The Biggest Risks and Challenges Facing the CPG Industry
Consumer packaged goods (CPG) — and to some extent, services — is arguably one of the most challenging industries to be successful in. It’s an industry where brands have to work to find a balance between being innovative and adaptable, without changing too much of the core offerings that allowed them to be successful in the first place. While this provides organizations in the CPG industry to find new opportunities for growth, it also means there are risks that top-level executives are constantly thinking about.
Changing Consumer Habits
One of the biggest challenges for CPG companies is also, surprisingly, a positive risk (more on what that means, here) for the industry as a whole. As consumer habits change, it forces organizations to regroup and come up with new ways to be innovative and efficient.
Wellness & Sustainability
An emerging trend is that consumers are becoming more concerned with sustainability and the social impact of the products they purchase and the brands they purchase from. A 2018 Nielsen survey found that “67% of Americans say they will be prioritizing healthy or socially-conscious food purchases.” Consumers are also starting to pay more attention to what is in their food, or rather, what’s not in their food, choosing products that are organic, plant-based, and “free-from” certain ingredients. Nielsen also found that sustainability is profitable — products that looked sustainable saw sales growth of anywhere between 3 and 14 percent, depending on the type of product. It’s a big risk for CPG companies to not adapt to this change in consumer habits, especially considering that 64% of US households are buying sustainable products — a number that continues to grow annually.
Still, brands will have to deal with the challenge of finding a balance between consumer pressure to embrace sustainability, versus what actually sells. As the debate about single-use plastics continues to expand, consumers are beginning to ask for consumer goods that can be refilled in order to reduce the amount of packaging being used. However, some CPG companies find that refills are more difficult to sell, as the way their products are marketed and packaged are a big part of maintaining customer loyalty and brand recognition.
The Digital Age
How do consumers learn about brands or decide what brands to purchase from? Some consumers may choose a brand because of brand loyalty, which we’ll discuss in more detail later on. But how can brands win over new customers? As consumer habits change when it comes to the types of products they purchase, so do the ways they learn about new brands and products.
One way that technology has impacted how consumers shop is the rise of voice search and voice assistants. This is a huge space for CPG companies to explore. According to Performic’s Intent Lab, household items are some of the most likely to be bought using some variation of voice AI. Even if consumers don’t ultimately end up making a purchase, 17% of shoppers use voice assistants to get product information and 12% use this technology for brand comparisons. Similar findings were reached in a 2018 study conducted by Voicebot that found that 20% of U.S. adults used voice search in some part of their buying journey.
While brand loyalty is important for many CPG companies, the demographic of their current loyal customer base is ageing. In order to attract new, potentially younger customers, advertising strategies need to be adapted. One advertising avenue that is starting to grow and become more viable for CPG companies is podcast advertising. Nielsen and Midroll, an advertising network for popular podcast platform Stitcher, found that podcasts generated over 400% better recall of a brand versus display ads and that purchase intent increased by an average of 10% after listening to an ad on a podcast. Reaching a wider audience through different mediums is one risk that CPG brands will need to take on, especially as new competitors continue to enter the industry.
One of the biggest changes in consumer habits is the shift away from a traditional brick-and-mortar retail experience. Big companies are now looking at investing in vertical integration, relying less on retailers that are now creating their own private labels, and looking towards developing new points of sales that allow them to have more control over how their products are presented to the final consumer. With so many options available to the consumer, brands need to stay competitive and think not only about the product they are selling, but also creating an entire brand experience that speaks to an increasingly digitally savvy consumer base.
New Entrants and Competitors
There are many competitors that CPG companies need to consider. Not only are traditional retailers expanding into the CPG space themselves by creating their own private labels, but we also are seeing a deluge of direct-to-consumer CPG startups that are paving the way for new and innovative products in the industry.
Without the burden of legacy infrastructure, these startups are more agile, more innovative, and because they don’t have to work with traditional retailers, typically offer their products at a lower cost to the consumer. Sometimes, they also have the advantage of having a smaller team, which could mean less bureaucracy and less resistance to change from existing executives.
