Perspectives on retail and consumer goods - Number 7, January 2019
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Perspectives on retail and consumer goods Number 7, January 2019
Perspectives on retail and Editor McKinsey Practice
consumer goods is written Monica Toriello Publications
by experts and practitioners
in McKinsey & Company’s Contributing Editors Editor in Chief
Retail and Consumer Goods Susan Gurewitsch, Christian Lucia Rahilly
practices, along with other Johnson, Barr Seitz
McKinsey colleagues. Executive Editors
Art Direction and Design Michael T. Borruso,
To send comments or Leff Communications Allan Gold, Bill Javetski,
request copies, email us: Mark Staples
Consumer_Perspectives Data Visualization
@McKinsey.com Richard Johnson, Copyright © 2019 McKinsey &
Jonathon Rivait Company. All rights reserved.
Editorial Board
Peter Breuer, Tracy Francis, Editorial Production This publication is not
Jan Henrich, Greg Kelly, Sajal Elizabeth Brown, Roger intended to be used as
Kohli, Jörn Küpper, Clarisse Draper, Gwyn Herbein, the basis for trading in the
Magnin, Paul McInerney, Pamela Norton, Katya shares of any company or
Tobias Wachinger Petriwsky, Charmaine Rice, for undertaking any other
John C. Sanchez, Dana complex or significant
Senior Content Directors Sand, Katie Turner, Sneha financial transaction without
Greg Kelly, Tobias Wachinger Vats, Pooja Yadav, Belinda Yu consulting appropriate
professional advisers.
Project and Content Managing Editors
Managers Heather Byer, Venetia No part of this publication
Verena Dellago, Shruti Lal Simcock may be copied or
redistributed in any form
Cover Photography without the prior written
© Rawpixel/Getty Images consent of McKinsey
& Company.
Table of contents
2 Foreword by Greg Kelly
4 12 22 26
Winning in an era of A new value-creation Agility@Scale: Capturing ‘Fast action’ in fast food:
unprecedented disruption: model for consumer goods growth in the US consumer- McDonald’s CFO on why the
A perspective on US retail The industry’s historical goods sector company is growing again
In light of the large-scale value-creation model To compete more effectively Kevin Ozan became CFO of
forces disrupting the US retail is faltering. Here’s how to in the US market, consumer- McDonald’s in 2015. Since
industry, once-optional moves reinvent it. packaged-goods companies then, the restaurant chain
have become imperatives. must combine greater has had a string of successes.
agility with new types of Here’s his take on what’s
scale advantage. working, what’s not, and what’s
next for the iconic brand.
34 48 54 64
Reviving grocery retail: Who’s shopping where? From lab to leader: How Faster fashion: How to
Six imperatives The power of geospatial consumer companies can shorten the apparel calendar
In the United States and analytics in omnichannel retail drive growth at scale with To get new styles into
Western Europe, many Using advanced geospatial disruptive innovation stores more quickly, fashion
traditional grocery retailers analytics, retailers can now In the era of “fast products” companies must improve
are seeing their sales and quantify the true economic and digital disruption, internal collaboration, tap into
margins fall—and things value of each of their stores delivering growth requires consumer insights, and start
could get even worse. Here’s across channels—and they’re putting in place new to digitize the value chain.
how to reverse the trend. uncovering surprising insights. predictive consumer-growth
capabilities—including
innovation—based on speed,
agility, and scale.
70 76 QUICK TAKES
46 Global consumer sentiment:
Still on an upward trend
47 Commercial excellence in China
62 2019: A year of awakening for the
Delivering the goods, on Beyond procurement: fashion industry
time and in full Transforming indirect
86 Are your fruits and vegetables
E-commerce giants spending in retail
top-notch?
have raised the bar for If retailers treat indirect costs
supply-chain performance. as an opportunity for business
Now consumer-goods transformation rather than just
manufacturers face a a procurement matter, they
stark choice: achieve new can boost return on sales by 88 Contributors
levels of accuracy and as much as 2 percent. 90 Regional leaders
responsiveness, or pay a
heavy price.
1
Foreword
A new year is an opportunity for renewal—a fresh start, a time
to recommit to long-standing goals or to pursue new ones, a chance
to get reenergized and build momentum for the year ahead.
Indeed, most of my recent conversations with leaders in the retail
and consumer-goods industries have been about bold plans to
tackle the challenges and make the most of the opportunities that
this year will bring.
As you embark on your 2019 journey, my colleagues and I offer some of our latest thinking on
topics that affect retailers and consumer-goods manufacturers worldwide. We find this to
be a time like no other, as large-scale trends and disruptions fundamentally and systematically
reshape the consumer sector. The articles in this edition of Perspectives on retail and consumer
goods explore how these trends and disruptions are changing our industries, and how successful
companies are responding to—and capitalizing on—these changes. We hope that our research
and analyses will help you gain new insights, find inspired solutions, and learn from the
experiences of others.
Some recurring themes emerge in many of these articles. One is the potential of digitization and
advanced analytics to transform every part of the business. Another is the rising importance
of agility in organizations—the ability to act rapidly on customer feedback, bring solutions to
2 Perspectives on retail and consumer goods Number 7, January 2019
market quickly, and refine them continuously. Yet another is the crucial role that talent plays in a company’s success, in a world where certain skills and capabilities are in extremely high demand but short supply. Companies neglect these themes at their peril. In every subsector within retail and consumer goods, we’ve found that the winners are those companies that harness the power of digitization and analytics, implement agile methodologies, and put talent at the top of the CEO agenda. We believe that laggards in these areas might get by in the short term but will be vulnerable in the medium term—and ultimately will struggle to survive. This edition of Perspectives also features an interview with Kevin Ozan, the CFO of McDonald’s. As part of the top team at one of the world’s largest restaurant chains, he has firsthand knowledge of what it takes to turn around a company in decline and steer it toward sustained, profitable growth. McDonald’s has been one of the most fascinating growth stories in the retail and food-service industry in the past few years. I hope you find the interview both interesting and instructive. On behalf of my colleagues at McKinsey, I wish you a happy and prosperous 2019. Greg Kelly Senior partner, Atlanta This edition of Perspectives on retail and consumer goods is available for download on McKinsey.com. Most of the articles are also available on the McKinsey Insights app. We welcome your thoughts and reactions; email us at Consumer_Perspectives@McKinsey.com. Copyright © 2019 McKinsey & Company. All rights reserved. Foreword 3
Winning in an era of
unprecedented disruption:
A perspective on US retail
In light of the large-scale forces disrupting the US retail industry, once-optional
moves have become imperatives.
