Industry
Highlights
- The CPG industry has undergone considerable transformation since its inception, and the next significant transformation will be sustainability and AI-driven.
- Today, consumers' most enormous demand is sustainability, and AI is the most potent weapon that CPG companies could use to satisfy consumer demands.
- When it comes to AI & Digital Maturity, CPG companies are certainly not table-toppers.
- It is no more “Just Tech” when it comes to success. There are three key missing elements for the AI-led sustainability transformation of CPG: Strategic vision and leadership, innovation, and ecosystem.
- TCS understands the challenges of navigating the complexities of transformation and hence we bring two engines to navigate this wave of transformation: TCS PACETM Circular and TCS PACETM Digital accelerator.
On this page
On this pageinpage
CPG industry through the years
Evolution of the CPG industry
Since its origins, the Consumer-Packaged Goods (CPG) sector has evolved by leaps and bounds. This industry was probably started to cater to basic survival needs by offering items such as fruits and vegetables, medicines, beverages, and household and personal care supplies. However, industrial evolution, along with advancements in technology, manufacturing, and logistics, have enabled CPG companies to expand their product ranges, improving both the quality and diversity of their offerings. Today, the CPG industry is less about survival and more about enhancing lifestyle. The earlier focus on the economy of scale is being replaced now by innovation, sustainability, and convenience aimed towards a comprehensive approach that emphasizes consumer well-being, environmental ownership, and improving quality of life.
Consumer behavior evolution
Consumer behavior has evolved significantly over the past few decades, driven by various social, economic, and technological factors. In the early days, consumers were primarily concerned with affordability and availability, and that resulted in assembly-line-style mass productions. However, societies developed over the years, resulting in increased disposable incomes and increased access to information, which drove shifts in consumer priorities such as greater emphasis on health, environmental, and social issues. Today's consumers demand transparency, sustainability, and ethical business practices from the brands they spend on. The influence of digital social media has taken the consumer expectation of personalization to the next level. All these trends have been keeping CPG companies on their toes to adapt to evolving consumer preferences and continuously relook into their product portfolio.
Evolution of business models
To keep up the pace with evolving industry and consumer expectations, the CPG sector's business models have also evolved. Traditional economies of scale and mass production models have given way to more flexible and consumer-centric approaches. The rise of e-commerce, localization strategies, and omnichannel has disrupted traditional retail and taken them even closer to their customers. Increasing sustainability has become a core component of modern business models. An increasing number of companies, especially in the personal care sector, have a portfolio of sustainable products, and the majority of companies are committing to reducing their environmental footprint and adopting circular economy practices. Furthermore, the tech evolution– AI/ML, IoT, digital twins, big data analytics, etc. - has allowed businesses to offer the next level of personalized offerings, optimize operations, and a subscription-based sales model, among many things, enhancing customer experiences. CPG companies are prioritizing these trends in their long-term value creation roadmap.
Driving CPG companies with AI and sustainability
Today, the biggest ask from consumers is sustainability. Consumers are increasingly prioritizing sustainability in their purchasing decisions and are willing to pay a premium for it. A survey by Nielsen IQ revealed that clean beauty products are going to grow 1.6 % to 11% faster than total beauty and personal care segments.
Figure 1: Growth of sustainable beauty
The most potent weapon that CPG providers have with them to satisfy consumer demands is AI! Looking ahead, the union of AI, and sustainability will play a crucial role in shaping the future of the CPG industry. There is little doubt among leaders about the necessity of transformation.
In response, companies and investors are expected to invest approximately $ 100Bnii in sustainability-focused innovations, with the aim of boosting revenues by 10% or more. Additionally, advancements in AI are estimated to potentially add over $ 200 Bn + in annual profits or 1-2% of additional revenue for companies. Emerging AI capabilities can reinvent consumer interaction, hyper-personalization, waste reduction, and accelerate new and sustainable product development
Are CPG companies on track to exploit the envisaged benefits?
