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Tuesday, April 16, 2024

Fortune favours the brave

Is sustainable growth proving elusive? Then look beyond your core business and build a new one. By McKinsey & Company’s Pavlos Exarchos and Paul Jenkins

It’s a challenging time for FMCG businesses. As inflation drops, it is important to put in place a sustainable long-term growth strategy that does not rely exclusively on price/mix. Success, however, cannot be taken for granted in largely mature categories and while consumer demand continues to be under pressure.

To get there, many CEOs are looking to new business building as a core part of this growth strategy, on top of strengthening their core offering and expanding into adjacent categories and markets. Indeed, our new research found that across sectors, 58 percent of business leaders agree that because of the current economic environment, new-business building has become a greater priority for their organisations in the past year. Similarly, nearly two-thirds of public-equity investors and analysts say it would be advantageous for organisations to increase their investment in new-business building over the next year.

So why now? What’s making this an opportune moment to seize new business building as a strategy to growth? This shift is driven by disruptive trends creating opportunities. Companies expect generative AI can help them launch new businesses more quickly.

At the same time, they see how disruptive the technology is, and want to get ahead. Alongside this, the transition to net zero emissions creates an opportunity for organisations to build green new businesses to reduce carbon.

From a capital raising perspective to fund these new ventures, established organisations have a relative advantage compared with startups, which are experiencing more difficulty raising capital today. And we know that markets appreciate these new ventures. Every dollar of revenue in an adjacent business is valued at two times the dollar of revenue from the core business.

Historically, retailers have led the way when it comes to new business-building. In large part because they have a wealth of customer data that can be monetised in a whole raft of ways – from launching retail media networks to expanding into completely new (though adjacent) sectors. Take supermarket-brand finance, health-related businesses and mobile businesses as prime examples. Although those services aren’t core offerings for brick-and-mortar supermarkets, the businesses themselves have large customer bases that they know well, and who can be carried along relatively easily on the journey that extends their loyalty from product purchases to a current account or phone contract.

The new business building opportunity for FMCG

A new business building strategy can enable FMCG businesses to not just fight for incremental growth in their heritage offering, but access rapid, sustainable growth in other areas.

To unpack what this looks like in practice, here are four examples of how FMCG organisations can achieve growth through a new business-building approach.

First, there’s green business building, driven by the global focus on reaching net zero emissions and carbon abatement. These new green businesses most often take one of two forms: launching a new product that is net zero or investing in specific parts of the value chain like packaging solutions to make them greener and more sustainable. Some businesses are already prioritising sustainability and leaning into the energy transition to gain a competitive edge and even reinvent themselves.

Rising prices, consumer expectations, tightening regulations, and vulnerable supply chains are propelling the shift to circular business models that prioritise sustainability and are less vulnerable to global supply shocks. FMCG companies that mitigate energy risk by implementing green technologies and practices are also benefiting from current tailwinds in the green economy, particularly where ESG regulations come into play. Ultimately, businesses that prioritise environmental responsibility are more likely to succeed in the long run – not least because it can increase customer loyalty and improve market share as a result.

Second, FMCG businesses that aren’t already in this space can consider building a direct-to-consumer (D2C) channel to access new revenue streams, often investing in CRM to do so.  Post-COVID, consumers are far more comfortable purchasing direct and online. In fact, our latest European Consumer Sentiment research shows that nearly half of all UK consumers (48 percent) want to shop across channels in an omnichannel way.  We often find that businesses deprioritise or discount a D2C strategy because the benefits remain unclear – but this is a mistake. In truth, the benefits go beyond important but hard-to-quantify aspects such as closer customer interaction and less dependence on intermediaries, and deliver improved shareholder value.

Building out a D2C business can help companies generate shareholder value in three ways: direct consumer interaction, commercial flexibility, and, in many cases, also cost efficiency. Direct connections to consumers allow companies to test ideas, learn, and adapt much more quickly and effectively. The D2C channel allows the company to quickly test new, service-oriented products and solutions and to adjust its offers based on customer uptake and feedback. And of course, with fewer or no intermediaries, the D2C business stands to earn higher margins.

Third, there’s an opportunity to build new business via the ‘everything as a service’ model (EaaS) as digital adoption continues to increase, and consumers shift away from pure ownership. For example, health and wellness FMCG businesses combining their products with a service and making them available through a rolling subscription model. In today’s business environment, reducing up-front costs for consumers is crucial to lowering purchase barriers. EaaS products are more affordable and accessible to a broader range of consumers because they reduce the financial burden of making an outright purchase – and they also offer companies the opportunity to gather more data on product usage and so glean valuable insights into customer behaviour and preferences.

Finally, FMCG businesses could drive growth by building out their innovation capabilities within the supply and value chain, both in-house and through external partners. Generative AI is a huge driver of this. The technology could increase productivity in the retail and consumer packaged goods industry by 1.2 to 2.0 percent of annual revenues, or an additional $400 billion to $660 billion.

While technology has played an essential role in the CPG industries for decades, generative AI can provide additional source of power. Traditional AI and advanced analytics solutions have helped companies manage vast pools of data across large numbers of SKUs, expansive supply chain and warehousing networks, and complex product categories. But generative AI could power automation and AI as the foundation for new, resource-light services and ventures. It allows companies to re-imagine the product and service on offer – for example powering high end services to the mass market.

Now is an opportune time to build new businesses. CEOs are making it a top strategic priority, investors like it and the market values this approach. The question is only – which FMCG companies will be bold enough to capture the opportunities at play?

Pavlos Exarchos is a Senior Partner at McKinsey & Company
Paul Jenkins is Senior Partner and Global Leader of Leap by McKinsey 

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