Key takeaways:
- Ecommerce has experienced a significant boost, making channel integration and innovative physical spaces new priorities for retailers
- Strong analytics and customer communication is required to stay on top of rapidly changing consumer needs and wants, including new trends around flexible working
- Many opinion leaders believe that inflation is right around the corner, with implications for manufacturers, retailers and consumers
- M&A activity remains high, but there’s a sense that CPG executives are becoming more hesitant to take on large transformative deals
Many companies at RBC Capital Markets’ Consumer and Retail Conference attributed their survival through the pandemic to an adaptive and flexible culture that was able to shift to meet the challenges of the last 18 months.
“COVID was a tragedy on every level,” said Michele Buck, Chairman of the Board, President and CEO of the Hershey Company. “But the good that came out of it for our company, and for many other companies I've spoken with, is it forced agility, it forced people to have to turn on a dime to adapt and I think that holding on to that agility mindset will be important going forward.
1. A flexible workforce
Key opinion leaders at the conference, including Buck and Sir Martin Franklin, Founder and CEO of Mariposa Capital, believe that the desire for flexible working is here to stay. And that trend will require retailers to reconsider where their customers are geographically and where and how they are shopping.
“I think how we work has probably changed forever. I think the openness to remote working will probably be around for a very long time now. People will go back to the office but it will be more of a hybrid model for a lot of companies,” said Franklin.
Hershey’s Buck agrees and also links this to the growing trend of deurbanization.
“We have seen a lot of folks move out of urban areas, and want to have more locations in suburban and rural settings, both because of how hard hit the cities were during the pandemic, and also because they have flexibility now to live other places,” she said.
For retailers, this will affect how, when and where their consumers shop. City center stores, for example, may need to reconsider aisles of prepackaged sandwiches that used to be a draw for commuters. They may need to instead broaden their range of ingredients for home-cooked meals, because more of their shoppers are preparing their own lunch at home.
2. The rapid ecommerce revolution
The pandemic supercharged the evolution of ecommerce into a rapid embrace and companies have had to move fast to respond. When the pandemic started, Hershey had perhaps 1% of its business in ecommerce, but that evolution took off into the mid-single digits in just 18 months.
"What are things that we can do with the parking lot? Are there ways that we can wire it for power? Can we have food trucks that are out there? Can we do pop-up stores?"
- Paco Underhill, Founder of Envirosell
Paco Underhill, Founder of Envirosell, and author of “Why We Buy: The Science of Shopping”, also pointed to the trend to buy online and pick up in-store.
“This is one of the nascent issues that's going on, because first, it saves time. Second, it saves budget because when I buy online and I pick up at the store. I'm not tempted, I stick to my list,” he said.
For many retailers, losing out on that temptation for point-of-sale opportunities could dampen sales, which is why Underhill recommends rethinking the parking lot as a retail space.
“What are things that we can do with it? Are there ways that we can wire it for power? Can we have food trucks that are out there? Can we do pop-up stores in our parking lot?” he asks.
3. Analyzing consumer needs, wants and behaviors
This sort of rapid response to changing consumer behaviors is what is needed for a post-pandemic world. For the Hershey Company, the only way to keep up is to constantly gather customer data and apply strong analytics to make decisions as quickly as possible.
“There were a lot of ways during the pandemic that we used analytics, such as tracking COVID cases within our supply chain map so we could get ahead of where we were likely to have issues being able to get ingredients or distribute products.
“We stayed close to the consumer at all times so that we would know what was important to them, but we leveraged analytics in somewhat non-traditional ways as well. Like in HR, we looked at how our people were spending their time during the pandemic to give us clues that would let us better manage them and help them,” she says.
4. Rethinking physical retail spaces
Analytics will also be increasingly important for retailers in their physical stores. For Underhill, analyzing whether parking lots can become places to close sales isn’t the only way that retailers need to adjust their bricks-and-mortar experience. He points to a Nature Republic store that’s advertising the key ingredient in its skincare products – aloe vera – by constructing a vertical garden of aloe around the entire shop. This makes the store do more than just house products, it also acts as a living billboard for the company’s products, while positioning the brand well for sustainability practices too.
He also points to shopping malls that are embracing multiple uses. Malls have long included cinemas and bowling alleys, but today, their multi-use function is expanding and growing globally. For example, the Time Warner Center in New York City includes apartments, so residents are, in a sense, living in the mall.
“If I go to a shopping mall in Thailand, there are doctors offices, there are preschools, there are yoga studios. Are they paying major league rents? No, but they drive major league traffic,” he says.
Retailers need to find a way to integrate the customer journey, so that different channels can play complementary roles in meeting consumer wants and needs. Physical stores and parking lots can have new multiple uses, while ecommerce supports and enhances bricks-and-mortar offerings.
5. Inflation is showing up everywhere
At the same time as adjusting to a rapidly changing consumer world, retailers need to be wary of the spectre of inflation, which Franklin believes is just around the corner.
“Across all of our businesses, inflation is a reality, and that will inevitably be passed on to consumers. One of the things we're doing in the capital markets is we're raising fixed capital because long term use rates are going to rise at some point,” he said.
Inflation proved to be a key focus for both management and investors at the conference – the most mentioned pain points include freight, logistics, and packaging. From a retail perspective, most businesses currently expect to be able to handle inflation, although the strategy changes by sector. However, if inflationary pressures continue and more businesses are forced to pass on price increases, then it is ultimately a flat tax that hits all consumers, but has the biggest impact on lower-to-middle income consumers
6. M&A activity strong, but multiples are easing
In the last 12 months, retail has probably had the best year of M&A in history, with a level of activity that’s unprecedented. But there are some signs of slowing, as large transformative deals start to look less attractive. Our panelists discussed a variety of new strategies, including companies looking for closer partnerships, finding opportunity with smaller players, acquiring companies at an earlier stage and looking for iconic brands ripe for innovation.
“I think corporates are recognizing that the research that big consulting firms have put together shows that over 50% of corporate M&A has been an absolute failure. Therefore, they've got to take a new approach to M&A, whether they're acquiring lots of things, or they're acquiring earlier, smaller companies."- Vito Sperduto, Co-head of Global Mergers and Acquisitions, RBC Capital Markets
Pano Anthos, Managing Partner, XRC Labs, thinks that companies are changing direction in how they approach M&A.
“I think corporates are recognizing that the research that big consulting firms have put together shows that over 50% of corporate M&A has been an absolute failure. Therefore, they've got to take a new approach to M&A, whether they're acquiring lots of things, or they're acquiring earlier, smaller companies," he said.
Vito Sperduto, Co-head of Global Mergers and Acquisitions at RBC Capital Markets, points out that very successful mergers between larger firms consider stakeholder evaluation, not just shareholder needs.
“We’re in the later stages of the M&A cycle right now, which is probably the longest that we’ve seen in history, and one of the interesting things that I notice is that you see more mergers than acquisitions. What happens in a merger is that there are two cultures coming together and you need to make proper decisions about who’s going to run each part of the pro forma organization and pick the best of each organization. And those tend to be the more successful transactions down the road, because you’ve thought about the key issues,” he said.