Jess Huang, Sajal Kohli, and Shruti Lal
4 Perspectives on retail and consumer goods Number 7, January 2019
Much has been made lately of the “retail apocalypse,” other large-scale risks and uncertainties—new
with headline after headline declaring the demise trade tariffs and cyberthreats, to name just two—are
of retail as we know it. Yes, store closures have indeed keeping many a retail CEO up at night.
outpaced store openings across the US market in
recent years. And, yes, retail foot traffic in both mall If there was ever a time to challenge assumptions
stores and stand-alone stores has been, and continues and take bold action, it is now. In the face of this
to be, on a downward trajectory. It’s also true that disruption, formerly optional moves have become
the retail landscape is littered with bankruptcies— “must dos.” Retailers that sit on the fence risk getting
upward of 40 in the past two and a half years in North outcompeted by aggressive, fast-moving, forward-
America alone, with more looming on the horizon. thinking competitors.
Yet, at the same time, Amazon and other digital In this article, we discuss five disruptions and five
disruptors had a massive run-up in share in a slew of imperatives for competing in the retail environment
retail categories. Brands are getting into the retail of the future. While a few retailers may be ahead of
game themselves and going directly to the consumer. the game in one or more of the imperatives, none are
The pace of M&A and private-equity activity in the yet excelling in all of them.
sector has quickened in recent months. Perhaps most
© GS Visuals/Getty Images
telling of all, US retail sales have actually risen: the A disruption like no other: Key questions to
2017 total of $3.53 trillion is a 3.9 percent increase ask now
from 2016. Although many of the trends we discuss have been
evident for several years, the certainty, combination,
So, is traditional retail dead? Or is it undergoing and acceleration of these forces have resulted in a
a metamorphosis—and more alive than ever? disruption unlike any that retailers have faced before.
This is the new normal.
In our view, the answer is clear: the US retail industry,
far from being moribund, is experiencing disruption— Are you meeting consumers where they are—
and reinvention—at unprecedented speed. It’s not both physically and digitally?
a story about the malaise of an entire sector but rather Gone are the days when a retailer could rely on brand
a tale of two worlds. A confluence of trends has changed loyalty. Recent surveys have found that millennials
the playing field, forcing retailers either to adapt and tend to perceive newer brands as better and more
innovate or to suffer painful losses or imminent demise. innovative, and that more than 60 percent of Gen Z
consumers are attracted to smaller “new” and “fun”
In this new playing field, consumers are promiscuous brands. Many younger consumers, who want brands
in their shopping, easily switching from one brand to be transparent and approachable, say they distrust
or channel to another. Technology not only drives large corporate brand names. Being an older, well-
consumer engagement but also changes the playbook established brand name—once a major asset—is now
for retail productivity. Industry boundaries are something of a liability.
blurring: nonretailers are selling to consumers,
while retailers are expanding into adjacent sectors Against this backdrop, retailers and consumer
in pursuit of growth. The war for talent rages on, and brands must work harder to engage consumers—and
retailers are battling companies both inside and the most effective way to do so is via digital media.
outside retail to attract the best people. And, of course,
Winning in an era of unprecedented disruption: A perspective on US retail 5
Customer relationships are now digital-centric, automatically. For all retailers, this means having to
with consumers spending, on average, almost six ensure a convenient, frictionless shopping experience
hours per day on digital media. Digital channels both offline and online. A retailer’s accessibility and
continue to be the source of most retail growth and relevance are no longer just about physical location but
will soon influence most retail purchases: Forrester also about digital presence, whether through mobile
Research estimates that by 2022, e-commerce will sites and apps (their own or others’) or smart devices in
account for 17 percent of total retail sales (ranging, cars and homes.
by category, from 4 percent in grocery to 66 percent
in electronics), while an additional 41 percent will Are technology and analytics working for you?
be digitally influenced offline sales (with digital Digitization is revolutionizing not just how retailers
channels influencing as much as 30 percent of offline engage with consumers but also how they unlock
sales, even in mostly offline categories like grocery).1 productivity. Whereas scale was once the primary
lever of cost and efficiency, technology now plays
The shift to online sales, coupled with rising labor that role across the value chain. In-store retail
costs, puts pressure on store economics. At best, the technologies, from handheld devices to sensors,
economics are break even; at worst, a 5 percent shift are improving store processes. Robotic process
from in store to online can reduce earnings before automation is speeding up back-office tasks. Retailers
interest and taxes (EBIT) by 20 to 30 percent. At the have access to more operational data than ever, can
same time, the “buy online, pick up in store” option, conduct sophisticated analytics, and can tap into
now offered by many retailers, boosts store traffic. artificial intelligence (AI) to inform everything from
Retailers must therefore evaluate store economics product design to supply-chain management to
within the broader context of omnichannel economics. store experience.
Consumers’ embrace of digital media has also Our research suggests that currently available,
made retail competition more intense: savvy upstart at-scale technology could help automate more
brands can quickly gain a foothold online, even than 55 percent of tasks in a classic grocery store.
bypassing traditional retail channels. E-commerce This automation would reduce selling, general,
platforms, such as Shopify, have enabled value and and administrative (SG&A) costs; enhance customer
luxury brands alike to launch direct-to-consumer and employee experience; and free up funds to fuel
sites without making big investments in tech growth elsewhere. Furthermore, research from
capabilities. Smaller brands can market themselves the McKinsey Global Institute has shown that the
inexpensively yet effectively on the internet and on retail industry could reap global benefits from
social networks. These innovative brands selling AI worth $400 billion to $800 billion—more than
directly to consumers also further reinforce the idea any other industry. Such advanced technologies
that traditional retailers are stale, as they don’t carry were once too expensive and unproven, but their
these new brands. economics now work.
