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IBM Global Business Services

IBM Institute for Business Value

                                   Consumer Products

IBM Institute for Business Value
   IBM Global Business Services, through the IBM Institute for Business Value,
 develops ...
The future of the Consumer Products industry
The end of the world…or a world of opportunity?
by Guy Blissett, Trevor Davis...
are projected to have populations exceeding         •	 Becoming intimately familiar with new
      20 million, many of whi...
The future of the Consumer Products industry
The end of the world…or a world of opportunity?

 Population growth and     W...
In India, of the more than 1 million kilometers of                           basic services, they are exposed to modern
Affluent Potentials are   The rural poor will constitute US$1.3 trillion in   •	 Today’s enlightened and empowered middle
Consumption, climate and shortages impact                                 And all of these items require more energy to
Climate changes and      Such spoilage and losses may already equal            Summary
                           50 perce...
3. Business models that will be reinvented                                   CP companies looking to prosper in the 21st
Empowered consumers        Innovation, persistence and partnerships            Indulgences and essentials in every facet
In addition to rethinking the “where” dimen-        Leading CP companies are rapidly navigating
      sion of new markets,...
CP companies      marketing messages and brand hierarchies                  2. Channel: Managing complexity,
      need to...
As CP companies expand their reach and               At the same time mega-retailers still account
      push into new mar...
CP companies can build      through to the retail shelf is also no guarantee       the expansion of mobile coupon initiati...
Hindustan Unilever Limited’s Project Shakti: Connecting with the Rural Poor
        Recognizing the specific needs, as wel...
Ongoing consolidation     The basis of competition in the CP industry        SOS.68 Commodities giant Cargill readily
•	 Companies are vertically integrating for                               nology to drive consistent global processes
Flawless execution      Capabilities                                       4.	 Innovation	–	An open innovation model
       Success in this changing world will require execution against six capability areas.

The status	quo is no longer sustainable. The      For more information about this study, you may
     future belongs to th...
About the authors                                Patrick Medley is the Managing Partner -
      Guy Blissett is the Consum...
The right partner for a changing                  References
     world                                             1
11                                                      19
           IBM Institute for Business Value analysis;          ...
30                                                   39
          IBM Institute for Business Value analysis            Cor...
IBM Retail | The future of the Consumer Products Industry
IBM Retail | The future of the Consumer Products Industry
IBM Retail | The future of the Consumer Products Industry
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IBM Retail | The future of the Consumer Products Industry


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The market dynamics for the Consumer Products industry are changing rapidly and drastically. Explosive population growth, increased urbanization, an evolving customer base, and global climate and natural resource issues are creating both significant opportunities and daunting challenges. Learn the 6 capabilities of a winning CP company in the 21st century.

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IBM Retail | The future of the Consumer Products Industry

  1. 1. IBM Global Business Services IBM Institute for Business Value Consumer Products The future of the Consumer Products industry The end of the world…or a world of opportunity?
  2. 2. IBM Institute for Business Value IBM Global Business Services, through the IBM Institute for Business Value, develops fact-based strategic insights for senior executives around critical public and private sector issues. This executive brief is based on an in-depth study by the Institute’s research team. It is part of an ongoing commitment by IBM Global Business Services to provide analysis and viewpoints that help companies realize business value. You may contact the authors or send an e-mail to for more information.
  3. 3. The future of the Consumer Products industry The end of the world…or a world of opportunity? by Guy Blissett, Trevor Davis, Bill Gilmour, Patrick Medley and Mark Yeomans In the midst of explosive population growth, increased urbanization, an evolving, demanding customer base and global climate and natural resource issues, the Consumer Products (CP) industry faces shifting market dynamics, channel challenges and renewed pressures for business model innovation. An emerging class of empowered consumer, steadily increasing consumption and aggressive competition from private labels will require CP companies to execute flawlessly in connecting with consumers, managing supply chain efficiencies and collaborating with channel partners. The world is changing...rapidly. Dramatic population growth and income gains Consumer products companies have tradition- in regions such as Asia, Latin America and ally focused their efforts and resources on Africa, coupled with rapid urbanization and serving a relatively narrow, affluent segment global macroeconomic shifts, are challenging of the world’s population. These coveted notions about how and where to grow. For CP consumers are likely to live in a developed companies, these shifts are creating historic market, make regular trips to the supermarket opportunities that will require new thinking, and chemist, with less frequent trips to a decisive action and flawless execution. hypermarket or supercenter. To grow their busi- Consider, for example, that the global popula- ness with these consumers, CP companies tion, 6.75 billion at the end of 2008, will reach 8 leverage heavy doses of trade and consumer billion by 2025 and 9 billion by 2050.1 In 2008, promotion, while seeking to improve collabo- for the first time, more than half of the devel- ration with retail customers to help deliver oping world’s population was middle class or operating efficiencies. above, and more than half of the world’s total While this marketing and operating model population lived in urban areas.2 Urbanization remains prevalent today, it is not an engine is expected to continue unabated for the geared to drive long-term, sustained growth. foreseeable future. Indeed, by 2020, 16 cities 1 The future of the Consumer Products industry
