The Digital Revolution is not Simply a Technology Issue: How Consumer Brands are Struggling with Digital Disruption
From Nairobi to Nanjing to New York, consumers across the globe have clearly embraced the digital world. They – we – have rapidly adapted to shopping for groceries during the daily commute; downloading books, music or films on the move; or tweeting, pinning and sharing our purchasing decisions on social networks. This expectation of ‘anytime, anywhere’ consumption has grown exponentially, bolstered by the rise of a mobile, social, cloud-based era of computing.
The pace of change has surpassed all prior shifts in the nature of an industry: it took just seven years from the launch of the internet in the US for it to become a mass medium, faster than any prior innovation. Today, digital is ubiquitous. It crosses all boundaries: age, geography and stage of economic development. Kenya, for example, leads the world in mobile banking uptake; Korea has the world’s fastest broadband network, while six in ten Japanese consumers go online with their phones today.
Usually adept at exploiting new trends, consumer facing brands have struggled to keep pace or adapt strategically to the new digital landscape. Of course, there has been much experimentation with digital, from both consumer goods companies and, especially, retailers. Supermarket giant Tesco has created a virtual store in Korea’s subway system where you shop by scanning QR codes. Brazil’s Magazine Luiza has invited consumers to create social media ‘stores’ on Facebook, with the company providing fulfillment and paying ‘storeowners’ a commission.
But most consumer brands’ experiments so far are tactical rather than strategic responses to the challenge of the digital revolution: digital add-ons to an existing, analog business. But if they are going to enjoy sustained growth into the future, consumer facing companies need to take a far more holistic approach that places the consumer at the center.
This is doubly important when combined with the impact of globalization on consumer facing companies. Consumers in developed markets, where companies have traditionally focused, are aging and looking to live healthier lives, but they are also cash-strapped, due to the stagnant economy, and seeking value. At the same time, emerging markets are growing. By 2015, there will be at least one billion middle class emerging market consumers. An estimated 15 million new retail outlets would be required to reach these new consumers, which is a vast undertaking even before realizing that many of these new consumers will likely require very competitive prices. Quite simply, leveraging digital technology will be the only economically viable way to compete.
The pressing need for truly digital operations
Over the last two decades, consumer brands have skillfully aligned their businesses to a changing world. This has led them on a journey from their predominantly local roots, to boldly reshape their operating models and become first regional, and then global, giants. Their vision has been rewarded: every stage of the journey has been accompanied by increased earnings and profitability.
But many firms are likely to find that, if they do not embrace an increasingly digital world, their margins and growth will come under challenge. It is time for them to radically reshape their existing business models and strategies for the digital world. Importantly, this isn’t about some kind of digital faade; it’s a far more transformational change.
We have identified six key implications resulting from this shift:
1. Geography as the principal organizational construct will become redundant. For consumer facing companies, structuring their business operations geographically made sense in a world of high transport and communications costs, and limited globalization. In today’s era, companies will need to structure their business around types of consumer and route to market to be successful. This might include groupings of culturally similar markets – so Australia grouped with the UK, rather than nearby Indonesia, for example. More radically, they should structure themselves and their propositions around distinct consumer groups, such as working mothers, or the recently retired.
2. Digital retail will dominate growth, and change the industry landscape. Much of the growth in retail today is in non-store business. Although online sales are still a relatively small part of the market, their compound annual growth rates of 18% are far outstripping that of High Street retail. With lower costs and greater flexibility, so-called etailing will lead the way. But in turn, this will disrupt the traditional structure of the industry, as consumer brands discover new opportunities to sell direct to their consumers, and build a relationship with them, more than ever before.
3. Consumer demand for a seamless shopping experience regardless of where and when they shop will force companies to ensure integration throughout their organization. The integration of physical and virtual shopping experiences, across the lifecycle of a product, continues to develop rapidly. This is making the previously intangible aspects of how consumers discover and value goods far more valuable—from how they are paid for, delivered, used, and disposed of. This demands that these fragmented aspects of the value chain can no longer be arm’s length processes: they need to be integrated with the manufacturer’s brand. Nespresso’s market strength is partly wrapped up in its tight integration of all these aspects, ensuring a seamless customer experience from its concept stores, to its online fulfillment channels, to its dedicated support lines.
4. Networked consumers will increasingly expect an interactive, customized and meaningful relationship with their brands of choice. Marketing departments have long been expert in the art of monologue: endlessly highlighting a brand’s merits to consumers. Now they need to learn the art of dialogue; they need to find the points of intersection between what they want to say and what a consumer wants to hear, through multiple channels, including digital. Content needs to be customized, timely and continuously relevant to individual consumers.
5. Product ranges will expand rapidly, as constraints set by physical space decrease. The size of stores has limited product ranges; a physical constraint that will disappear with the digital revolution. We foresee an exponential expansion of product ranges to meet consumers’ individual needs around the world.
