Moreover, a majority of retailers (58%) agree that companies will increasingly outsource or divest capabilities where they cannot add differentiated value. This proportion is slightly higher than in consumer products (55%).
Innovative deal structures and models are becoming more prevalent
Growth in innovative deal structures seems likely to accelerate. One model gaining traction sees companies divesting their presence in a particular geographical market to a local distributor. This entity becomes a quasi-partner, required to invest in marketing to grow the brand.
Consumer products companies are also exploring the use of licensing as another route to lower overhead and enable greater investment in digital capability.
Divestments can also help fund the exploration of innovative business models such as subscriptions, rentals and direct to consumer.
For retailers, the question is different. The key calculus is that of managing their store footprint and balancing the loss of physical sales when closing some of their outlets against the likely conversion to online sales.
Consumer products grappling with ESG challenges
A growing governmental and investor focus on environmental, social and governance (ESG) issues poses a very significant challenge for consumer products companies in particular. In fact, according to the EY Future Consumer Index, 68% of consumers expect companies/organizations to drive positive social and environmental outcomes. Even where management and stakeholders strongly support ESG-friendly policies, implementing these is likely to involve a more profound transformation of the supply chain than in many other sectors — and significant expense.
Companies also may not be able to control all the ESG elements in their business. Examples include inadequate supply of recyclable polyethylene terephthalate (PET) or limited electric vehicle infrastructure. These factors clearly affect the capacity of consumer products companies to reduce their plastic use and fleet emissions.
ESG considerations appear unlikely to drive divestments yet: just 23% of consumer products companies’ divestment plans are directly influenced by sustainability challenges or social issues or policies.
But the prospect of future legislation in areas of environmental and social impact is already influencing strategic decisions in the sector. One example is PepsiCo’s purchase of SodaStream: exposure to home preparation gives the company a way to continue participating in the soft drink revenue stream even if traditional sales are limited by sugar taxes or other measures.
- Consumer products companies should consider harnessing valuations enhanced by the pandemic by divesting non-core units and reinvesting to upgrade digital capabilities.
- Retailers may review their store footprints with even greater intensity to highlight candidates for sale or closure while strengthening their online and home delivery capabilities.
- Both types of companies should investigate asset-light approaches as potential routes to reduced operational complexity and increased focus on enhancing core businesses.
Sal Davy of Ernst & Young LLP contributed to this article.