  4. 4. are projected to have populations exceeding • Becoming intimately familiar with new 20 million, many of which will be in emerging markets and finding new ways to connect 3 markets. These cities will represent tremen- with consumers dous concentrations of wealth. In fact, by 2020, • Understanding and sustaining consumers 20 out of the top 50 richest cities in the world in the lower income tiers with appropriate 4 are expected to be in emerging markets. services and products Mass urbanization brings a host of significant • Mastering diversified distribution channels, infrastructure challenges. But it also presents collaborating with retail customers and, at city dwellers with expanded opportunity for the same time, forging direct relationships employment, education and information, as with consumers well as improved access to basic services, • Grasping where direct involvement in the such as water, sanitation and electricity. value chain adds value and creates sustain- Perhaps most important, individuals living in able differentiation. cities have greater opportunities to move up the income ladder. Regardless of their area of focus, winning CP companies in the 21st century will be those Simultaneously, though, expanding popula- that can effectively address markets, channels tion, consumption and climate change will and model, while executing flawlessly against exacerbate pressures on resources, creating six enabling capabilities: an increasingly volatile environment with chal- lenges in product sourcing, manufacturing, • Glocalization – Balancing market demands packaging, distribution –– and even disposal. for localization with global/standard In their quest to develop the next generation operating efficiencies of loyal consumers, CP companies and their • Differentiation – Deploying assets and suppliers must consider the environmental, processes to create sustainable differentia- social and economic impact of their opera- tion tions. Concerns about underlying issues such • Integrated information – Integrating informa- as carbon and water footprints will drive tion to drive the business through insight the industry to develop and invest in smart environmental solutions. Industry leaders will • Innovation – Create and deliver offerings that integrate broad-based corporate responsibility go beyond consumer expectations into their organizations and brands to build • Consumer-centricity – Finding new ways to awareness and create value. connect with consumers Clearly, the world is changing in profound ways • Corporate responsibility – Integrating and is ripe with opportunities. But it is also corporate responsibility into the organiza- increasingly unpredictable and unfamiliar. CP tion’s DNA. companies need to take action now to position themselves for future profitable growth. Critical areas of focus will include: 22 IBM Global Business Services IBM Global Business Services
  5. 5. The future of the Consumer Products industry The end of the world…or a world of opportunity? Population growth and What on Earth? only three cities – Tokyo, New York and Mexico 8 increased urbanization More people + more money = more City – had populations in excess of 10 million. opportunity By 2020, 16 cities will have populations in will present CP 9 Over the next 10 years, the world’s population excess of 20 million. More than 70 will boast companies with a mix is expected to grow by almost 20 percent, populations greater than 5 million, roughly the of opportunties and primarily in emerging market regions (see population of Denmark. 10 5 challenges. Figure 1). China and India, as well docu- Many of the new “mega-cities,” such as mented, will be among those with substantial Mumbai, São Paulo, Dhaka, Cairo and Lagos, increases, but so will nations such as Pakistan, will be in developing nations and will present Nigeria, Democratic Republic of the Congo 6 a mixed set of opportunities and challenges. and Ethiopia. Meanwhile countries such as Availability of transportation, sanitation and Russia, Japan and Germany will be among 7 healthcare are not likely to keep pace with the biggest population losers. Clearly big population growth, resulting in issues with changes are happening. logistics, hygiene and illness. Already, in 2007 , Much of the world’s increased population will more than 1 billion people – or 30 percent of 11 live in a city, and, as a result cities are getting the world’s urban population lived in slums. bigger... much bigger. Consider that in 1975, FIGURE 1. The World’s population is growing rapidly, but not evenly. 1950 1975 2000 2025 2050 2.5bn 4.1bn 6.1bn 8.0bn 9.2bn +64m +80m +76m +48m per annum per annum per annum per annum North America Europe Asia 2007 2020 2007 2020 2007 +1% -1% +15% 2020 339m 342m 731m 722m 4.0bn 4.6bn Latin America Africa Oceania 2007 +15% 2020 2007 +34% 2020 2007 +18% 2020 572m 660m 965m 1.3bn 34m 40m Source: IBM Institute for Business Value analysis, “The World at Six Billion,” United Nations, 2004; The World UN Population Assessment 2006; “Unsustainable World,” BBC, April 15, 2008. 3 The future of the Consumer Products industry
  6. 6. In India, of the more than 1 million kilometers of basic services, they are exposed to modern roads, only 10,000 kilometers were paved.12 The retail establishments and new technologies, underdeveloped infrastructure, crowded living such as 3G cell phones and the Internet. conditions and unfamiliar consumers will chal- Having recently elevated themselves from a lenge even the most innovative CP company. rural subsistence lifestyle, many of these indi- However, these favelas, barrios and colonias, viduals will represent a new energized class and slums will be the destination for dynamic of empowered consumer, hungry for upward growth in the future. mobility and demanding of the products and services they see afforded by their more To analyze these market opportunities, we affluent neighbors. coupled individual consumption power with population growth and urbanization. The Significant opportunities exist for the innovative result is a population diamond consisting of CP company within this consumer category. four broad population facets (see Figure 2). Largely underserved in the past, this mass of Historically, most CP companies have focused individuals and consumption power is posi- on selling to the top two facets of the diamond tioned to drive sweeping economic, social (The Cosmopolitan Elite and Growing Middle and political changes across all facets of the Class) via familiar channels. But, as more and diamond and regions of the globe. more of the Affluent Potentials gain access to employment, education, healthcare and FIGURE 2. The World’s population is growing rapidly, but not evenly. 2020 aggregate Facets 2020 population consumption power* (annual consumption power) (change vs. 2008) (change vs. 2008) Cosmopolitan Elite > $20,000 0.5 $11.5T ($0.5T) Growing Middle Class >$3,000 - $20,000 2.1 (+0.1) $13.1T ($0.6T) Affluent Potentials $4.1T ($0.5T) 3.4 (+0.4) >$300 - $3,000 Rural Poor $1.3T ($0.4T) <= $300 1.5 (+0.5) • Cosmopolitan Elite: unbounded affluence Are these the next 5 • Growing Middle Class: mass affluent billion for you? • Affluent Potentials: upwardly mobile “under-classes” living in rural or urban setting • Rural Poor: subsistence living in rural areas *Consumer goods only (excluding consumer durables and electronics). Source: IBM Institute for Business Value analysis; World Bank, “Bottom Billion;” World Resources Institute; United Nations. 4 IBM Global Business Services