Another effect of digitization: consumers now have sky- At the same time, there are dramatic business
high expectations when it comes to convenience. They’ve implications that retailers will need to grapple with.
become accustomed to near-instant gratification: For example, with more processes and information
on-demand movies and music, speedy delivery of online being digitized, cybersecurity becomes ever more
orders, and even smart devices that can purchase items critical. Yet, only 16 percent of global organizations
6 Perspectives on retail and consumer goods Number 7, January 2019
believe their risk-management processes are mature movies and TV shows, a maker of smart-home devices,
enough to handle cyberthreats. 2 and an online pharmacy, among other things. As these
cross-industry ecosystems capture an ever-larger
How will you compete with the nonretailer share of consumers’ time and attention online, they’ll
retailer? easily grab more and more market share.
Many retailers aren’t just retailers anymore—they’ve
expanded into services, healthcare, and other adjacent Are you positioned to win the war for talent?
sectors. Target acquired delivery-focused companies To win in this era of disruption, retailers can no
Grand Junction and Shipt, CVS Health acquired longer rely on the traditional talent profiles; they
health insurer Aetna, and IKEA now owns TaskRabbit. need to hire the would-be disruptors. This means
Conversely, nonretail companies are encroaching acquiring new skills, including data science,
on retailers’ turf. Fitness companies like Peloton are software development, and advanced analytics.
selling products, such as exercise bikes and athletic And as retailers expand into becoming service and
apparel, as well as experiences and technology. experience providers, they’ll also need expertise
in new industries.
China’s Alibaba, JD.com, and Tencent—and, following
their lead, Amazon—became online juggernauts Finding best-in-class talent is tough, not least
precisely by crossing industry boundaries. These because retailers are competing with direct-to-
pioneer companies created ecosystems that integrate consumer companies, energetic start-ups, and tech
marketplaces, services, platforms, and digital content. giants—all of which tend to be more appealing to
In the US market, Amazon is a retailer as well as an the most in-demand talent profiles. Even the hottest
e-marketplace, a web-services provider, a producer of retail brands may not be perceived as desirable
© Hero Images/Getty Images
Winning in an era of unprecedented disruption: A perspective on US retail 7
© benimage/Getty Images
employers, as they’re tainted by the retail industry’s Meanwhile, on the global stage, much remains in flux.
reputation of being old fashioned and slow. An The level of uncertainty and volatility surrounding
additional challenge for retailers is that talent is global trade is higher than it’s been in recent years,
concentrated in the major coastal cities. with new tariffs, changes in several countries’ trade
agreements, new data-privacy rules and regulations,
Another facet of the war for talent, both at the and geopolitical developments all across the globe.
front line and in corporate offices, is the potential For most retailers in the Western Hemisphere
displacement and necessary reskilling of retail engaged in offshore sourcing, geopolitical forces
workers, driven by the advent of AI and automation. could fundamentally reshape the P&L.
In our view, this should be the number-one obsession
of chief people officers and heads of HR in retail. No longer optional: Key actions to take now
They will need to get ahead of it before competitors, To survive and thrive in the coming decade, retailers
regulators, or public-opinion shapers force the issue. must refashion their businesses to capture the
opportunities presented by the totality of these
Are you prepared for the local impact of trends. For many retailers, it’s now do or die.
global risks? Operational discipline will be more critical than
With a number of emerging-market companies ever, as retailers will need to find funds to fuel
experiencing supercharged growth, it’s no surprise that these transformations. Here are five imperatives—
they’re looking to expand beyond their home countries not suggestions—for companies that aim to be
and even their home continents. Retailers with global tomorrow’s retail winners.
aspirations—including Alibaba and JD.com—are eyeing
the US market as their next target for expansion.
8 Perspectives on retail and consumer goods Number 7, January 2019Reimagine the store New York and San Francisco stores of the apparel
Since established brand names mean much less brand Reformation, customers use digital screens to
to consumers than they used to, the basis of retail select items they want to try on; store associates then
competition is shifting from price and product place the items in dressing rooms.
superiority to privileged insights and customer
experience. In light of this shift, there’s no doubt that Sweat your tech and analytics spend
physical stores can still be highly effective consumer Technology and advanced analytics represent
touchpoints, but retailers need to think hard about massive opportunity in retail. Advanced analytics
the role of the store.3 Stores must be tightly integrated should inform retailers’ decisions across the value
with the online channel, enabling online sales while chain—from targeted pricing and promotions
simultaneously offering experiential features to smarter category management and localized
and cutting-edge technology that sets the store apart. assortment planning. In back-office functions,
analytics and machine learning can increase
Nike does an admirable job of marrying in-person efficiency and effectiveness, reducing cost to fuel
experiences with digital capabilities in its stores. At efforts on more strategic priorities.
the company’s flagship store in midtown Manhattan,
customers can use the Nike app to reserve products Personalized marketing, in particular, can
for pickup, scan QR codes on mannequins to check unlock enormous value: retailers have seen sales
for available colors and sizes, pay for merchandise uplift of 10 to 30 percent and as much as 5 percent
instantly, and book in-store consultations with Nike improvement in customer acquisition. Using
experts. Another New York City store, in the SoHo advanced analytics, retailers can monitor customer
neighborhood, boasts athletic environments—such “signals”—such as purchases, online browsing, and
as a basketball half-court and a treadmill—enhanced social-media posts—which should then trigger
with cameras and digital screens to give shoppers relevant and timely personalized messages. And
an immersive experience and real-time feedback. retailers shouldn’t wait for perfect systems or
perfect data to get started cultivating real-time
Because convenience has become increasingly relationships with individual consumers. Although
important to consumers, retailers should deploy one-to-one personalization is the goal, even one-to-
technology that makes shopping easy and seamless. many is better than no personalization at all.4
Food retailer Ahold Delhaize’s no-checkout “tap
to go” technology is one example. Apparel retailer There’s much higher scrutiny today, from both inside
Everlane allows customers who have registered on and outside companies, on resource allocation and
its website to “shop walletless” in its stores. At the returns on tech spending, but the right investments
The basis of retail competition is shifting from price and product
superiority to privileged insights and customer experience.
