The consumer packaged goods industry is changing rapidly. While emerging markets receive a lot of attention, mature markets like Western Europe also face significant changes continent, the average disposable income will fall, and with it the buying power of a considerable fraction of the population. Consumers therefore won’t be willing to pay higher prices. Manufacturers that generate most of their revenue from the mass market will no longer be able to pass on price increases to consumers without seeing a subsequent drop in sales volumes. For such companies, value creation will be achievable only through major cost reductions. Fragmented niches of growth. As the mass market shrinks, a range of small yet lucrative consumer segments will blossom. For example, more and more consumers will gravitate toward healthy food, environmentally friendly products, personalization, and convenience. Already, nearly a third of European consumers say they’re willing to pay more for products with added health and wellness benefits. The disadvantage of niche markets and microsegments, of course, is that they often require some level of customization. Companies that want to serve microsegments effectively will need to be innovative and agile, as the traditional production, marketing, and distribution processes of CPG companies are too slow and cost-intensive to allow profitable growth in niche markets.

Cross-channel shopping and the continued rise of discounters. The consumer who shops at only one type of store is becoming a rarity. Across Europe, consumers are making purchases from multiple retail banners, formats, and channels. Furthermore, shoppers not only in Germany but also now in France, Italy, Spain, and the United Kingdom are migrating toward discounters and away from local retailers. Discounter sales are growing at approximately 5 percent per year Europe-wide even as many other retail formats are stagnating. This trend, although a threat to branded manufacturers, can also be an opportunity for companies that decide to venture into private-label manufacturing. E-grocery and the fight for digital placement. Online grocery, which has experienced slow but steady growth in most European markets, is becoming an increasingly important source of revenue for both retailers and CPG manufacturers. According to some forecasts, it could capture up to 15 percent of the grocery market in selected European countries by 2030. And because online grocery shoppers tend to buy the same items every week rather than browse for new products, securing a place on consumers’ digital shopping lists will become a top priority for CPG brands. Whereas manufacturers have historically fought over endcaps or displays at the front of a grocery-store aisle, in the future the important battleground will be in the digital space: a prominent presence on retailers’ websites and mobile apps, high placement in search-engine results, and the like.

Industry dynamics

It’s not just consumer behaviors that are changing; the CPG industry itself is undergoing massive shifts as well. Three industry-wide trends will transform the consumer-goods landscape by 2030: vertical integration, digitization, and the aggressive pursuit of cost leadership by large companies. Vertical integration and new business models. Particularly in online retail, vertical integration will become a new paradigm. E-commerce pioneers like Amazon are already expanding their own-brand business into more categories. At the same time, specialized start-ups are selling products such as razor blades or functional foods directly to consumers, often on a subscription or membership basis. By bypassing distributors, these start-ups are able to offer low prices and sell even small volumes profitably. In response to these new and disruptive business models, several larger manufacturers have begun to sell directly to consumers as well—but they must tread carefully, lest they alienate their retail partners. These trends could fundamentally change dynamics in well-established categories. They could also spur an expansion of manufacturer-owned distribution channels and the development of innovative products related to the Internet of Things (Oral-B’s connected toothbrush is one example). Digitization of operations. The most cutting-edge companies will set new digital and technological standards in consumer interactions and process optimization, among other fields. Their digital superiority will enable them to reach consumers even in the smallest segments, tap growth markets faster, and apply a long-term price premium with attractive margins. Early examples of fully digitized factories have seen cost savings of up to 30 percent—and these factories have the capability to manufacture individualized products. Cost leadership and consolidation. Activist investor are spurring modernization efforts among CPG companies. In the future, activist investors, hedge funds, and private-equity firms will even more rigorously pursue cost leadership in the companies that they’ve invested in. With improved efficiency and lower costs, some of these companies will choose to introduce aggressive pricing in order to gain market share. Cost leaders will also be able to make acquisitions, further strengthening their market dominance.

External influences

CPG manufacturers, of course, will also have to grapple with a number of strong forces outside the industry. Among the most powerful will be increased government intervention, supply-chain disruptions, and new norms in labor and employment. Each of these external forces could exert considerable financial pressure on CPG companies, thus heightening the need for business-model reinvention.
Tighter regulation. Government bodies, both at a European level and at the country level, are introducing new measures to strengthen consumer protection and ensure sustainability. Rising social and environmental standards, new laws, and tougher sanctions will make business harder for companies but will also offer opportunities for those that stay ahead of the regulatory curve by launching groundbreaking initiatives, especially in production and supply-chain management.
Fragile global supply chains. Far more difficult to anticipate are the effects of natural catastrophes and political unrest on the globally interconnected CPG industry. Disruptions in the supply chain pose a constant threat. Potential solutions include early-warning systems at critical points of the supply chain, as well as alternative routes on standby in case of infrastructure blockades. As mentioned, vertical integration—for instance, chocolate manufacturers running their own cocoa plantations—could be an effective way to protect against raw-material shortages.

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