  7. 7. Affluent Potentials are The rural poor will constitute US$1.3 trillion in • Today’s enlightened and empowered middle likely to move up the purchasing power by 2020.13 They represent class or affluent consumers are demanding one of the fastest growing facets in some key more functionality and value from products, income ladder and markets. Between 2006 and 2008, for example, as well as much greater information about become members of the the rural market for fast-moving consumer their source, handling, ingredients and middle class. goods (FMCG) in India doubled, to $US4 impact.16 billion, and now comprises 17 percent of the • Marketing and selling to upper facets of total FMCG market.14 The lifestyle of this popu- the diamond through modern trade has lation segment may be one of subsistence, but also become more difficult and costly. basic hygiene, sanitation and food represent Slotting fees can cost thousands of dollars a strong and growing market. Combined, the per product, and trade promotions can purchasing power of the bottom two classes is account for upwards of 14 percent of gross expected to increase by almost US$1 trillion by revenue.17 2020, roughly equivalent to the increase antici- pated from the top two classes.15 • Modern retailers are also demanding differ- entiated or customized products and more On the surface, each facet of the diamond services from their suppliers, including more appears to offer similar growth potential. complete, accurate and timely shipment However, when serviced through innova- and forecast data. tive approaches and models, the Affluent Potentials and Rural Poor have the potential These same demanding retail customers to deliver greater value than the two more are also increasingly formidable competitors affluent facets of the diamond. Factors beyond – aggressively marketing and selling broad purchasing power increase the relative attrac- portfolios of private-label products. In short, tiveness and potential profitability of these it can be both expensive and challenging lower categories: selling to consumers in the upper facets of the diamond. • The majority of the world’s population growth will occur in the lower facets of the diamond. Summary There will be significantly more consumers, many • Many of these consumers are Affluent of them city residents who will call a developing Potentials who will move further up the nation home. diamond during their lifespan – with A class of affluent potentials will create an increasing wealth comes greater spend and attractive, upwardly mobile market for consumer a broader span of consumption. products. Consumers the world over, particularly in the developed markets, are increasingly demanding of the products they use and consume, and are less brand loyal, further increasing the attractiveness of emerging markets. 5 The future of the Consumer Products industry
  8. 8. Consumption, climate and shortages impact And all of these items require more energy to sourcing, production and prices grow, manufacture and distribute. Across all While increases in population, urbaniza- CP categories, these dynamics are increasing tion and affluence create compelling growth pressure on crops such as wheat, rice, cocoa, opportunities, they also place massive strains palm oil, cotton, fish and other resources, on agricultural, mineral and other natural especially water. The industry’s impact extends resources, as well as energy, water and land. further, however, with its use of fertilizers, In light of the high profile of their products and hormones and other chemicals also exacting impact of their operations, CP companies must a toll. It is estimated that although just 2.4 be especially innovative in understanding and percent of the world’s crop land is dedicated mitigating the economic, social and environ- to growing cotton, it accounts for 24 percent mental impact of their actions. of global insecticide sales and 11 percent of 19 Changes in consumption pressure resources pesticides. Greater affluence increases consumption of Water stressors protein in the form of meat, fish and dairy – While carbon footprints are an intense area which typically require more land, energy and of scrutiny, an acute global shortage of water other resources (i.e., feed) to produce than is of particular concern to the CP industry. grains and pulses. Indeed as income’s rose, Agriculture is the largest human use of water, between 1980 and 2005, Chinese per capita comprising some 70 percent of total consump- 18 pork consumption effectively doubled. More 20 tion (see Figure 3). And it is estimated that affluent consumers are also more likely to the current water utilization of just five large buy packaged products that require more tin, CP companies could meet the daily needs aluminum, steel, paper, cardboard and plastic. 21 of everyone on the planet. Yet, inefficiencies and spoilage in the food supply chain result in a massive waste of water and other resources. FIGURE 3. Water consumption for the manufacture of selected products. 4,800 liters 10,855 liters 10 liters 40 liters of water to make one of water to make one pair of of water to make one sheet of water to make one slice kilogram of PORK JEANS of PAPER of BREAD 15,500 liters 16,600 liters 70 liters 80 liters of water to make one of water to make one of water to make one of water per dollar of kilogram of BEEF kilogram of LEATHER APPLE INDUSTRIAL PRODUCT 140 liters 1,300 liters 91 liters 120 liters of water to make one cup of of water to make one of water to make one pound of water to make one glass COFFEE kilogram of WHEAT of PLASTIC of WINE Source: “Water. A Global Innovation Outlook Report.” IBM. 6 IBM Global Business Services
  9. 9. Climate changes and Such spoilage and losses may already equal Summary 50 percent of total production.22 Product The sheer number and consumptive power of resource shortages recalls also contribute significantly. The 2008 more affluent consumers will put pressure on a continue to drive up the wide range of resources, forcing new trade-offs, recall of 65 million kilograms of beef in the cost of commodities. United States represented 650 billion liters of new ways of working and some difficult decisions. water – roughly equivalent to the annual water Prices of many commodity inputs, as well as the requirements of the U.S. city of Las Vegas.23 energy required for their growth, conversion and As incomes grow, increasing consumption of transportation, will become increasingly volatile meats, fruits and vegetables will increase pres- – and, in a growing number of cases, their very sures on water, as well as create more waste availability is in question. and spoilage. CP companies and their suppliers will have to consider the environmental, societal and economic Climate and energy issues impact that their operations have around the In addition to consumption and natural globe. resource issues, many of the food-producing areas of the world have been adversely affected by volatile weather. Australia is in its The dimensions of change tenth year of drought and has experienced a The seismic shifts in income, consumption 98 percent decline in rice production.24 Food and resource utilization are rapidly shaping a producing regions in China, Argentina (700,000 new landscape for the CP industry. This will cattle deaths), California, Texas and Brazil continue, and even accelerate, as markets are also experiencing extended and unprec- open further and infrastructure issues are edented drought conditions. Famine induced addressed. Innovative CP companies will act by worldwide climate change may displace as with purpose and vigor to seize the oppor- many as 250 million people by 2050.25 tunities created, reinventing themselves and redefining their interactions with customers, Energy shortages also drive up the cost and consumers, suppliers and stakeholders in the availability of commodities. Oil reserves are process. forecast to fall short of demand, and prices are expected to maintain an upward long- Based on our research and experience, we term trend, despite short-term fluctuations. believe action is needed across four dimen- As global demand for biofuels expands, sions: commodity food supplies are coming under 1. Markets that will continue to change from increasing pressure, aggravating short- the familiar and predictable – to the increas- ages and driving up prices. Worldwide use ingly unfamiliar and unpredictable of cereals for ethanol production expanded 2. Channels that will offer dynamic new oppor- more than 30 percent in 2008 and is projected tunities for simultaneously collaborating to grow another 30-plus percent in 2009. 26 and competing with retail customers, while The impact of these issues on food prices is forging new connections with consumers already quite apparent. 7 The future of the Consumer Products industry