Winning in an era of unprecedented disruption: A perspective on US retail 9can pay off handsomely. Retailers that are technology be a reimagination of the retail business model:
leaders can generate two to five percentage points for instance, the ecosystem might offer rentals,
greater EBIT than technology laggards. subscriptions, ad space, or digital goods, all of which
hold significant potential as new revenue streams
Pursue partnerships as a new way to compete and new ways of reaching customers.
Witnessing the seemingly unstoppable growth of retail
ecosystems like Alibaba and Amazon, traditional Become an agile, talent-first organization
retailers are realizing that they can’t go it alone, because Because speed is at a premium, agility must become
of both capability gaps and the sheer financial burden a way of life for retailers. There are, of course, SG&A
of keeping up with technology cycles. Some retailers benefits associated with organizations implementing
have joined forces with companies in other industries, flatter structures with flexible networks of teams,
allowing them to amass consumer touchpoints, gather but agility is about so much more. Agile companies
new consumer data and insights, or access capabilities are three times faster at going from ideation to
they couldn’t otherwise afford. Examples include implementation and two times more likely to take
Kroger partnering with UK-based Ocado to build 20 bold risks to transform the customer experience. 5 For
automated warehouses in the next three years, several retailers, becoming agile means moving away from
grocers linking up with delivery service Instacart, the heavily matrixed organizations and meeting-
and McDonald’s working with Uber Eats to offer food driven cultures of the past and instead forming small,
delivery from thousands of McDonald’s restaurants cross-functional teams that use “concept sprints” to
around the world. design, test, and scale initiatives.6
Retailers should also seek to establish consumer Just as essential as agility is an organization-wide
touchpoints within the large ecosystems: Alibaba, emphasis on talent. What does it mean for a retailer
Amazon, Google, JD.com, and Tencent. For example, to put talent first?7 Practically, it means coming
several retailers—including Carrefour, H&M, and up with a new value proposition for attracting and
Walmart—have formed partnerships with Google. retaining a new breed of retail employees. It means
(Recognizing their outsize influence, even the looking for candidates in nontraditional places,
ecosystems themselves are partnering with each other. including the so-called gig economy, in which 20 to
Amazon has a storefront on Alibaba’s TMall. Google 30 percent of the US working-age population already
and Tencent announced a long-term agreement to participates. Retailers must create a culture for new
share patents. Tencent has an ownership stake in talent profiles to succeed in the organization and
JD.com.) Retailers must determine what they bring offer creative options and approaches (such as virtual
to the table in both data and capabilities and how working environments) to support different ways
to integrate such partnerships into their strategy. of working. Some retailers, including Target and
Walmart, have opted to secure needed capabilities
If retailers have the cash and capabilities, they could through “acqui-hiring,” or acquiring start-ups
perhaps create their own ecosystems. Consider primarily for their talent. Retailers must also
the following scenario: a drugstore chain partners develop strategies for reskilling and retraining the
with a health insurer, a chain of fitness centers, workforce. 8 Simply put, company leaders must be
a physician-referral service, and a health-focused tech convinced of—and then act on—the fact that without
company, like Fitbit. Such an ecosystem would offer the right people and the right skills, success just
a single, comprehensive network for a consumer’s won’t be possible.
health and wellness needs. Part of this strategy should
10 Perspectives on retail and consumer goods Number 7, January 2019Take a 360-degree view of risk 2
Thomas Poppensieker and Rolf Riemenschnitter, “A new
With disruption comes uncertainty, and retailers posture for cybersecurity in a networked world,” March 2018,
McKinsey.com.
must ensure they can respond rapidly to fast-changing
3
Brian Gregg, Jess Huang, Sajal Kohli, and Kelsey Robinson,
circumstances. Take the issue of tariffs: if new tariffs
“Where stores can still compete—and win,” November 2017,
on Chinese imports materialize, a company that is McKinsey.com.
heavily reliant on Chinese manufacturing could suffer 4
For more on personalization, see Julien Boudet and Kai
devastating financial consequences. Retailers face Vollhardt, “Personalization at scale: First steps in a profitable
a broad range of other risks as well, including brand journey to growth,” August 2018, McKinsey.com, and Julien
and reputation risk, activist investors, cyberattacks, Boudet, Brian Gregg, Kathryn Rathje, and Kai Vollhardt, “No
customer left behind: How to drive growth by putting
and data-privacy breaches. Yet a recent McKinsey personalization at the center of your marketing,” July 2018,
survey of more than 1,100 global companies found that McKinsey.com.
boards spend less than 10 percent of their time on risk 5
For more on agility, see Wouter Aghina, Aaron De Smet, Gerald
management—a percentage that hasn’t increased in Lackey, Michael Lurie, and Monica Murarka, The five trademarks
the past few years. 9 of agile organizations, January 2018, McKinsey.com, and
Santiago Comella-Dorda, Krish Krishnakanthan, Jeff Maurone,
and Gayatri Shenai, “A business leader’s guide to agile,” July
It’s critical for retailers to cultivate strong risk- 2017, McKinsey.com.
identification and risk-management capabilities 6
Kent Gryskiewicz, Hugo Sarrazin, Conrad Voorsanger, and Hyo
and to create and prepare for a variety of scenarios Yeon, “How concept sprints can improve customer-experience
systematically; taking lessons from the banking innovation,” March 2018, McKinsey.com.
sector could be one idea.10 And retailers must develop 7
Dominic Barton, Dennis Carey, and Ram Charan, “An agenda
for the talent-first CEO,” McKinsey Quarterly, March 2018,
strategies for data protection and digital resilience,
McKinsey.com.
the hallmarks of which include an engaged and aware
8
See Pablo Illanes, Susan Lund, Mona Mourshed, Scott
frontline staff, differentiated protection for the most Rutherford, and Magnus Tyreman, “Retraining and reskilling
important assets, and active defenses that can be workers in the age of automation,” McKinsey Global Institute,
deployed in real time.11 January 2018, McKinsey.com.
