Search

How consumer-goods companies can prepare for the next normal

Updated: May 25, 2020

by Raphael Buck,Tracy Francis, Eldon Little, Jessica Moulton, and Samantha Phillips

https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/how-consumer-goods-companies-can-prepare-for-the-next-normal


Consumer-packaged-goods manufacturers must anticipate changes in consumer behavior and set up plan-ahead teams to guide and accelerate decision making.

As the coronavirus pandemic spreads across the globe, threatening both lives and livelihoods, consumer-packaged-goods (CPG) manufacturers continue to play an important role: producing essential items we all rely on for our health and well-being. CPG leaders have focused on meeting this demand while guarding the safety of employees and customers.


At the same time, forward-thinking CPG companies have begun to think about the “next normal”—what the world may look like after strong virus-control measures are lifted. The measures in place are expected to lead to the largest quarterly decline in economic activity since World War II. An unprecedented 40 to 50 percent decline in discretionary spending will translate to a roughly 8 to 13 percent drop in GDP. While many CPG companies have withstood the initial economic shock, all will need to prepare for the longer-lasting effects, including an erosion in consumer confidence that will drive recessionary behavior.


In this article, we describe five trends in the consumer and retail landscape that have emerged during the crisis and, we believe, will persist in the aftermath. We then recommend the creation of a plan-ahead team to equip CPG companies for whatever the next normal may turn out to be.

It’s increasingly clear that the intervening period will be lengthy. Consumers and retailers will need to adjust to ongoing physical distancing and travel restrictions. Outlets and venues where physical distancing cannot be achieved will be among the last to reopen.


Current sentiment, the trends we are seeing in Asia, and lessons from the last recession lead us to anticipate at least five behaviors to “stick” through the prolonged recovery and the next normal: increased price sensitivity, higher digital engagement, rise in attention to wellness and hygiene, “nesting” at home, and a redefinition of brand purpose. We also expect to see important channel shifts: a smaller food-service sector, retailer consolidation, the rise of value retailers, and Amazon’s growth in grocery (a sector in which the e-commerce giant has historically had lower share).




It’s increasingly clear that the intervening period will be lengthy. Consumers and retailers will need to adjust to ongoing physical distancing and travel restrictions. Outlets and venues where physical distancing cannot be achieved will be among the last to reopen.


Current sentiment, the trends we are seeing in Asia, and lessons from the last recession lead us to anticipate at least five behaviors to “stick” through the prolonged recovery and the next normal: increased price sensitivity, higher digital engagement, rise in attention to wellness and hygiene, “nesting” at home, and a redefinition of brand purpose. We also expect to see important channel shifts: a smaller food-service sector, retailer consolidation, the rise of value retailers, and Amazon’s growth in grocery (a sector in which the e-commerce giant has historically had lower share).


Economic insecurity, leading to price sensitivity


Already, two-thirds of consumers are pessimistic or unsure about the pandemic’s lasting effect (Exhibit 2). Despite their comparative optimism for economic recovery, 46 percent of US consumers and 28 percent of Chinese consumers said they plan to reduce spending in the coming weeks.



The 2008 recession is an imperfect analog to the COVID-19 crisis—which is more of a shock, with many governments introducing bold, unprecedented fiscal measures—but we believe it offers valuable lessons about how consumers behave under financial stress. That recession had a lasting effect on consumer confidence, which didn’t return to prerecession levels until 2011 in Germany, 2014 in the United Kingdom and the United States, and 2017 in China.


Consumers reduced their spending in several ways:


  • Refocusing on home occasions. Many consumers spent less outside the home; 55 percent of Germans and 63 percent of Americans said they ate out less.

  • Cutting back on nonessentials. Two-thirds of US shoppers said they cut back on high-end luxury goods; one-third cut back on cosmetics.

  • Deal seeking. Shoppers became increasingly promotion conscious. In the United Kingdom, the percentage of products sold on discount climbed from 26 percent in 2002–06 to 36 percent in 2011.

  • Trading down. Consumers switched to cheaper brands or private labels. UK private-label sales increased by 10 percentage points from 2008 to 2010.

  • Shifting channels. Many consumers began shopping at value retailers. Discounters now account for 10 percent of grocery sales in the UK market, up from 3 percent in 2006.




A seismic shift in digital engagement


Physical-distancing rules have increased consumption of online media and significantly accelerated e-commerce, particularly in markets that already had a head start. In the United Kingdom, for example, where online’s share of grocery shopping was 7 percent before the crisis, grocers are furiously increasing capacity to meet demand: the three largest grocers have added more than 500,000 new delivery slots—an increase of more than 30 percent. For many discretionary categories, e-commerce has become the channel as stores have closed.


We expect this channel shift to endure to some extent, especially in countries where retailers had enough preexisting capability to offer a positive online experience. Early lessons from China suggest that three to six percentage points of online market share will be “sticky,” driven by older generations newly comfortable with digital channels and by new consumer segments who have overcome barriers to trial (such as account setup). Also, in the medium term, we expect shoppers to prefer the “safe” experience of shopping online to the prospect of shopping in crowded stores.


