How consumer-facing companies can speed up, as economies slow down

The trends present challenges and opportunities, for both CP companies and retailers. Companies in both sectors will be squeezed between inflationary costs — from transportation to labor — and weakening demand as consumers become more sensitive to rising prices and interest rates.

To compete effectively, brands need to reinvent their relationship with consumers, who are seeking meaningful differentiation from the companies they buy from, not just brand promises. Their products need to tell a story that shows how they can have an impact in areas that matter to consumers, such as health and wellness, higher-quality ingredients or sustainable environmental impact.

With the access today’s consumers have to multiple shopping channels and vast information sources, it’s important for companies to be visible. Retailers have physical stores, but digital channels are available to all, and CP companies can benefit from developing independent channels such as direct-to-consumer.

Companies that combine these efforts with changes to improve efficiency, such as creative uses of technology, can gain a competitive edge. Digital solutions are especially important because they can be the basis for significantly improving consumer relationships.

Consumer products: Connect with consumers with value adding strategies

In past recessions, many CP companies pulled back on marketing and advertising spending to cut costs. Those that did this, however, found that their smaller “share of voice” hurt brand awareness and market share once the economy picked up again.

Savvy competitors maintained their marketing spend and were able to gain market share in many cases. For many companies, the lesson is to resist the temptation to cut marketing expenditures, and, where possible, hold marketing and advertising budgets steady or even increase them to grow share of voice.

As companies invest in their brand, they will need to think carefully about their message to get the most from their advertising budget. Organizations need to align their approach with consumer values such as the demand for greater authenticity and transparency, personalization, emphasis on health and the environment, convenience and value. Instead of cutting prices, companies can add value to product portfolios through a combination of product innovation and premiumization with strategies that create opportunities to connect with consumers and their evolving expectations.

Pricing considerations will be of paramount concern, and, in an inflationary environment companies will need to maintain profitability by managing the squeeze between elevated input costs and weaker demand as price-sensitive consumers pull back on outlays and shop for less expensive alternatives. To do this, many companies will need to offset rising input costs by increasing the value of their products and increasing productivity. Price-sensitive consumers will shop for lower cost alternatives, but value-driven consumers will remain loyal. Low-demand products, on the other hand, will face substitution or delisting from major retailers.

As retailers emphasize own-label products and reduce shelf space for brands, CP companies must re-evaluate channels to consumers. CP giant Unilever is an example of a company that has invested in its direct-to-consumer capabilities while expanding its global reach. It partnered with the Chinese e-commerce company Alibaba to launch a new digital incubator to create new beauty and personal care brands for an online flagship store to reach more customers in China.³

Companies can also explore opportunities to expand footprints in high growth markets and can consider reshaping the core business through M&A, such as considering value-led, sustainability-related growth opportunities, or through divestitures or spin-offs, to generate new value.

Japanese beer maker Kirin is going through such a transition, diversifying its traditional beverage line to reposition itself as a health beverage company. New products include probiotic drinks, teas and alcohol-free beer. It is also spending to improve its environmental image with new programs for sustainable packaging, supply chain operations and plastic bottle recycling.⁴

Retailers: efficiency, balanced pricing approach and private label emphasis

Retailers can adopt similar pricing approaches that are likely to work for CP manufacturers, such as discounting lower-demand products and reinvesting in high demand products.

In an example of the approach some companies are already taking in the fluid environment, many retailers have reacted to abating energy and shipping costs in the third quarter of 2022 by maintaining high product prices to conserve margins.

With consumers buying less or seeking lower price alternatives, retailers can also benefit from consumers’ broader acceptance of private labels and value brands by introducing these in more discretionary product categories as shoppers show a willingness to switch. We are seeing many grocers introducing new budget price ranges and being rewarded with high demand from shoppers.

The EY Future Consumer Index found that 28% of consumers are planning to buy more store-branded products in the future. This rises to 61% of consumers who are willing to try store-branded fresh food and 53% who are willing to try store-branded packaged foods.⁵

Another strategy for retailers to consider is rationalizing stock-keeping units (SKUs) to increase focus on high-margin products. Additionally, streamlining the inventory procurement process allows retailers to:

• Minimize purchasing lead times
• Enhance inventory visibility
• Enable the cash conversion cycle
• Ensure greater flexibility to adapt to changes in consumer behaviors and economic conditions

An example of a company that benefitted from SKU streamlining is an American food and tea company that reorganized the products in its personal care segment in 2008 to focus on high margin items only. Between 30 and 40% of SKUs were discontinued, which helped increase SKU velocity, reduced working capital and business complexity and improved operating efficiencies.

Retailers have opportunities to deepen the connection with shoppers by educating them on how to get the most for their money and from the products they buy. They can promote recipe ideas that make food go further; and are driving sustainability by wasting less – retailers in some countries have acted to remove unhelpful “best before date” stickers from some products and are once again promoting ugly fruit (a must, given the heatwave-stricken harvests across Europe).  

Organizations can consider the efficiency of their store footprint to reduce store-related expenses while reallocating capital to online channel innovation. Successful companies are using technology, such as data analysis and automation to contribute to unconventional retail staffing approaches. For example, companies EY has worked with are using retail “rescue squads” to support teams at understaffed stores, category-level analysis to improve staffing allocations (via ey.com US) and special programs with schools to hire work-eligible students for simple tasks.

Weathering the storm

CP companies and retailers may also find it useful to combine strategies for growth in some areas with financial belt-tightening or efficiency moves in others.

• Reduce leverage now as much as possible to conserve cash, improve access to capital and prepare for the rising cost of servicing debt
• Reduce back office and cost-of-goods-sold overheads to optimize prices while maintaining enough cash and margin buffer to weather a more sustained recessionary period
• Pursue asset-light opportunities to curtail overhead costs and focus only on core operations. For example, companies can rationalize product portfolios and consider the impact of private label and how to counter it (for CP) or exploit it (for retail)
• Consider various steps to reduce costs and increase resiliency in their global supply chains.
• Increase communications and commitment to key vendors to have the right goods in the right place at the right time to limit supply chain disruption.
• Invest in technology integration across the value chain, including automated vendor management, artificial intelligence and machine learning in demand planning, augmented or virtual reality in selling and autonomous delivery.