9
Daniela Gius, Jean-Christophe Mieszala, Ernestos Panayiotou,
and Thomas Poppensieker, “Value and resilience through
better risk management,” October 2018, McKinsey.com.
10
Conor Kehoe, Cindy Levy, and Matt Stone, “Stress testing for
Retail is in the midst of a disruption like no other,
nonfinancial companies,” June 2017, McKinsey.com.
which is forcing an existential crisis. Every retailer
11
Digital blog, “Digital resilience: Seven practices in
must decide whether or not to get ahead of the curve cybersecurity,” blog entry by Aman Dhingra, Michael
and redefine its strategy and operating model to win in Gryseels, James Kaplan, and Harrison Lung, June 20, 2018,
this era of disruption. Some are taking a wait-and-see McKinsey.com.
stance; others are moving too cautiously and making
little impact. But there are real costs to waiting Jess Huang (Jess_Huang@McKinsey.com) is a
that may never be recoverable. Only by heeding the partner in McKinsey’s Silicon Valley office; Sajal Kohli
(Sajal_Kohli@McKinsey.com) is a senior partner in the
imperatives discussed in this article—and acting
Chicago office, where Shruti Lal (Shruti_Lal@McKinsey
with urgency—can retailers position themselves for
.com) is a senior practice manager.
a winning future.
The authors wish to thank retail knowledge expert
Catherine Fong for her contributions to this article.
1
Sanjeev Kumar and Satish Meena, Forrester Data: Digital-
influenced retail sales forecast, 2017 to 2022 (US), Forrester Copyright © 2019 McKinsey & Company.
Research, November 2017, forrester.com. All rights reserved.
Winning in an era of unprecedented disruption: A perspective on US retail 11A new value-creation model
for consumer goods
The industry’s historical value-creation model is faltering.
Here’s how to reinvent it.
Greg Kelly, Udo Kopka, Jörn Küpper, and Jessica Moulton
12 Perspectives on retail and consumer goods Number 7, January 2019The fast-moving-consumer-goods (FMCG) industry companies have increased centralization to
has had a long history of generating margin-enhancing continue pushing costs down. This synergy-
growth. By 2010, the industry had created 23 of the based model has kept general and administrative
world’s top 100 brands and had grown total returns expenses at 4 to 6 percent of revenue.
to shareholders (TRS) almost 15 percent a year for
40 years. But the model that fueled industry success Used M&A to consolidate markets and create
now faces great pressure as consumer behaviors shift a basis for organic growth postacquisition. After
and the channel landscape changes. updating their portfolios with new brands
and categories, FMCG companies applied their
To win in the coming decades, FMCG companies superior distribution and business practices to
must reduce their reliance on mass brands and offline grow those brands and categories.
mass channels. They must also embrace an agile
operating model focused on brand relevance rather Signs of stagnation
than synergies. But this long-successful model of value creation has
lost considerable steam. The household-products
The traditional model subsegment, for example, has dropped from the sixth
FMCG companies owed much of their success to most profit-generating subsegment at the start of
© Hero Images/Getty Images
a five-part model for creating value. Pioneered just the century to the tenth, measured by economic
after World War II, the model has seen little change profit. Food products, long the most challenging
since then. FMCG companies did the following: FMCG subsegment, fell from 21st place to 32nd. As
a consequence, FMCG companies’ TRS growth
Perfected mass-market brand building and product lagged behind the S&P 500 by three percentage
innovation, thus capturing not only reliable points from 2012 to 2017. As recently as 2001 to 2008,
revenue growth but also gross margins typically their TRS growth beat the S&P by 6 percent a year.
25 percent above those of nonbranded players.
The issue is the lack of organic growth. From 2012
Built relationships with grocers and other mass to 2015, the FMCG industry grew organic revenue
retailers that provide advantaged access to at 2.5 percent (net of M&A, foreign-exchange effects,
consumers. By partnering on innovation and and inflation), slightly behind global GDP growth.
in-store execution and tightly aligning their But companies with more than $8 billion in annual
supply chains, FMCG companies secured broad revenue grew at only 1.5 percent—half the growth rate
distribution as these retailers grew. of companies with sales of under $2 billion (Exhibit 1).
This difference suggests that large companies face
Entered developing markets early and actively a serious growth penalty, which they are not making
cultivated their categories. Consumers in up for through their minor earnings-before-interest-
developing markets became wealthier and proved and-taxes (EBIT) expansion.
a tremendous source of growth—generating
75 percent of revenue growth in the sector over Organic growth matters in the consumer-goods
the past decade. industry. FMCG companies that achieve above-
market revenue growth and margin expansion
Designed their operating model for consistent generate 1.6 times as much TRS growth as players
execution and cost reduction. Most FMCG that outperform only on margin.
A new value-creation model for consumer goods 13New model for consumer goods
Exhibit 1 of 5
Exhibit 1 Organic fast-moving-consumer-goods (FMCG) industry growth has been weak, with
large companies growing at only 55 percent of GDP.
