respond nimbly to customer preferences. For example, the direct-to-consumer boomlet was powered by the ability of a fledgling brand to efficiently outsource functions such as design, manufacturing, and drop-shipping. Challengers also have inexpensive access to a proliferation of data and analytics on customer preferences. Those companies can more precisely identify needs and target offerings through search and social media.

Changing Global Consumer Demographics and Preferences

As a whole, the industry does a great job of listening to customers and consumers and keeping track of and anticipating trends. Yet new technologies have made it easier than ever for consumers whose demographic profile is shifting to discover, access, and switch to new products. And consumers increasingly make decisions not only based on a brand’s purpose, a product’s formulation or its features, but also based on how they find those products, how they get them into their hands, and how they dispose of them.

The latter consideration — a product’s environmental impact — forces consumer staples companies to make hard choices on sustainability. And while there is a meaningful gap between consumers’ stated preferences and their actual purchase behavior, the risk of falling behind the trend is real.

We looked back at the past five years of financial data on publicly held consumer staples companies worldwide to deeply understand how the best performers dealt with and capitalized on the three disruptive forces.

Stepping back, we first looked at how the sector’s total shareholder return (TSR) compared with those of other sectors between 2016 and 2021. In short, the consumer staples sector has underperformed. TSR of public companies in food, beverages, household goods, hygiene products, alcohol and tobacco were less than half the average for all industries over the period. If a shareholder bought $100 in a consumer staples index in January 2016, their investment would have grown to $143 vs. $236 from a broader market index by the end of 2021 (See Exhibit 2).

Despite the overall underperformance, seven companies not only outperformed the sector but also did so while pursuing transformational strategies: Estée Lauder, Nestlé, Ocado, Shiseido, Tata Consumer Products, Walmart, and Woolworths Australia.

How did they do it? They leaned hard into business model innovation, transforming the way they operate. As such, we refer to them as consumer staples transformers (See Methodology note at the end of this report).

The transformers come from many places in the consumer staples landscape — from product brands to retailers — and with different global footprints. And while some of their outstanding financial performance is no doubt due to a strong category tailwind (especially in the case of higher-end beauty products), the variety of companies in the transformers group suggests something else is going on beyond being in the right category at the right time.

Did the seven transformers uniquely recognize the three disruptive trends? Not at all. Instead, they had the determination to act more aggressively to get ahead of disruption. For example, in anticipating consumer demand, these companies far outpaced peers in building direct consumer channels. Nestlé, Estée Lauder, Shiseido, and Tata laid down new distribution pathways. Retailers Walmart, Ocado, and Woolworth’s built meaningful new digital business models. The seven transformers not only focused on their legacy businesses; they leaped ahead of — and in some cases, accelerated — shifts in the traditional value chain (See Exhibit 3).

Disruptive forces will create new winners and losers in consumer staples. The outperformers over the rest of this decade will be those that catalyze and capitalize on them.

How did the seven transformers capitalize on the disruptive forces over the last five years?

We found they were strikingly similar in four ways:

1. They developed an engaging purpose and “North Star,” externally and internally.

Given the multifaceted need to change, executives need to agree on, craft, and articulate a clear plan for where the company will be over the next decade and beyond.

Estée Lauder’s recent success stems from CEO Fabrizio Freda’s clarity of vision and focus on execution. “Fabrizio was 100% clear on priorities and how we were going to get there. It really helps when it comes from the top,” a former executive told us. Broad changes and strategic transformations during his tenure have included:

• Hear from Walmart’s Suresh Kumar how the consumer staple transformer went from a physical retail giant to a digital commerce leader.

  Focusing on and investing in China as a market, while negotiating with key partners such as T-Mall for premium positioning to protect and burnish its brands’ reputation.
• Treating Lauder’s brands as a portfolio rather than as independent companies
• Shifting the culture from its heritage of being “trend-driven” and intuition-based to be more data-oriented – proactively investing ahead of consumer trends.
• Establishing a good reputation as a place for founder brands, through its acquisitions of MAC, Aveda, and Bobbi Brown.

Similarly, Walmart has benefited from a crystal-clear strategy. In 2016, the giant retailer announced e-commerce was critical to its future. Walmart followed its North Star declaration with an aggressive acquisition and investment strategy. It invested over $20 billion in buying more than 15 e-commerce firms. That included its 2016 acquisition of Jet.com to firmly establish itself as an online player — and infuse the company with digital talent — as well as its $16 billion purchase of Indian e-commerce firm Flipkart in 2018, its largest acquisition to date.

2. They scrutinized their portfolio to determine whether their businesses fit their North Star.

They then made the difficult decisions to jettison good businesses that no longer fit or had limited growth potential, while clearly identifying what new businesses and capabilities to pursue.

Nestlé is a great case in point. The company has been steadily shifting its focus from food and beverage to nutrition, health and wellness and it continues to make strategic portfolio changes. In recent years it divested its confectionery and water businesses in the US to “invest and innovate across a range of categories where we see strong future growth and [can] hold leadership positions,” CEO Mark Schneider has said. Those include pet care, coffee, and infant nutrition.