An analysis of CPG companies reveals that while many have embarked on some form of digital transformation, particularly with a focus on AI, and sustainability, they are not as mature and evolved as other industries.
Figure 2: Digital & AI maturity scores across industries
According to McKinsey analysis, CPG companies rank among the lower performers in Digital & AI adoption, while retailers are moving to the forefront. Even within the sector, some companies excel, while many struggle to advance beyond basic automation and compliance failing, to unlock new growth opportunities. Those with growth initiatives in place often find it difficult to scale and fully benefit from them.
Let’s try to deep dive on what is happening on the ground!
Consumers of today are asking for products that represent their beliefs, culture, and commitment to the environment. In the race to capitalize on emerging trends, many CPG companies have formed dedicated teams and launched internal programs aimed at achieving specific outcomes. We at PACE have categorized all these programs of CPG companies below three based on the outcome targeted.
- Fit to operate
- Become differentiator
- Driving growth
- Focus on ESG compliance, cost reduction and efficiency gains.
- Existing products and processes are decarbonized.
- Does not involve product innovation.
- Providing services to same set of target customers
Fit to operate initiatives
Fit to operate initiatives represent the essential programs that CPG companies implement to meet the baseline demands of AI and sustainability. These initiatives focus on ensuring compliance with regulatory requirements and automation through well-established AI applications. These are targeted to optimize operational efficiencies and reduce costs. For instance, using AI models for energy consumption optimization allows companies to reduce their environmental footprint while saving on energy bills. In the realm of sustainability, these initiatives might include basic recycling programs or sourcing from certified sustainable suppliers. Most often, these initiatives are extensions of existing efficiency improvement programs. While foundational in nature, these initiatives are crucial as they lay the groundwork for more advanced and differentiated efforts. They ensure that companies remain competitive and compliant, paving the way for deeper integration of AI and sustainability into their core business processes.
- Focus on premium product positioning.
- Making existing value chain more sustainable
- Innovating product composition and design
- Providing services to same set of target customers
Differentiator initiatives
These initiatives are aimed at the premiumization of current offerings to address consumer demands for sustainability. Differentiator programs go beyond compliance, focusing on creating unique value propositions that allow companies to outsmart the traditional products available on the market. Technology has a big role to play here. Examples in the CPG industry include leveraging AI to offer consumers sustainably sourced products, simulating product design to offer ease of repairing, eco-friendly formulations, or biodegradable packaging. By incorporating advanced AI capabilities and gamification techniques, companies can also incentivize consumer behavior towards more sustainable choices, improving their environmental impact, and enhancing customer loyalty at the same time. These initiatives improve the product and service portfolio and align with the latest consumer expectations for sustainability, and technology without a doubt has big role to play here.
- Focus on product and business model innovation
- Business model with sustainability at its core.
- New ecosystems are created, and new partners are identified which may or may not be part of the traditional value chain.
- Expansion of target customer landscape
Growth initiatives
Growth Initiatives, as name suggests, are bold programs designed to develop entirely new revenue streams that align with a company’s existing capabilities, targeting significant changes in both products and business models. These initiatives aim to produce products and services that did not previously exist, driven by AI and sustainability. For example, a CPG company might use AI to pioneer new service models such as personalized nutrition plans based on AI analysis of individual health data or develop subscription-based delivery services for eco-friendly household products. These initiatives require a high level of digital maturity and a strong commitment to sustainability, as they involve rethinking and redesigning traditional business processes. By embracing growth initiatives, companies can position themselves as leaders in innovation, capturing new market opportunities and driving long-term growth in a rapidly evolving industry landscape.
Figure 3
How efficiency, differentiation, and growth are addressed through AI for sustainability trends or pain points
Figure 3
What separates winners from others
Based on market analysis, we found out that majority of companies start their transformation programs with ‘Fit to Operate’ initiatives but many fail to carry the momentum to ‘Differentiator’ and very few successfully design and deliver ‘Growth’ initiative.