  10. 10. 3. Business models that will be reinvented CP companies looking to prosper in the 21st based on a mastery of where value is century will need to explore segments and created and destroyed across the entire regions beyond their traditional market(s). value chain Much of the growth opportunity will be 4. Capabilities that will be developed, nurtured with lower income consumers, the Affluent and acquired to create lasting differentiation Potentials and Rural Poor, who bring unique and competitive advantage. values, perceptions, constraints and drivers to their CP purchases. CP companies must, 1. Market: Connecting with the unfamiliar therefore, build a deep understanding of the and the unpredictable motivations and influencers of both percep- For most of the 20th century, the CP industry tions and purchasing decisions in order to grew largely by improving its ability to rapidly “connect” with consumers in these develop and sell products to a relatively markets. Many of these consumers have yet affluent, homogenous market of shoppers, to form the brand associations that will persist who responded in familiar and predictable as both their income and consumption rise. ways to the traditional 4 P’s of price, product, However, they will demand products that place(ment) and promotion. The fading communicate and deliver a clear and relevant relevance of this marketing construct is accel- value proposition. Those with limited dispos- erating with the emergence of new economic able income can ill afford products that fail powers and the adoption of technologies that to deliver value. Companies with unfocused enable greater transparency and connectivity. marketing messages that try to sell stripped- Indeed, across all facets of our population down versions of existing products are unlikely diamond, in the both the developed and to succeed. developing world, conventional market thinking is rapidly being replaced by a new set of reali- ties (see Figure 4). FIGURE 4. Across all facets of the diamond, conventional market thinking will increasingly be challenged by emerging realities. Conventional thinking Emerging realities Price is primary driver of purchasing behavior Low prices perceived to be of inferior quality Global brands prized over local brands Local brands increasingly trusted by consumers High income consumers not overly price sensitive High earners equating thrift and responsibility Consumers will buy more if more discounts offered Many consumers cannot afford to buy in bulk Growth market learnings have limited applicability Products and learnings can be applied directly Private label products are low price and quality option Three-tiered private label offerings with top quality Source: IBM Institute for Business Value Analysis; Menzel, Peter and Faith D’Alusio,”Hungry Planet: What the World Eats,” Tricycle Press; “Rise of Domestic Brands.”AlixPartners press release, October 21, 2008; “Tightening the Beltway, the Elite Shop Costco,” The New York Times, Novmber 25, 2007. 8 IBM Global Business Services
  11. 11. Empowered consumers Innovation, persistence and partnerships Indulgences and essentials in every facet will be differentiators in developing insights of the diamond are demanding ever into these markets. Indeed, Chinese retailers Opportunities exist for CP companies within each more information facet of the population diamond as the concept of and FMCG respondents to the 2008 IBM about the products Collaboration Study both listed “complicated occasional luxury or indulgence differs: they consume and are and diversified consumer needs” as their • Cosmopolitan Elite: Super premium liquor, 27 increasingly turning to top challenge. Recognizing the burgeoning “scarce” ingredients, frivolous essentials, private labels to meet need for insights about consumers such as designer fashion, premium hair dye, organic pet these, McCann Worldgroup, a global adver- food, nutraceutical foods delivering health and/ their needs. tising agency, created a new division, Barrio, or beauty benefits specifically tasked with marketing products to • Growing Middle Class: Organic foods, tooth 28 lower-income consumers in Latin America. whitener, skin whitener/ tanner, premium chocolate, imported beer, logo fashion, ultra- Consumers in both developed and developing convenient “home-cooked” meals markets are empowered with more knowl- edge about products and alternatives, and • Affluent Potentials: Small tubes of toothpaste, are demanding the combination of message, deodorant, bottled drinks, packaged bread, product and service that best meets their indi- packaged broth, low rinse detergent, noodles vidual needs (See sidebar, Indulgences and formulated to address region-specific nutritional deficiencies essentials in every facet of the diamond). The majority of them crave detailed information • Rural Poor: Individual sachet of shampoo, about product contents, ingredient sources single cigarette, candy bar, individual tea bags, and environmental and social impact. 29 shampoo formulated to treat lice, nutritional Indeed, savvy consumers are increasingly fortified powdered milk sachets. willing to purchase private-label alterna- tives when branded products disappoint, Russian CP company Wimm-Bill-Dann is one don’t connect and/or fail to justify their price firm exploiting these dynamics with products premium. And they will trade up, down and and messages targeted to specific consumer across categories in a quest for greater value. facets and is rapidly growing both revenue 31 For example, consumers seeking a personal- and share. Its Beauty dairy drink delivers ized, premium cup of coffee have embraced functional benefits centered around hair, nail the Nestlé Nespresso machine, sales of which and skin health to premium consumers – doubled between 2006 and 2008, at least those, according to the company, with “enough partially at the expense of established coffee money to buy major household appliances, retailers. 30 monthly income above $500 per family 32 member.” Its Zavetny Bidonchik product is aimed at the economy facet – individuals with 33 “enough money for food only” . 9 The future of the Consumer Products industry