Now consider Shiseido’s experience. When CEO Masahiko Uotani took the helm in 2014, the company was stagnating, struggling with low profitability and internal resistance to change. Uotani, the first outside CEO in Shiseido’s more than 140-year history, spearheaded close scrutiny of the brand portfolio. “People were confused about the company’s strategy, and which brands were for which consumers,” a former senior executive told us. Uotani decided to focus on “prestige first” brands, where the company had more expertise. The company inked new deals to expand its high-end portfolio and divested its personal care product line. By sharpening its focus, Shiseido concentrated its leadership and investments on the booming China market. That produced steep increases in total shareholder return.

Culling through the portfolio also boosted the fortunes of Ocado. Founded in 2000 in the United Kingdom as an online supermarket platform, it later marketed its proprietary warehouse and shopping technologies to grocery retailers worldwide. This business, Ocado’s Solutions & Logistics division, grew revenue at CAGR of 80% from 2016 to 2019. The firm has repositioned itself as a software and robotics business.

3. They built relevant digital connections with consumers — meeting them where and how they want to shop.

From 2015 to 2021, roughly 85% of all venture capital funding in the consumer staples space went into new retail, e-commerce, and logistics platforms. That is a harbinger of continued innovation and disruption in distribution. The seven transformation leaders have capitalized on this trend, forging new pathways and new business models to meet consumers where, when, and how they want to be met. No matter how strong a brand is, consumers increasingly value those that get them their products in the most convenient way. Indeed, the way consumers search, discover, obtain, and dispose of a product is increasingly a critical part of the offering.

Estée Lauder developed personalized skin care, virtual consultation, and product try-on loyalty programs, and a one-platform approach for uniform customer experiences on its 1,700 e-commerce sites in more than 50 countries.

An early e-commerce pioneer was Nestlé. It was an innovator in direct-to-consumer sales with the introduction of Nespresso coffee machines and coffee in the mid-1990s.Today, it’s a $6 billion-a-year business with the highest margins in the company. Since then, Nestlé has expanded its direct marketing to other businesses. In meal kits, it acquired Freshly in the US and Mindful Chef in the UK. In pet care, its subsidiary Purina has added assets like healthy pet food brand Lily’s Kitchen. Healthy pet food is one of the fastest-growing segments, with 10% year-over-year growth.

Beyond going direct, making sense of the proliferation of consumer data also can point the way for companies to win in novel spaces.

Take the example of Walmart. It has aggressively leveraged data to launch digitally-focused businesses. Viewing the millions of visitors to its website and stores as a marketing audience, the company created Walmart Connect, a rapidly growing advertising business. It also launched the Walmart+ omnichannel platform featuring free delivery, Walmart Health, and Walmart PhonePe payments service. Walmart’s online marketplace doubled in size from 2019 to 2020.

4. They created a culture that embraces non-stop change.

To prepare for the future, companies must build a culture that can get employees to quickly adapt to new challenges, competitors, ideas, and trends. They must emphasize innovation and ensure that a diverse workforce plays key roles and exercises a powerful voice.

In 2017, Woolworths launched WooliesX, its innovation business, to make significant investments in strategic priorities. Powered by “the brightest minds in e-commerce, technology, media and data,” according to the Australian company, WooliesX is creating “a truly connected customer experience that is human and warm, driven by our purpose: to make our customers’ everyday lives easier.”

In the same way, the leaders of India’s Tata Consumer Products see disruption as the norm. In their view, product lifecycles are getting shorter, particularly since the pandemic. In addition, they see younger generations demanding innovation in sustainability, plastic-free packaging, health and wellness, and guilt-free indulgence. The company prioritizes building a capacity for innovation within teams and generating a big pipeline of robust ideas, with deep product and functional knowledge to meet the demands of product development, manufacturing, sustainability, and regulatory requirements. The company provides strong incentives for Tata management to take risks and invest in new products. And it stands behind this ethic by its willingness to take a hit on the bottom line for products that fail.

Shiseido, too, had to reshape its culture to embrace continual change. As global markets became more important, it shifted its organization structure from a centralized two-region view (Japan, where the company was founded and “rest of world”) to an internationally decentralized structure with teams leading six key geographies. Shiseido has also focused on creating a more inclusive and diverse culture. This was reflected in the diverse set of new leaders appointed to critical roles, moving away from its Japanese-dominant leadership team.

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The disruptive trends that threaten to indelibly change the global consumer staples industry — disintermediation in the value chain, erosion of traditional scale advantages, and changing global consumer demographics and preferences — will only accelerate. And they will play out in novel ways, given emerging enabling technologies such as Web3 and the metaverse, and additional socioeconomic shocks from the pandemic, inflation, geopolitical instability and polarization.

The successes of the seven consumer staples transformers show it is within every traditional brand’s or retailer’s grasp to make far-reaching changes that drive growth and create positive impacts for stakeholders. Those that define and align their strategy to their North Star, incisively rejigger their portfolio, build direct digital connections to consumers, and make their cultures change-obsessed will be the leaders for the rest of the 2020s.