Exponential value can be unfolded through ‘Differentiator’ and ‘Growth’ initiatives, which are left behind when the majority of players stall their journey beyond ‘Fit to Operate.’ Very often, companies categorize the ‘Growth’ and ‘Differentiator’ initiatives as high-risk or capital-intensive initiatives and tend to adopt a ‘wait and watch’ policy. However, in today’s world, companies that adopt the ‘wait and watch’ approach are frequently surpassed by those that successfully execute innovation in products and business models. Previous waves of transformation were mostly limited to tactical and cognitive work activities, but transformation compelled by sustainability and AI is going to have an impact on fundamentally different sets of activities like knowledge work and decision-making. The good news is that there is a method to the madness, and success is hinged on four key ingredients, as below.
Figure 4: What separates winners from others
In the last couple of decades, the majority of companies have continued with “Business as usual” over bold measures. Having strong leadership and their buy-in is crucial for guiding the company through the complex landscape of AI and sustainability. This involves setting long-term goals, making informed decisions, and fostering a culture of innovation and sustainability. It is important for organizations to adopt newer ways of working and shed the mindset that sustainability is compliance, and AI is just an enabler, but they are game changers.
Innovation is central to embracing newer possibilities. If an organization wants to successfully execute ‘Differentiation’ and ‘Growth’ initiatives, then innovation need not be limited to products and services alone. It needs to be also extended to the way an organization provides products and services, interacts with customers and suppliers, and how the performance is measured for long-term value creation.
To support high-performance innovation efforts, a robust ecosystem of partners is needed. The key differentiation in today’s ecosystem is they are no longer limited to CPG’s value chain, but they extend much beyond that. A CPG company can partner with a startup to accelerate their new product development using AI powered simulation models or become truly circular by partnering with utility companies which can use their waste as a resource. This ecosystem approach encourages collaborative innovation and accelerates the development and deployment of AI and sustainability solutions.
Last but not the least – speed and scale of impact. This is concerning to see organizations not able to stay ahead of the learning curve and can’t move past their successful pilots. Key to speed and scale is what we call ‘Success’ and how it is embraced and reinforced.
Winning Triangles
The challenges of navigating complexities and ever-emerging consumer choices need a fulcrum that builds speed and scale by design on one hand and an outside-in capability to embrace Innovate, integrate newer ecosystems linked to Strategic Vision.
Inner Triangle - TCS PACETM Digital accelerator: The high-energy and immersive capability called TCS Pace Digital Accelerator helps orchestrate ‘Problem to Value’ journey contributing to ‘Purpose to Impact’ commitment of our customers.
Outer Triangle - TCS PACETM Circular: An inspirational advisory capability to help innovate on emerging themes and spot new ecosystems ahead of time and stay focused to organization’s ‘True North’ vision is the key to ensure companies provide themselves the right opportunity to truly ‘Set the Pace’ of industry and do that every time.
Figure 5: How an organization can build and accelerate meaningful outcomes
How we build and accelerate those meaningful business outcomes.
‘Problem to Value’ is an innovation framework that begins with identifying the problems worth solving, designing innovative solutions, and validating them based on the principles of desirability, viability, feasibility, rapid prototyping, and validating the hypothesis with real-world users – all in 120 days.
Fast execution and co-innovation are the keys to the way we work. Our innovation hubs across the world bring our identity to life in a very tangible way. Through our future labs, we can show the art of possible and emerging techs, and our innovative co-creation spaces allow us to co-create, incubate, and execute ideas rapidly. We build co-creation sessions to discover problems and build solutions through immersive workshops and sprints, using cutting-edge tools from our digital workbox, platforms, and tech solutions.
We invite you to join us on this purpose-to-Impact journey to reimagine the future and unlock new possibilities.