2012–16 performance of FMCG companies larger than $400 million in net revenue
Reported growth, Real organic growth (M&A, Median EBIT 2
CAGR,1 % foreign exchange, and margin expansion,
inflation adjusted), CAGR, % percentage points
All FMCGs (n = 290) 6.0 2.5 0.6
Large, >$8 billion
3.7 1.5 1.1
(n = 57)
Medium, $2 billion
6.3 2.6 0.1
to $8 billion (n = 102)
Small, $0.4 billion to
$2.0 billion (n = 131) 6.7 3.0 0.6
2012–16 real GDP
2.7
growth, CAGR
55% of GDP
1 Compound annual growth rate.
2 Earnings before interest and taxes.
Source: World Bank; McKinsey analysis
Ten disruptive trends Furthermore, millennials are much more open to
This FMCG value-creation model stopped generating sharing personal information, allowing “born digital”
growth because of ten technology-driven trends, challenger brands to target them with more tailored
most of which are in their infancy but will have propositions and with greater marketing-spend
significant impact on the model within the next five efficiency. Millennials are generally willing to pay for
years (Exhibit 2). special things but otherwise seek value. Millennials in
the United States are 9 percent poorer than Gen Xers
1. The millennial effect were at the same age, so they have much less to spend
A recent McKinsey survey found that millennials are and choose carefully what to buy and where to buy it.
almost four times more likely than baby boomers to
avoid buying products from “the big food companies.” 2. Digital intimacy (data, mobile, and the Internet
And while millennials are obsessed with researching of Things)
before buying, they resist marketing and look instead to The volume of data generated continues to increase,
learn about brands from one another. They also tend to boosting companies’ capabilities but also consumer
believe that newer brands are better or more innovative, expectations. Most FMCG companies have started
and they prefer not to shop in mass channels.1 to embrace digital but have far to go, especially in
14 Perspectives on retail and consumer goods Number 7, January 2019New model for consumer goods
Exhibit 2 of 5
Exhibit 2 Ten trends are disrupting the historical value-creation model in the fast-moving-
consumer-goods (FMCG) industry.
FMCG industry’s 5-part model for value creation
Moderate Very high
Value created 10 disruptive trends Impact of trend
Past 5 years Next 5 years
1 Excellence in mass-market • Stable growth • The millennial effect
product innovation and • 25% gross-margin • Digital intimacy (data, mobile, IoT1)
brand building, including advantage over
“premiumization” • Explosion of small brands
nonbranded players
• “Better for you”
2 Advantaged consumer • Broad distribution • E-commerce giants
access via mass trade • Limited competitive • Discounters
relationships set • Mass-merchant squeeze
3 Developing-market • 75% of FMCG • Rise of local competitors
category creation revenue growth over
alongside rising incomes past 10 years
4 Operating model that drives • 4–6% reduction in • Pressure for profit from
consistent execution and general and activist investors
achieves cost reduction administrative expenses
5 M&A to consolidate markets • Attractive market • Building competition
and enable organic growth structure for deals
postacquisition • Opportunity to
increase organic
revenue growth
1 Internet of Things.
adopting truly data-driven marketing and sales because they are often sold online or in channels not
practices. Some FMCG categories, particularly covered by syndicated data. But venture capitalists
home care, will be revolutionized by the Internet of have spotted them: more than 4,000 of them have
Things (IoT)—converting some product needs, like received $9.8 billion in venture funding over the past
laundry, into service needs. And in many categories, decade—$7.2 billion of it in the past four years alone
the IoT will reshape the consumer decision journey, (Exhibit 3).
especially by facilitating automatic replenishment.2
Retailers have also taken notice of these small
3. Explosion of small brands brands. According to Nielsen, US retailers are
Many small consumer-goods brands are capitalizing giving small brands double their fair share
on millennial preferences and digital marketing of new listings. Small brands can be a source of
to grow rapidly. These brands can be hard to spot differentiation for retailers and can help drive
A new value-creation model for consumer goods 15New model for consumer goods
Exhibit 3 of 5
Exhibit 3 The venture-capital industry is fueling the explosion of small brands, providing
$7.2 billion in investment in the past four years alone.
Total venture-capital investment by year, $ million
2,362
1,994
1,578
1,287
647
452 506
336 346 317
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Example Bai Caulipower Hello Beverages Koia Spindrift
companies Banu Daily Harvest Impossible Foods KRAVE Jerky Sugarfina
Beyond Meat FEED Projects Just Memphis Meats Unreal Brands
Brad’s Raw Foods Green Park Snacks Kensington and Sons
Brandless Health-ade Kite Hill
Source: Pitchbook Data; McKinsey analysis
© Radius Images/Getty Images
16 Perspectives on retail and consumer goods Number 7, January 2019margins, as these small brands tend to be premium beauty-related videos are posted on YouTube every
and rarely sell their products at less than full price. month, almost all of them user generated. 3
As a consequence, they are capturing two to three
times their fair share of growth while the largest 4. “Better for you”
brands remain flat or in slight decline (Exhibit 4). For years, consumers have said they want to eat
healthier foods and live healthier lifestyles, but only
Five factors make a category ripe for disruption recently has their behavior begun to change. Consumers
by small brands: high margins, strong emotional are redefining what healthy means, eating more fresh
engagement, a value chain that is easy to outsource, food instead of packaged food, and demanding more
low shipment costs as a percent of product value, products that are natural, organic, and free from sugar,
and low regulatory barriers. The beauty-products gluten, pesticides, and other additives.
category fits this profile especially well. In color
cosmetics, born-digital challenger brands already 5. E-commerce giants
represent 10 percent of the market and are growing Alibaba, Amazon, and JD.com grew gross merchandise
four times faster than the rest of the segment. value at an amazing rate of 34 percent a year from
The explosion
New model forof small brands ingoods
consumer beauty enjoys the 2012 to 2017. They are having a profound impact on
support of4significant
Exhibit of 5 venture-capital investments— consumer decision journeys across categories, forcing
$1.6 billion from 2008 to 2017, with 80 percent of this FMCG companies to rewrite their channel strategies
investment since 2014. Digital marketing is fueling and channel-management approaches, including
the growth of challenger brands while lifting the rest how they assort, price, promote, and merchandise their
of the category as well. An astounding 1.5 million products. In markets besides China, this disruption
Exhibit 4 Small companies are generating two to three times their fair share of growth in
developed markets.
