How to balance the CPG, retail and consumer relationship

As retail and CPG change, pressure on their relationship is building

Shelf space is at a premium again

The EY Future Consumer Index shows that as their priorities and options change consumers are turning away from once-favored brands. Branded products now come in smaller pack sizes, say 74% of consumers (they’ve spotted shrinkflation). And 50% would switch to a new product if it offered better quality. They’re more willing to try private label, with 41% having switched already. Brands are not important in 48% of purchase decisions, putting CPG companies at a disadvantage.

New power dynamics are certainly emerging. CPG companies and retailers now have a different kind of relationship with the consumer, and with each other. There used to be a simple linear chain: CPG companies manufactured brands; retailers sold them in their stores; consumers bought them. That’s how it worked for decades. But with consumers focusing more on value and price, they’re showing less interest in brands – apart from luxury goods – and more interest in what retailers themselves have to offer. 

These trends are intensifying a traditional challenge for CPG companies. They’ve always had to work hard to make consumers believe their brands are worth a premium price, and to persuade retailers to stock them in favorable positions. But now retailers are exercising far more control over their shelf space, ensuring that every item works hard to earn its place, not least because they have more private label products that they want to sell.

Shopping is fragmenting, making value elusive

While the power dynamic appears to be tilting towards the retailer in some aspects of the CPG relationship, they shouldn’t celebrate too soon. In a world where marketplace and peer-to-peer platforms, subscription models, and social media are re-landscaping the shopping environment, consumers aren’t just turning away from brands they used to trust; they’re also losing interest in traditional shopping experiences.

Five opportunities for CPG companies and retailers to reset the relationship

In addressing their challenges, retailers and CPG companies have in many ways taken on parts of each other’s traditional role with varying degrees of success. The change in relationship is unsettling, but the core goal of CPG companies and retailers remains true – to develop and sustain profitable relationships with consumers.

Ultimately, maintaining an understanding of the consumer remains critical. When actions benefit the consumer, the whole ecosystem reaps the rewards. And in such a mutually reliant ecosystem, success hinges on nurturing flexible, cooperative and innovative methods of thinking and operating – maximizing each other’s talents and innovations to face the future. Here are five opportunities for better consumer-centricity and collaboration:

1. Working together to deliver multi-channel experiences

With the many challenges that both CPG companies and retailers have to address, they must prioritize operating without friction across multiple channels and creating the distribution and logistics systems. They need to be able to make compelling offers to consumers wherever they are, in the moments that matter. And they also need to make their offers compelling to an algorithm, so the consumer is made aware of them.

This will take sustained investment in marketing and innovation from both parties. Retailers are rethinking the location, size, purpose and design of their stores, so they can maintain footfall while supporting e-commerce effectively. CPG companies are trying to carve out their share of online shopping by experimenting with direct to consumer (D2C) platforms. If they leverage one another’s core strengths and take a combined strategic approach to these common challenges, addressing the investment needed together, it could pay dividends for them both.

2. Addressing value versus volume

In response to consumers becoming more price-sensitive, retailers have focused heavily on delivering value. However, this drive for value in retail appears to contradict a desire to drive volume in CPG. The EY Future Consumer Index shows that as price sensitivity is growing, consumers are buying less and trading down in search of value. With 55% only buying brands that are on promotion. This leads to the question of whether CPG companies are focused on the right metrics and measures of success if they are still pursuing volume. Both CPG companies and retailers have a shared interest in striking the balance between value and volume.

In an effort to achieve this there’s scope to use AI-led solutions, such as revenue growth management, to customize and fine-tune portfolio, pricing, promotions and price/pack architecture right down to the store level.

3. Data innovation and insight sharing 

Retailers have vast amounts of first-party data about what, where, when and how consumers make different purchase choices, which often determines a brand’s future shelf space. But they have a limited view of the future consumer, where they are headed and what that looks like for their stores. In contrast, CPG companies tend to focus their insights on future product innovation or new product design, but these consumer insights tend to be very category-siloed, meaning product decision makers don’t have a view of how their products and categories are interacting with other categories and consumer buying behavior more broadly.

Working together and sharing their deep consumer insights, CPG and retail could deliver a much stronger understanding of consumer purchasing behaviors, enabling for example, more effective analysis of trade promotions and create better-targeted consumer campaigns. Working together, they could create and execute more profitable business and promotion strategies, discover tactical opportunities through the year, and maximize return on investment.

4. Turning points of friction into drivers of value

There are many points of friction in the shopping experience; for example, in apparel, consumers have switched the changing room for their bedroom. They expect to return unwanted goods at no cost to themselves, and often engage in bracketing – buying items in multiple sizes, so they can send back what doesn’t fit. For both retail and brands, returns have become a key point of friction, and in response to the associated costs, some sellers are experimenting with differentiated returns policies to reward and build customer loyalty. Some are accepting bracketing within defined limits and offering faster or free returns to regular customers who meet a minimum actual spend or who join their loyalty programs.

Others are innovating using AI to help consumers make better buying choices from the start and deliver a better buying experience. The Index shows 59% of consumers trust AI-generated imagery to show them what a product would look like on them, 50% trust AI to take size measurements via their phone camera, and 56% are happy for AI to answer their questions about an item.

5. The AI opportunity

There are endless ways sellers can use AI to turn current points of friction into value drivers. The strategic use of AI is an increasingly important driver of growth and margin improvement. AI can help to anticipate future consumer needs before they arise, and it can help to constantly reassess and fine-tune the relationships with the other parties that are critical to success.

EY research¹ shows senior CPG executives are much more likely than their retail peers to see AI investment as an opportunity for front-end business transformation, for example around developing consumer touchpoints; retailers are more focused on AI as an optimization tool for their back-end operations to drive cost savings and efficiencies. CPG leaders are also more likely than their retail peers to believe AI will have a significant impact on revenue growth now and within the next two years.

But we expect these differing attitudes about the AI opportunity to come into alignment as AI becomes an essential part of a profitable and sustainable CPG and retail relationship. This will be increasingly critical as retailers and CPG companies anticipate additional costs in 2024 (63% of CP leaders and 58% of retailer leaders expect costs of inputs and cost of doing business to increase in 2024) and intend to pass these costs onto the consumer. 

Creating a collaborative mindset with the consumer in mind

The relationships between CPG, retail and consumers have changed primarily in response to the ongoing disruption of the past few years, but also because needs, expectations and values have changed too. The linear model we mentioned earlier is not a straight line anymore. CPG companies make products, but they also deliver and sell them to consumers; retailers sell and deliver products to consumers, but they also make them; consumers buy products, but they often personalize and co-create them with CPG companies.

In addition, the ecosystem has expanded, as shopping fragments across different places and platforms and consumers have more input into the products they buy – all of which creates challenges for CPG companies and retailers. This means it’s more important than ever for retailers and CPG companies to stay close to their consumers. We see CPG companies still chasing volume, but when consumers aren’t buying as much, are they focused on the right measures of success? The retailers who have survived the past few years have innovated and kept a laser focus on customer needs; those who didn’t are no longer around.

In an ecosystem as interdependent as this one, success now is about fostering open, collaborative and agile ways of thinking and working – leveraging one another’s strengths and innovations to approach the future in a position of strength. Ultimately, it’s crucial to continue to understand the consumer. If you do the right thing for the consumer, the entire ecosystem wins. 

Summary 

Disruption and innovation have forced CPG and retail companies to rethink their businesses, while at the same time, consumers have been re-evaluating how they shop and what they really need.

The changes in the way CPG and retail work together could present the opportunity for a more radical rethink, not just of how they go to market, but how they measure success in a continually changing world.