  12. 12. In addition to rethinking the “where” dimen- Leading CP companies are rapidly navigating sion of new markets, technology advances the knowledge curve in developing mobile and changing consumer preferences are applications. Kraft launched an application impacting “how” companies connect. Two for the iPhone, iFood Assistant, that accesses main drivers are the consumer’s ability to recipes, builds shopping lists and finds nearby 39 access a wealth of unfiltered information about stores. Nestlé’s Purina brand has launched products and the companies that make them, its go2 Pets mobile phone service that delivers and acceptance of word-of-mouth as a trusted location-specific information to travelling source of information. The Internet and interac- pet owners about pet-friendly playgrounds, tive tools of Web 2.0 – such as social networks, beaches and hotels, as well as local emer- 40 blogs, wikis, and mashups – can help CP gency numbers. companies generate “buzz” and capture mind and market share. However the ability of In this era of new media, CP executives may companies to exert control over these connec- often find themselves at the mercy of unfet- tions and resulting perceptions is limited. tered and open consumer-controlled social In Japan, young women looking for trusted communication regarding their companies, recommendations on cosmetics frequently operations, impact, branding and marketing. turn to the online Cosme community, where While there will be unprecedented opportunity they can access over 6.6 million individual, to create connections, and even dialogs, it is 34 unfiltered product reviews. Individuals looking the consumer who will decide when, where for information and a connection with the and on what terms these connections occur. spread Nutella can join the more than 2 million Successful CP companies will be those that 35 fans of the product on Facebook. identify and leverage information, insights and While shoppers in Mexico currently are more capabilities across all facets of the population likely to turn to their local shopkeeper for diamond. For example, responsible interac- recommendations and insights, the wide- tions with consumers in the bottom facets of spread and broad-based global ownership of the diamond – the Affluent Potentials and Rural mobile phones is driving the relevance of this Poor – will influence perceptions among more medium in connecting with consumers in the upscale audiences. News of recalls, examples 36 future. Worldwide mobile phone subscrip- of social or environmental irresponsibility tions are forecast to reach 5.3 billion by 2013, and/or poor product quality will get exposed up from approximately 3 billion currently. 37 and change perceptions across the diamond. Globally, the mobile phone penetration rate Conversely, products marketed at the top of was 47 percent in 2007 with rates in many , the diamond will create aspirations among emerging markets growing by double digits. 38 other facets. Savvy CP companies will craft 10 IBM Global Business Services
  13. 13. CP companies marketing messages and brand hierarchies 2. Channel: Managing complexity, need to balance that create and feed a virtuous cycle of brand collaboration and competition associations. Another critical element will be For the foreseeable future, consumers in much improved service and leveraging insights across different markets. of the developed world and some of the devel- collaboration with For example, Nestlé is leveraging exper- oping world will continue to purchase their retail partners while tise gained selling its Popularly Positioned soap, soup, socks and soda though modern developing direct Products in emerging markets to introduce chain retailers. However, for literally billions connections with smaller pack sizes in its mature markets.41 In of other consumers – in both developed the United Kingdom the company is selling and developing economies – primary chan- consumers. 100 gram packs of instant coffee, which nels include kiosks, pavilions, open markets reduces consumer outlay.42 and single-unit retailers. At the same time, alternative channels for distributing prod- Summary ucts and disseminating information are also CP companies will need to: growing in relevance. Global channel choices 1. Identify the key influencers and drivers of include: traditional Indian haats, kiranas and purchasing behavior for each consumer micro- Paanwallas; Web grocers such as Ocado in segment the United Kingdom and Fresh Direct in the 2. Connect with consumers via the development U.S.; online category or lifestyle-centered and delivery of highly targeted product and communities of interest; and individually driven service offerings for all facets of the population distribution models, such as Amway, Mary Kay diamond and Shakti. 3. Use existing and new technologies to tap The venerable vending channel is also carving consumer insight and influence buyer behavior out new niches, with machines now assessing (e.g., social networks, gaming, mobile phones, individual skin type and dispensing Elizabeth kiosks, etc…) Arden cosmetics in malls and airports, baking 4. Rapidly apply key learnings across and within custom, “from scratch” pizzas in three minutes markets and segments and crafting fresh, custom ice cream in 5. Work with partners to rapidly gain local market machines that use wireless Internet connec- knowledge, distribution and other key compe- tivity to report when supplies or maintenance tencies. are needed.43 The challenge for CP compa- nies is to balance the need for improved service and collaboration with traditional retailers, while simultaneously developing alter- native sales and influence channels. 11 The future of the Consumer Products industry
  14. 14. As CP companies expand their reach and At the same time mega-retailers still account push into new markets, the channel choices for a heavy percentage of sales at many multiply, as do the complexities. In Brazil, CP companies – and a growing number of there are 850,000 outlets for groceries, while these retailers provide access to point-of-sale, in India 95 percent of retail sales flow through operational and shopper data. CP compa- independent, family-run kiranas, general nies need to determine the best option for 44 stores and chemists. In Russia, modern capturing, harmonizing and transforming the trade penetration is only 21 percent, and the various streams of demand signal, opera- top three retailers comprise only 6 percent tional and shopper behavior data. Some are 45 of the market. Further complicating the already integrating this data into their category channel picture in many markets – including management, trade promotion management, China, India and Japan – multi-tiered distri- supply chain forecasting and planning, sales bution remains a fixture, creating significant and operations planning, and retail store oper- challenges tracking product, measuring ations applications in order to improve store inventories, calculating sales and forecasting operations, better target shoppers, and create demand. new in-store experiences. Given the relative immaturity of traditional Improving retail collaboration remains a retailers in many markets, CP companies will critical concern for the CP industry. Although need to choose how to invest in training and significant advances have been made, development of channel participants. CP through initiatives such as Collaborative companies are well aware that the creation of Planning Forecasting & Replenishment, a viable modern trade also creates the poten- Vendor Managed Inventory and the Global tial for formidable competitors. Indian health Commerce Initiative’s New Ways of Working and beauty giant Dabur has deployed Astra, Together, effective collaboration remains 46 49 a retailer training module, in five languages. elusive. For many, the focus remains on Meanwhile, Coca-Cola is training more than expanded data sharing which – while neces- 6,000 traditional retailers via its Parivartan sary – is by no means a sufficient condition program, imparting the necessary skills, tools for collaboration. Even when data is shared, 47 and techniques to succeed. These initia- it is often unusable or not acted upon. tives – aimed at building and leveraging the As a result, inaccurate and/or out-of-date traditional trade – are reflective of the strength forecasts persist. Even when forecasts are and growth possible in markets served by accurate, such issues as out of stocks, poor this channel. Between 2006 and 2008, the promotions, ineffective product launches rural market segment in India for CP products and excessive inventory levels often remain. grew from 13 percent of the total market to 17 The growing presence of Demand Signal 48 percent. Repositories (DSR) – 36 percent of CP companies reported having a DSR at the end of 2007 – that enhances visibility all the way 12 IBM Global Business Services