Fast-moving-consumer-goods industry share of sales and of growth, 2016–17
United States Australia and Europe
% of sales % of category % of sales % of category
growth growth
Retailer
private label 17 20 32
39
Small1 19
53
Medium1 33 33 59
12
Large1 31 25
16 15
2
–6
1 “Large” refers to top 16 companies, “medium” to next 400 companies, and “small” to remaining companies.
Source: Retail Measurement by Nielsen
A new value-creation model for consumer goods 17is still in its early days and will only accelerate as the will require FMCG companies to update their go-to-
e-commerce giants expand their geographic reach and market approaches.
move in to brick-and-mortar locations. Amazon’s push
on private labels is a further game changer. 9. Pressure for profit
Driven by activist investors, the market now has higher
6. Discounters expectations for spend transparency and reallocation
In each grocery market discounters enter, they of resources. Large FMCG companies are implementing
typically grow to secure market share of 20 percent or cost-reduction approaches such as zero-based
more. Aldi and Lidl have grown at 5.5 percent between budgeting, which typically reduce spend on activities
2012 and 2017, and they are looking to the US market such as marketing. While effective at increasing
for growth. Discounters lure consumers with their short-term profit, such approaches haven’t yet proved
carefully curated offering of approximately 1,000 fast- their ability to generate longer-term winning TRS.
moving SKUs sold at prices 20 percent below mass
grocers—and can still generate healthy returns. 10. Increasing competition for deals
Certain consumer-packaged-goods sectors—such as
7. Mass-merchant squeeze over-the-counter drugs—will see greater competition
Together, the seven largest mass retailers saw flat for deals, as large assets become scarce and private-
revenue between 2012 and 2017. This pressure is equity firms provide more and more funding and drive
forcing mass merchants to become tougher trading up valuations. M&A will therefore continue to be an
partners: they are pursuing more aggressive important capability for growth.
procurement strategies, including participating in
buying alliances; being more vigilant about SKU Creating value in a reshaped marketplace
proliferation; and decreasing inventory levels. As To survive and thrive in the coming decades, FMCG
mentioned, they are also seeking out smaller FMCG companies will need a new model for value creation—
brands and strengthening their private labels. consisting of a three-part portfolio strategy as well as
organizational and operational agility (Exhibit 5).
8. The rise of local competitors
Developing markets still have tremendous growth A broader portfolio strategy
potential. They are likely to generate new consumer Going forward, FMCG companies will need to sustain
sales of $11 trillion by 2025, which is the equivalent of excellence in developed markets, even as they build
170 P&Gs. Local competitors will fight aggressively the capabilities to leapfrog in developing markets and
for that business by offering locally relevant products to “hothouse” premium niches.
and acquiring local talent. FMCG companies will
need to respond by moving away from their fairly Sustaining excellence in the developed-
centralized decision-making models. Local relevance, market base
proximity to the consumer, and speed will become FMCG companies must keep the base healthy. The
more important drivers of competitive advantage good news is that the industry keeps advancing
than consistent execution. Furthermore, channels functional excellence through better technology
in developing markets are evolving differently than and, increasingly, use of advanced analytics. The
they did in the West: discounter-like formats are highest-impact advances we see are in the areas
doing well in many markets, and mobile will obviously of revamping media spend, particularly through
continue to play a critical, leapfrogging role. This programmatic M&A and a deeper understanding of
18 Perspectives on retail and consumer goods Number 7, January 2019New model for consumer goods
Exhibit 5 of 5
Exhibit 5 The new model is a three-part portfolio strategy enabled by an agile organization,
with continued use of M&A as an accelerator.
3-part portfolio 1 Excellence in the 2 Leapfrogging in 3 Hothousing premium
strategy developed-market base developing markets niches, scaling each to its
greatest potential
Relentless focus on innovation Bringing best technologies to Innovation based on rapid test
that generates incrementality market early and learn
Daily excellence in execution, Market leadership in Targeted digital marketing
including use of advanced digital and mobile
analytics
Local market autonomy Full use of channels, including
retailer e-commerce and direct
to consumer
Joined-up sales approach that wins with omnichannel mass and Supply capability adapted to small
e-commerce giants runs and shipments
Agile operating 4 Agile organization: dynamic front end, stable backbone
model
Semiautonomous agile teams
Digital and IT Data and advanced Mass supply Niche supply Back-office
capability analytics capability system system functions
5 Continued use of M&A as an accelerator to drive market consolidation and fuel organic
growth postacquisition
return on investment; fine-tuning revenue growth Finally, FMCG companies will need to keep driving
management with big data and tools such as choice down costs through zero-based budgeting,4 highly
models; strengthening demand forecasting; and using automated “touchless” supply-chain and sales-
robotics to improve shared services. and-operations planning, and advanced analytics
and digital technologies to improve manufacturing
Companies will need to increase their pace of testing performance (for instance, through predictive
and adopt a “now, new, next” approach—ensuring that maintenance).5 Many of these changes will require
they have a pipeline of sales-stimulating incremental companies to treat technology as a core competency
innovation (now), efforts trained on breakthrough rather than a cost center.
innovation (new), and true game changers (next).
Leapfrogging new category creation in
Furthermore, they will need to join up their historically developing markets
decentralized sales function and overcome channel FMCG companies must bring their newest and
conflict. E-commerce must be treated as part of the best innovation, not lower-quality products, into
core business. Players like Koninklijke Philips that have developing markets early to capture a share of the
weathered the laborious process of harmonizing trade $11 trillion potential growth. Success will require
terms across markets are finding that they can grow excellent digital execution, as many of these markets
profitably in e-marketplaces. will grow up digital; empowerment of local leadership
A new value-creation model for consumer goods 19to make marketing decisions; and a route to market backbone includes clear rights and accountabilities,
that is unified across offline and online channels. expertise, efficient core processes, shared values
and purpose, and the data and technology needed for
Hothousing premium niches a simple, efficient back office.