So, what can CPG companies do to stay competitive? One way to go about it, if they have the cash on hand, is to acquire the competition. According to CB Insights, Dollar Shave Club held 7% of the U.S. shaving market by 2016. Not at all insignificant. Dollar Shave Club was eventually acquired by Unilever the same year. Even with this acquisition, Unilever will still have to compete with similar startups like Harry’s or Supply. It would be near impossible to acquire every small competitor; the only option is to continue to find efficiencies and improve infrastructure to stay competitive.
Challenges with Supply Chain Distribution
As the CPG industry adapts to new innovations and competitors, so must supply chain management. Retailers with their own private labels will want to prioritize their own products over those of their competitors. That leads to tougher vendor negotiations between retailers and CPG companies; retailers are demanding lower prices from CPG brands while also holding less inventory, which is a risk to the bottom line. Executives will need to rethink their vendor and inventory management strategies as it pertains to overall supply chain distribution.
Automation and the ability to retain and attract talent is also another risk for CPG companies. Though automation allows companies to be more efficient and potentially save time and money, there are still a few jobs that, currently, cannot be automated. One example of this is truck drivers. Until fully driverless trucks are adopted industry-wide (BCG predicts this will be at least another five years), CPG companies will always need truck drivers. The problem, currently, is that many drivers are ageing and there are fewer workers in the younger generation that are choosing this type of occupation, resulting in a shortage of drivers. With the rise of e-commerce, consumers and retailers are expecting shorter delivery windows, putting pressure on the logistics of supply chain management. Missing delivery windows could result in fines and penalties for suppliers, putting profitability at risk.
Some things are out of a company’s control, especially the weather. As climate change concerns continue to increase, so do the risks of the effects of climate change. By not adapting current risk management and security programs, CPG companies are putting profitability in jeopardy. Any one major climate event could interrupt the company’s activity and slow down the supply chain, preventing products from reaching the end consumer.
International Trade Regulations
Global CPG companies need to pay close attention to policies and regulations that could have implications on international business. Events like the likely ratification of new NAFTA, the looming presence of BREXIT, and ongoing trade talks will fundamentally impact how the CPG industry does business. Tariffs, import and export quotas, and, to some extent, overall economic viability in different countries, can determine where companies source their supplies from and what products will be sold in what countries in order to maximize profits.
Damage to Brand and Reputation
A brand’s reputation is one of its’ most valuable assets. A tarnished reputation could result in financial growth and revenue of the business. Losing customer trust and their business has huge implications for businesses. It’s why many customer service teams pay such close attention to the Net Promoter Score and work hard to build and retain brand loyalty.
Corporate Social Responsibility
As mentioned previously, changing consumers’ habits is a big risk for CPG companies. In a 2017 study conducted by Cone Communications, they found that 88% of Americans would be more loyal to a brand that supported social or environmental issues. Additionally, 76% of those surveyed would actually refuse to purchase a company’s products if that company supported an issue that was not aligned with their own values and views. Not having a focused corporate social responsibility (CSR) strategy is a huge risk to a CPG company’s brand and reputation, and, ultimately, the bottom line.
Cyberattacks and Data Breaches
Not having a plan in place to respond to cyberattacks can not only disrupt a company’s core operations, but it can also severely impact how that company is perceived by consumers. The Equifax breach happened in 2017, and to this day, consumer trust in Equifax is still on the rocks. While there are regulations in place, like PIPEDA and GDPR, to help protect consumer data, cyberattacks and data breaches are still huge risks to a company’s reputation, especially as organizations become more reliant on technology and improving IT infrastructure.
IP Theft and Patent Infringement
Branding is extremely important for CPG companies. The way a product is packaged and marketed plays a big part in maintaining customer loyalty. Intellectual property (IP) theft and infringement can damage a company’s reputation, affect the bottom line, and stifle innovation. If a consumer unknowingly purchases a counterfeit version of a product, it could pose health or safety risks, especially as it pertains to counterfeit pharmaceutical products.
How Software Helps the Consumer Packaged Goods Industry
Security software is designed to accurately track and report incidents on a global scale. This allows organizations to spot trends earlier and allocate budget to the areas that need it most. Resolver helps CPG organizations by enabling them to:
- Accurately track incidents by type (i.e. IP theft, fraud/counterfeiting, slip and falls) and location for better reporting and trend analysis
- Manage investigations around brand protection and loss prevention (specific to your products, stores, markets, etc.)
- Conduct physical site assessments of global locations, as well as tying incidents to risks across the entire supply chain.