  15. 15. CP companies can build through to the retail shelf is also no guarantee the expansion of mobile coupon initiatives by of success.50 Core change management supermarket chains Sainsbury’s and Kroger brand equity by initiating issues surrounding store, field sales, and and the delivery of mobile phone alerts for and nurturing new direct- third-party merchandiser staffing, timeliness of product recalls by Costco.53 to-consumer channels. information sharing and supply chain flexibility (i.e., ability to redirect shipments and produce/ Going forward, CP companies can expect ship to demand) continue to pose chal- retailers to: lenges. CP companies must adopt a holistic • Continue to consolidate and expand in and pragmatic approach to collaboration, emerging markets converting pilots and proofs of concepts with • Make inroads at the expense of traditional forward-thinking retailers into everyday ways of trade working. • Focus on increasing their understanding While retailers continue to serve as the of shopper and consumer behaviors and primary sales channel, they are also increas- shaping offers and communication to win ingly fierce competitors. Supermarkets their trust throughout the world now offer high-quality, • Continue private label as a key growth aggressively promoted private-label brands. strategy for boosting revenues, gaining These products are positioned at multiple control over the cost of goods and pres- price points (e.g., budget, volume and suring manufacturers. premium) and are benefiting from sophisti- cated management and marketing techniques To combat this, it is critical for CP compa- applied by recently acquired former CP nies to connect and build equity directly company executives. While private-label with consumers – at least in part by initiating share varies widely by retailer (Tesco at 48 and nurturing new channels. Already, P&G is percent, Kroger at 27 percent) and geog- experimenting with Tide-branded dry cleaners, raphy (United States at 22 percent unit share and Mr. Clean-branded car wash franchises. and Switzerland at 53 percent of total retail Plus, the company sells directly to consumers products) sales are big . . . and growing.51 It is via its The Essentials website.54 P&G has also telling that two of the world’s largest and faster invested UK£5 million for a 1 percent stake growing retailers – Aldi and Lidl – are hard in online grocer Ocado.55 As they continue discounters with robust private label volume, to refine their direct-to-consumer offerings, 61 percent and 94 percent of sales, respec- however, CP companies will have to balance tively.52 Increasingly retailers are delivering both the benefits gained with increased tensions innovation and value to consumers, such as with retailers. 13 The future of the Consumer Products industry
  16. 16. Hindustan Unilever Limited’s Project Shakti: Connecting with the Rural Poor Recognizing the specific needs, as well as huge potential, of the rural poor market segment in India – estimated at US$4 billion for FMCG in 2008 – Hindustan Unilever Limited (“HUL”) launched Project Shakti in 2000-2001 as a pilot in 50 villages.56 The project represents an innovative model for connecting with an underserved facet of the market in a deep and meaningful way, improving individual awareness of health and hygiene issues, creating income- generating opportunities for an underprivileged segment of the population and fostering the growth of market for its products.57 Shakti empowers women in small rural villages across India to become direct-to-consumer distributors, Shakti ammas, of a diverse range of Unilever products, including Lux and Lifebuoy soap, Wheel detergent, Lakme color cosmetics and Brooke Bond tea.58 In addition to providing the women with micro-credit for inventory purchases, HUL also provides sales training and, perhaps most important, self-esteem and status. Distributors typically earn between 700-1,000 rupees a month through a combination of a discount on inventory purchases plus a trade margin.59 This income is a meaningful amount in a country where the majority earns less than 20 rupees per day and live in “abject poverty.”60 The project has grown to reach more than 3 million households in more than 135,000 Indian villages via the network of 45,000 entrepreneurs.61 The scope of the project has also expanded to include additional services such as i-Shakti, an Internet-based rural information service network providing information on topics such as animal husbandry, hygiene, education, women’s empowerment and Shakti Vani, a health education initiative.62 A mobile phone partnership is also under consideration. The success of Shakti has prompted Unilever to export core elements into other markets such as Vietnam, Bangladesh and Sri Lanka.63 Projects Joyeeta and Saubaghya in Bangladesh and Sri Lanka, respectively, are now empowering Unilever to connect with consumers in rural areas not accessible by traditional mass media or distribution channels.64 Summary 3. Business model: Executing for CP companies must: differentiation and value 1. Hedge their bets between expanded collabo- Much has been written about the business ration with multi-national retailers (to achieve model changes CP companies must effect in captaincy) and more assertive, efficiency- response to industry and other trends. In the driven relationships with national and regional IBM 2008 Global CEO Study, 82 percent of CP independents (to maintain margins) CEOs recognized the need for “substantial change” to their organizations, and two-thirds 2. Deploy multi-channel retailing strategies prioritized for business model innovation as a that reduce reliance on modern retail where 65 feasible. principle driver of that change. While many CP companies have embraced aspects of business model innovation, i.e., outsourcing of non-core activities such as indirect procure- ment and Application Development and Maintenance, only a select few have truly embraced its transformative potential to rede- fine their role in the value chain. 14 IBM Global Business Services
  17. 17. Ongoing consolidation The basis of competition in the CP industry SOS.68 Commodities giant Cargill readily is fundamentally changing. Excellence in acknowledges it applies insights gained from is reshaping the historical roles and operations is no longer its upstream commodity trading activities to industry and requiring sufficient. Brand names that resonated with the other elements of their business.69 a rethinking and the generations of consumers raised in Miami, repositioning of the CP Munich or Manchester have little currency in The primary factors influencing business model innovation include: role in the value chain. Jakarta, Jinan or Jodhpur, and media spend on traditional TV, print and point of sale isn’t • Increasingly complex and extended supply effective in a G3 mobile world without super- chains as markets expand, channels market retailers. proliferate and participants specialize. For example, Li & Fung has emerged as a new The ongoing consolidation of companies is industry player, managing the financing, also reshaping the CP industry. In 2000, the procurement, new product design and top 20 brewing groups controlled 57 percent development, vendor relations and logistics of global beer sales, up from 48 percent in aspects of the extended supply chain for 1993.66 By 2007 approximately 50 percent , pharmaceutical, apparel, and food and of the global market was controlled by just beverage companies. 