To capitalize on the explosion of small brands, FMCG
companies must identify and cultivate premium The agile organization moves fast. Decision and
niches that have attractive economics and high growth learning cycles are rapid. Work proceeds in short
potential. They must acquire or build small businesses iterations rather than in the traditional, long stage-gate
and help them reach their full potential through process. Teams use testing and learning to minimize
fit-for-purpose commercialization and distribution. risk and generate constant product enhancements. The
This means, for example, building a supply chain that agile organization employs next-generation technology
produces small batches and can adapt as companies to enable collaboration and rapid iteration while
learn from consumers. The beauty industries’ reducing cost.7
incubators are a good model here.
M&A as an accelerator
This three-part portfolio strategy calls for an agile M&A will remain critical to FMCG companies as
organization. Agility allows a company to adapt to fast- a way to pivot the portfolio toward growth and
changing circumstances. improve market structure. The strongest FMCG
companies will develop the skills of serial acquirers,
An agile organization becoming adept at acquiring both small and large
Building an agile organization requires abandoning the assets and at using M&A to achieve strategic
traditional command-and-control structure—in which goals—redefining categories, building platforms and
direction cascades down from leadership to middle ecosystems, getting to scale quickly, and accessing
management to the front line—in favor of viewing the technology and data through partnership. These
organization as an organism that consists of a network companies will complement their M&A capability
of semiautonomous teams.6 In this model, the role with integration and scaling capabilities, such
of leadership isn’t “order giver,” but rather enabler or as incubators or accelerators for small players. 8
“servant leader.”
Moving forward
An agile organization has two essential components: To respond to the changing marketplace, FMCG
the dynamic front end and the stable backbone. companies should take the following steps:
The dynamic front end consists of small, cross- Take stock of your health by category in light of
functional teams (“squads”) that work to meet current and future disruption, and decide how fast
specific business objectives. The teams meet daily to to act. Ask questions about the external market:
prioritize work, allocate tasks, and review progress; How—and how much—are consumers changing?
use regular consumer and customer feedback loops; How well positioned are we to respond to these
and coordinate with other teams to accomplish their changes? What are the scale and trajectory of
shared goals. competitors that aren’t tracked by syndicated data?
Are our growth and rate of innovation higher than
The stable backbone provides the capabilities that these competitors’? How advanced are competitors
agile teams need to achieve their objectives. The on making model changes that might represent
20 Perspectives on retail and consumer goods Number 7, January 2019competitive disadvantages for us? How healthy 1
For more on millennials’ shopping habits, see Sangeeth Ram,
are our channel partners’ business models, and “Meeting millennials where they shop: Shaping the future of
to what degree are we at risk? Do our future plans shopping malls,” January 2017, McKinsey.com.
2
For more, see the article series “The Internet of Things: How to
take advantage of growth tailwinds and attractive
capture the value of IoT,” May 2018, McKinsey.com.
niches? Answering these questions creates the 3
Sara Hudson, Aimee Kim, and Jessica Moulton, “What beauty
basis for developing scenarios on how rapidly players can teach the consumer sector about digital disruption,”
change will happen and how the current business April 2018, McKinsey.com.
4
Søren Fritzen, Kyle Hawke, and Phil Hoblet, “Zero-based
model might fare in each scenario.
budgeting—The dos and don’ts of lasting change,” April 2018,
McKinsey.com.
Draft the old-model-to-new-model changes that will 5
Søren Fritzen, Frédéric Lefort, Oscar Lovera-Perez, and Frank
position the company for success over the next decade. Sänger, “Digital innovation in consumer-goods manufacturing,”
November 2016, McKinsey.com, and Robert Feldmann, Markus
This is the time to develop a three-part portfolio Hammer, and Ken Somers, “Pushing manufacturing productivity
strategy and begin the multiyear transformation to the max,” McKinsey Quarterly, May 2017, McKinsey.com.
needed to become an agile organization, perhaps 6
Oliver Bossert, Alena Kretzberg, and Jürgen Laartz, “Unleashing
the power of small, independent teams,” McKinsey Quarterly,
by launching and then scaling agile pilots. This
July 2018, McKinsey.com.
is also the time to determine which capabilities 7
Wouter Aghina, Aaron De Smet, Gerald Lackey, Michael Lurie,
to prioritize and build. Change management and and Monica Murarka, The five trademarks of agile organizations,
talent assessment (to determine where hiring or January 2018, McKinsey.com.
8
Rebecca Doherty, Oliver Engert, and Andy West, “How the best
reskilling are needed) will be critical.
acquirers excel at integration,” January 2016, McKinsey.com.
Develop an action plan. The plan should include
Greg Kelly (Greg_Kelly@McKinsey.com) is a senior
an ambitious timeline for making the needed
partner in McKinsey’s Atlanta office, Udo Kopka
changes. It should also specify steps for recruiting
(Udo_Kopka@McKinsey.com) is a senior partner in
the talent required for successful execution. the Hamburg office, Jörn Küpper (Joern_Kuepper@
McKinsey.com) is a senior partner in the Cologne office,
and Jessica Moulton (Jessica_Moulton@McKinsey
.com) is a partner in the London office.
FMCG companies should proceed with these efforts
with controlled urgency. They will need to make The authors wish to thank Fabian Chessell, Jasmine
ever greater use of the consumer insights, innovation Genge, Gizem Günday, Sara Hudson, Anastasia
expertise, and activation capabilities that have led Lazarenko, Ed Little, Susan Nolen Foushee, Kandarp
the industry to success—but companies must wean Shah, Sven Smit, Anna Tarasova, and Daniel Zipser
themselves away from reliance on the strategies and for their contributions to this article.
capabilities of the traditional value-creation model.
Copyright 2019 @ McKinsey & Company.
It’s time to adopt a new model.
All rights reserved.
This article is adapted from “The new model for
consumer goods,” which first appeared on McKinsey.com
in April 2018.
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