Amazon is likely to build momentum in fresh food and packaged goods, especially in markets where the major grocers lack e-commerce “legs.” In the month leading up to March 14—even before governments issued shelter-in-place guidance—Amazon US saw year-on-year growth of 41 percent in household goods, 25 percent in health products, and 23 percent in groceries.


Rise in attention to wellness and hygiene


The wellness trend has endured—and even gained strength—during the outbreak. “Healthy eating” has remained the highest priority of food shoppers across Europe: net sentiment (positive responses less negative) was 55 percent, rising to 82 percent in Italy. Consumers are also investing in at-home exercise: in Germany and the United Kingdom, Amazon’s fitness-equipment sales spiked by approximately 60 percent each week in March.


We expect this upward trajectory to continue into the next normal. Hygiene will become a core element of wellness. The speed of the virus’s spread has highlighted the level of connectedness in society—and the associated risk. Brands should consider the implications for their strategy and communications (for instance, reassessing manufacturing processes and packaging, as well as emphasizing health and cleanliness in marketing messages). The battle to eradicate COVID-19 will be a long one, and CPG manufacturers will need to prove their safety and trust credentials.


Nesting at home


Staying in is the new going out. Once restrictions are lifted, we expect consumers to continue spending more time at home, driven by a desire to save money, persistent safety concerns, and a newfound pleasure in nesting. Through the crisis period, many have invested in upgrading their homes and gardens or bought equipment for new hobbies and routines. Next to groceries, the category that saw the highest growth in US e-commerce in recent weeks has been breadmakers (652 percent growth). Other nonessentials, such as weight-training gear (307 percent), computer monitors (179 percent), and craft kits (117 percent) also made the top-100 list.





Redefinition of purpose


Large CPG companies have prioritized crisis-related communications (such as announcements of new safety protocols and charitable donations). Digital-native brands have nimbly connected with their social-media communities about how they’re helping people affected by COVID-19. Consumers may expect companies to continue this heightened emphasis on social responsibility after the crisis ends. In the previous recession, more than 75 percent of consumers agreed that “corporations should operate in a way that aligns with society’s interests, even if that means sacrificing shareholder value.” That said, brands must be careful to strike the right tone. During this pandemic, 77 percent of consumers said they appreciate CPG companies communicating how their brands can be helpful in daily life, but an almost equal percentage said brands shouldn’t “exploit” COVID-19 as a commercial opportunity.


It will be essential for companies to balance existing focus areas with emerging consumer concerns. Sustainability, for instance, continues to be important to consumers in many markets (60 percent of UK consumers cited it as a top consideration when food shopping). Yet consumers who have become more price sensitive or more concerned about hygiene may favor single-use packaging.


CPG companies should examine the potential impact of these trends on the categories in which they play. Besides these, we are also monitoring two other trends, whose longevity is less clear: deurbanization and big-brand growth. With cities becoming COVID-19 epicenters, urbanites may move to the suburbs, or cities could see a significant reduction in traffic as people stay local. Big brands may benefit over the longer term, as retailers’ current focus on high-volume SKUs will change the consumer decision set. (In the United States, for instance, large and midsize brands captured 60 percent of recent growth, compared with only 20 percent in previous years.)


Channel shifts


These consumer trends will have channel implications, each of which will have varying impact on different countries and categories. Most significantly, food-service operators—particularly independents—will experience substantial contraction and consolidation as a result of physical-distancing restrictions and the recessionary environment. Food-service closures have accounted for 10 to 20 percent grocery growth in Western markets; when the food-service sector reopens, we expect a few percentage points to remain in grocery.


We also expect to see significant retailer consolidation, especially in sectors that were less well capitalized and struggling before the outbreak, such as small US quick-service restaurants. Some distributors will go out of business, creating route-to-market challenges for some CPG players, especially in the fragmented trade.


Amazon and other e-marketplaces were already growing by 25 percent a year from 2013 to 2018 but had previously struggled with the supply-chain complexity of fresh food and the economics of delivering CPG products. During the crisis, however, these players are likely to capture an outsize share of core grocery.


In offline grocery, discounters and other value retailers will benefit from the downturn, as they did in 2009. Major grocers will rationalize their assortments based on learnings during the crisis. They will also likely invest more in neighborhood proximity formats: in China, for instance, convenience-store sales were 8 percent higher in March than in January. And grocers will ask CPG companies for support in making the economics of e-commerce work.


By now, most CPG companies have well-established crisis-response teams monitoring the situation and reacting accordingly. Preparing for the next normal, however, calls for a distinct working group: a plan-ahead team tasked with planning across multiple time horizons. As our colleagues explain in a recent article, “Getting ahead of the next stage of the coronavirus crisis,” the plan-ahead team should work through five frames: a realistic starting position, scenarios, a broad direction of travel, strategic moves, and trigger points. In the remainder of this article, we discuss CPG-specific considerations for each of these frames.