70 five brewers.67 Consolidation is impacting other categories, such as Turkish confec- • The emergence of new competitors in the tioner Ülker acquiring Godiva from Campbell form of aggressive retailers, private equity- Soup Company, PepsiCo acquiring the funded specialist firms and emerging leading Russian branded juice company JSC market competitors with family ownership Lebedyansky, and Danone acquiring Dutch and/or alternative capital structures. Private baby food-maker Numico. These acquisitions equity fosters new business models only deliver value when the resulting larger by leveraging diverse cash flows and companies are able to effectively harness and embracing longer investment time horizons. deploy the assets and capabilities to satisfy For example, private equity firm Vestar customers and delight consumers. Capital Partners purchased Unilever North 71 America’s laundry businesses. What is required is a rethinking and reposi- • Companies and countries are competing tioning of the CP role across the value chain, for increasingly scarce resources by lever- based on a deep understanding of where aging new approaches to maintain access the company’s direct involvement adds value to commodities and energy. Depending and is differentiating. This may drive upstream upon their market situation and imperatives, integration to develop and maintain access or many companies are moving upstream and better manage critical inputs, as PepsiCo has acquiring control over the commodities that done with Merisant for its PureVia™ sweetener, go into their products. Dubai-based Abraaj partnering to enter new markets, as Campbell Capital, a large private equity company, and Soup has done with Bridgetown Foods to Qatar Livestock Company have each been grow its business in Russia, or innovative deal acquiring land and other agricultural assets structures such as Unilever’s combined sale/ in Pakistan for food security purposes. 72 license of its Bertolli olive brand to Grupo 15 The future of the Consumer Products industry
  18. 18. • Companies are vertically integrating for nology to drive consistent global processes control access and quality. For example, and to manage complexity and create 75 PepsiCo has vertically integrated for access operational efficiency. to and greater control over the quality of potatoes grown in China for its Frito Lay Summary 73 snacks. CP companies must: • Companies need new models and capital 1. Understand at a deep level the unique or differ- to pursue the breadth and depth of growth entiated value their business model adds for opportunities. Wealthy financier and investor each element of the business and prioritize Warren Buffett, via his Berkshire Hathaway areas where greatest value is added and differ- company, provided critical investment entiated capital for the US$22 billion acquisition of 2. Identify future sources of capital and explore 74 Wrigley by Mars, Inc. alternative capital structures to realize growth opportunities • Maturity of technology has enabled the realization of long-held visions around the 3. Develop capabilities, skills and management globally integrated enterprise. For example, structures to enable the business model to the Nestlé GLOBE project harmonizes “execute flawlessly” business practices and leverages global 4. Assess whether the company is more likely standards, information systems and tech- to be acquired or acquiring, and developing strategies and models reflective of those realities. FIGURE 5. Macro trends are driving CP companies to embrace fundamental change to many elements of their organizations. Trend Business model implication Slow – no growth in developed Emphasis on true product innovation, and delivering new services to markets customers, suppliers and consumers Extended, complex global Redefine CP roles via developing deeper relationships with retailers, supply chains distributors and suppliers. Be clear on where you add value Robust competition in Exposing CP firms to entities with substantially different ownership, funding emerging markets and payback horizons Competition from discretionary Competitive set now includes media and entertainment, telecommunications consumer income and consumer electronics companies Number and breadth of growth CP companies accessing new types of capital and deploying new venture and opportunities capital structures Constantly connected Seeking new ways to interacting with brands and consumers, leveraging new customers tools to access information and embracing new inputs Source: IBM Institute for Business Value. 16 IBM Global Business Services
  19. 19. Flawless execution Capabilities 4. Innovation – An open innovation model With the proliferation of change in markets, that facilitates differentiated, value-oriented is a critical key in the environment and the global competitive product and service offerings that go positioning for long- posture of many CP companies, success will beyond consumer expectations will be an term success. hinge upon successful and flawless execution essential ingredient for the successful CP against six capabilities as follows: company of the very near future. 1. Glocalization – CP companies will need to 5. Consumer-centricity – CP companies put in place standard global systems and must develop channels to access infor- processes to deliver operating efficiencies, mation about consumers – what they while simultaneously delivering localized are buying, what issues are important to offerings in individual markets. Getting the them – and find avenues to connect with balance right between what is local and them, both directly and, where necessary, what is global and standard will be critical through retailers. for future success. 6. Corporate responsibility – Integrating 2. Differentiation – CP companies must corporate responsibility into the orga- understand what processes, assets and nization’s DNA will be a vital factor as a resources really help create sustainable source of both value and performance. differentiation in the market place and Increasingly, consumers will be looking not then focus on adding value to these at only at products and services offered, but every possible opportunity, while chal- how a company conducts business. lenging the operating model for those that Maturity in each of the capabilities ranges from do not differentiate. 1-“Innocence” – in which a company does 3. Integrated information – With the prolifera- not have the necessary processes in place, tion of data and information, both inside to – 6-“Excellence” – in which the company is and outside the organization, CP compa- likely to assume a position of market leader- nies must learn to capture the relevant ship. (see page 19, for more information about data, integrate the relevant information, capabilities maturity.) analyze this information and then convert it into insights that can be used to better deploy assets and optimize business performance. 17 The future of the Consumer Products industry