6. Simultaneously, digitally-enabled consumer co-creation will become normal, allowing individuals to customize their chosen products. As advances in technology make the mass-customization of products a reality, consumers will be able to specify products to suit their individual tastes, such as fragrance, flavor, pack size and color. Companies used to exploiting the mass market will have to learn to exploit the market of ‘one’.
Making sense of a new landscape
These trends are blurring the boundaries for consumer facing companies. Product manufacturers are becoming retailers, distributors and media operators. On the demand-side, consumers are no longer just passive shoppers: they are critics, product co-creators, and, in some instances, even digital storeowners.
Although the industry is talking about the need to digitize their businesses, they are still a long way from understanding the scale of the revolution that is coming. Right now, too many companies are simply seeing the digital revolution as a technology issue: adding another channel to reach consumers. It is far more. It is a commercial revolution that must be addressed strategically across the business, rather than being led tactically by the IT function.
It’s time to stop dabbling in digital. Consumer facing companies need to disrupt with a digital operating model.
ABOUT THE AUTHORS
Fabio Vacirca, global managing director, Accenture Consumer Goods & Services
As global managing director for Accenture's consumer goods business, Fabio Vacirca is responsible for business planning, industry services and development, investments and go-to-market strategy. Since joining Accenture in 1991, Fabio has held a variety of leadership positions. He has been a member of Accenture's consumer goods leadership team since 1999, and recently led the acquisition and successful integration of CAS in the software space. Passionate about innovation, Fabio is known as an entrepreneur and natural leader. He has, and still holds, several key client roles in Europe and the U.S. Fabio brings distinctive functional expertise in global operating models, business services, CRM and finance. In 2006 Fabio started the Accenture Fashion Practice and still sponsors the Milan Fashion Innovation Center today.
Fabio is a veteran in the consumer goods industry with more than 20 years of experience, including a short period at a global CPG company prior to Accenture. After earning a degree in engineering management from the Politecnico di Milano University in Italy, Fabio went on to earn a post-graduate degree in Information Technology Management. Fabio speaks five languages and lives with his wife and four daughters in Milan.
John Jackson, managing director for growth and strategy, Accenture Consumer Goods & Services
Based in London, John Jackson is the Managing Director for Growth and Strategy in Accenture’s Consumer Goods and Services practice.
With over 20 years of consulting experience with Accenture, John is one of the leading operating model design and implementation experts in consumer products, leading projects with most of the largest global organizations.
John also manages Accenture’s “High Performance Business” research program for the Consumer Goods & Services practice.
John counsels multi-national clients seeking to substantially improve their performance and ability to execute business strategy via major change initiatives involving strategy, organization, process and technology.
The pace of change has surpassed all prior shifts in the nature of an industry: it took just seven years from the launch of the internet in the US for it to become a mass medium, faster than any prior innovation. Today, digital is ubiquitous. It crosses all boundaries: age, geography and stage of economic development. Kenya, for example, leads the world in mobile banking uptake; Korea has the world’s fastest broadband network, while six in ten Japanese consumers go online with their phones today.
Usually adept at exploiting new trends, consumer facing brands have struggled to keep pace or adapt strategically to the new digital landscape. Of course, there has been much experimentation with digital, from both consumer goods companies and, especially, retailers. Supermarket giant Tesco has created a virtual store in Korea’s subway system where you shop by scanning QR codes. Brazil’s Magazine Luiza has invited consumers to create social media ‘stores’ on Facebook, with the company providing fulfillment and paying ‘storeowners’ a commission.
But most consumer brands’ experiments so far are tactical rather than strategic responses to the challenge of the digital revolution: digital add-ons to an existing, analog business. But if they are going to enjoy sustained growth into the future, consumer facing companies need to take a far more holistic approach that places the consumer at the center.
This is doubly important when combined with the impact of globalization on consumer facing companies. Consumers in developed markets, where companies have traditionally focused, are aging and looking to live healthier lives, but they are also cash-strapped, due to the stagnant economy, and seeking value. At the same time, emerging markets are growing. By 2015, there will be at least one billion middle class emerging market consumers. An estimated 15 million new retail outlets would be required to reach these new consumers, which is a vast undertaking even before realizing that many of these new consumers will likely require very competitive prices. Quite simply, leveraging digital technology will be the only economically viable way to compete.
The pressing need for truly digital operations
Over the last two decades, consumer brands have skillfully aligned their businesses to a changing world. This has led them on a journey from their predominantly local roots, to boldly reshape their operating models and become first regional, and then global, giants. Their vision has been rewarded: every stage of the journey has been accompanied by increased earnings and profitability.
But many firms are likely to find that, if they do not embrace an increasingly digital world, their margins and growth will come under challenge. It is time for them to radically reshape their existing business models and strategies for the digital world. Importantly, this isn’t about some kind of digital faade; it’s a far more transformational change.
We have identified six key implications resulting from this shift:
1. Geography as the principal organizational construct will become redundant. For consumer facing companies, structuring their business operations geographically made sense in a world of high transport and communications costs, and limited globalization. In today’s era, companies will need to structure their business around types of consumer and route to market to be successful. This might include groupings of culturally similar markets – so Australia grouped with the UK, rather than nearby Indonesia, for example. More radically, they should structure themselves and their propositions around distinct consumer groups, such as working mothers, or the recently retired.
2. Digital retail will dominate growth, and change the industry landscape. Much of the growth in retail today is in non-store business. Although online sales are still a relatively small part of the market, their compound annual growth rates of 18% are far outstripping that of High Street retail. With lower costs and greater flexibility, so-called etailing will lead the way. But in turn, this will disrupt the traditional structure of the industry, as consumer brands discover new opportunities to sell direct to their consumers, and build a relationship with them, more than ever before.
3. Consumer demand for a seamless shopping experience regardless of where and when they shop will force companies to ensure integration throughout their organization. The integration of physical and virtual shopping experiences, across the lifecycle of a product, continues to develop rapidly. This is making the previously intangible aspects of how consumers discover and value goods far more valuable—from how they are paid for, delivered, used, and disposed of. This demands that these fragmented aspects of the value chain can no longer be arm’s length processes: they need to be integrated with the manufacturer’s brand. Nespresso’s market strength is partly wrapped up in its tight integration of all these aspects, ensuring a seamless customer experience from its concept stores, to its online fulfillment channels, to its dedicated support lines.
4. Networked consumers will increasingly expect an interactive, customized and meaningful relationship with their brands of choice. Marketing departments have long been expert in the art of monologue: endlessly highlighting a brand’s merits to consumers. Now they need to learn the art of dialogue; they need to find the points of intersection between what they want to say and what a consumer wants to hear, through multiple channels, including digital. Content needs to be customized, timely and continuously relevant to individual consumers.
5. Product ranges will expand rapidly, as constraints set by physical space decrease. The size of stores has limited product ranges; a physical constraint that will disappear with the digital revolution. We foresee an exponential expansion of product ranges to meet consumers’ individual needs around the world.
6. Simultaneously, digitally-enabled consumer co-creation will become normal, allowing individuals to customize their chosen products. As advances in technology make the mass-customization of products a reality, consumers will be able to specify products to suit their individual tastes, such as fragrance, flavor, pack size and color. Companies used to exploiting the mass market will have to learn to exploit the market of ‘one’.
Making sense of a new landscape
These trends are blurring the boundaries for consumer facing companies. Product manufacturers are becoming retailers, distributors and media operators. On the demand-side, consumers are no longer just passive shoppers: they are critics, product co-creators, and, in some instances, even digital storeowners.
Although the industry is talking about the need to digitize their businesses, they are still a long way from understanding the scale of the revolution that is coming. Right now, too many companies are simply seeing the digital revolution as a technology issue: adding another channel to reach consumers. It is far more. It is a commercial revolution that must be addressed strategically across the business, rather than being led tactically by the IT function.
It’s time to stop dabbling in digital. Consumer facing companies need to disrupt with a digital operating model.
ABOUT THE AUTHORS
Fabio Vacirca, global managing director, Accenture Consumer Goods & ServicesAs global managing director for Accenture's consumer goods business, Fabio Vacirca is responsible for business planning, industry services and development, investments and go-to-market strategy. Since joining Accenture in 1991, Fabio has held a variety of leadership positions. He has been a member of Accenture's consumer goods leadership team since 1999, and recently led the acquisition and successful integration of CAS in the software space. Passionate about innovation, Fabio is known as an entrepreneur and natural leader. He has, and still holds, several key client roles in Europe and the U.S. Fabio brings distinctive functional expertise in global operating models, business services, CRM and finance. In 2006 Fabio started the Accenture Fashion Practice and still sponsors the Milan Fashion Innovation Center today.
Fabio is a veteran in the consumer goods industry with more than 20 years of experience, including a short period at a global CPG company prior to Accenture. After earning a degree in engineering management from the Politecnico di Milano University in Italy, Fabio went on to earn a post-graduate degree in Information Technology Management. Fabio speaks five languages and lives with his wife and four daughters in Milan.
John Jackson, managing director for growth and strategy, Accenture Consumer Goods & ServicesBased in London, John Jackson is the Managing Director for Growth and Strategy in Accenture’s Consumer Goods and Services practice.
With over 20 years of consulting experience with Accenture, John is one of the leading operating model design and implementation experts in consumer products, leading projects with most of the largest global organizations.
John also manages Accenture’s “High Performance Business” research program for the Consumer Goods & Services practice.
John counsels multi-national clients seeking to substantially improve their performance and ability to execute business strategy via major change initiatives involving strategy, organization, process and technology.