  20. 20. FIGURE 6. Success in this changing world will require execution against six capability areas. Glocalization Differentiation Balance market demands for Focus on those assets and processes localization of offerings with the need that create sustainable differentiation for global operating efficiency driven by and deliver the greatest value global standard processes and systems 6 5 4 3 2 Corporate responsibility 1 Integrated information Integrate corporate responsibility Integrate information both inside into the organization as a source of and outside the organization, and value, efficiency and effectiveness analyze and use that information to drive the business through insight Consumer centricity ILLLUSTRATIVE Innovation Find new ways to connect both Create and deliver innovative physically and virtually with consumers, product and service offerings that either directly or via retailers go beyond consumer expectations Source: IBM Institute for Business Value. Each capability area is important, but, as Conclusion resources available for capability building Undoubtedly, for any consumer products are finite, each company must decide, based company, the pace of change in nearly on its current market condition and growth every facet of operations – from defining the strategy, on which areas to focus – either as a market, to managing resources, to executing source of competitive advantage or to address a new, differentiated operating model – pres- shortcomings in the current maturity level of ents some daunting challenges. We believe, the capability. A large gap between existing however, that a gap will develop between the capability and ambition is a signal for action. global leaders and a second tier. The global leaders will recognize that a new, largely untapped market is waiting for those compa- nies willing to take bold, innovative steps. 18 IBM Global Business Services
  21. 21. The status quo is no longer sustainable. The For more information about this study, you may future belongs to those that cater to new e-mail the IBM Institute for Business Value markets and develop operating models that at To view other research consistently deliver exceptional quality and reports created by the Institute, please visit our service in both the mature and emerging Web site: growth markets. The leaders will maintain a balanced approach on social and environ- mental issues in all markets and at every For a detailed Maturity Model of the six capa- touch point along the value chain. These bilities mentioned in this paper, please email companies will prioritize connecting with consumers on a deep level and working to exceed their expectations. They will collabo- rate with channel partners and execute with excellence. They will reposition themselves to deliver value in everything they do. The world of the Consumer Products industry has changed. Those companies that recog- nize the change, embrace the challenges this imposes, seek new ways of working and new markets to sell to and focus on developing their capabilities for the future will position themselves to thrive in this new world. 19 The future of the Consumer Products industry
  22. 22. About the authors Patrick Medley is the Managing Partner - Guy Blissett is the Consumer Products Leader Global Consumer Products Industry for IBM for the IBM Institute for Business Value. He Global Business Services. He has over 20 has extensive experience in the consumer years consulting experience in the Consumer products industry and is a frequent speaker Products industry and has lived and worked in at industry events. He has also published Europe, Asia and Australasia. His current home numerous papers, including “Establishing trust is in Sydney, at the epicenter of the developing through traceability: Protect and empower markets of Africa, Asia and Latin America. He your brand for today’s ‘Omni Consumer’” and can be reached at “Enabling Multifaceted Innovation: Consumer Mark Yeomans is IBM Vice President respon- Products CEOs reaching beyond the familiar.” sible for the Consulting Services to clients Guy can be contacted at in Africa Middle East, Central Europe and com. Russia. He is a subject matter expert on the Dr. Trevor Davis is with IBM Global Business Consumer Products Industry, and has worked Services and is an expert on the best prac- with companies such as Diageo, Unilever, tices for developing consumer products and Nestlé, Kraft and Heinz. His work has taken launching them successfully. With 17 years of him to over 50 countries worldwide. Mark international business experience, Trevor has holds a BSc in Geology & Chemistry from the worked with a variety of clients on multi-year University of London and has further quali- transformational programs in R&D, marketing fications from INSEAD and the University of and supply chain. Clients have included Nottingham. Mark can be reached at mark. Unilever, Nestlé, Reckitt Benckiser and Mars. He is often quoted in the media and other Contributors publications about creativity and innovation Richard Essigs, IBM Sales & Distribution, and is a frequent speaker at industry confer- Director, CP Industry ences. Trevor can be reached at trevor.davis@ David E. McCarty, IBM Software Group, Worldwide CP Industry Sales Leader Bill Gilmour is the IBM Industry General Manager responsible for the Consumer Finn Conradsen, IBM Global Business Products and Wholesale industries. Bill’s Services, Industry Leader – Nordics background is in consultancy where his areas Yoshiko Shimizu, IBM Sales & Distribution, CP of focus include strategy development, busi- Industry Solution Manager – Japan ness transformation, customer relationship Carlos Pedro Fernandez, IBM Sales & management, supply chain management and Distribution, Business Development Executive systems strategy development. He has worked - Latin America for some of the world’s largest companies in Europe, North America and Asia. Bill has Fredrick J. Schideman, IBM Global Business published a number of papers including “Play Services, Associate Partner, CRM Big, The Consumer Products Imperative;” “CP Sonia Gupta, IBM Managed Business Process 2010, Executing in a World of Extremes” and Services, Business Transformation and CRM “Enabling Multifaceted Innovation in the CP Strategy Consultant Industry.” He can be reached at bill.gilmour@ 20 IBM Global Business Services
  23. 23. The right partner for a changing References world 1 IBM Institute for Business Value analysis; At IBM Global Business Services, we “The World at Six Billion.” Department of collaborate with our clients, bringing together Economic and Social Affairs, Population business insight, advanced research and tech- Division. United Nations. 2004; “The World nology to give them a distinct advantage in Population Assessment.” The United Nations. today’s rapidly changing environment. Through 2006; “Unsustainable World.” BBC. April 15, our integrated approach to business design 2008. and execution, we help turn strategies into 2 IBM Institute for Business Value analysis; action. And with expertise in 17 industries and “Burgeoning bourgeoisie.” The Economist. global capabilities that span 170 countries, we February 14, 2009; “World Population can help clients anticipate change and profit Prospects: The 2007 Revision Population from new opportunities. Database.” United Nations. 2007; “Wealth Gap Creating a Social Time Bomb.” The Guardian. October 23, 2008. 3 Ibid. 4 “The 150 richest cities in the world by GDP in 2020.” March 11, 2007 . cities-2020.html 5 IBM Institute for Business Value analysis; “The World at Six Billion.” Department of Economic and Social Affairs, Population Division. United Nations. 2004; “The World Population Assessment.” The United Nations. 2006; “Unsustainable World.” BBC. April 15, 2008. 6 IBM Institute for Business Value analysis; “World Population Prospects: The 2006 Revision.” United Nations, Department of Economic and Social Affairs. 2006 7 Ibid. 8 “World Urbanization Prospects: The 2007 Revision.”United Nations. Department of Economic and Social Affairs, Population Division. 2007. 9 Ibid. 10 Ibid. 21 The future of the Consumer Products industry
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