Demographics are changing the demands placed on businesses, with an unyielding desire for speed and convenience pushing more firms to seek out faster fulfilment options. But this is just the tip of the iceberg. So, is your supply chain ready to respond?
It’s 7.30am and you’re on the train heading into work, still waking up but already alert. Browsing your phone, you see a targeted ad for a revolutionary new smoothie-maker that would save you a small fortune in visits to coffee shops. With a single click, you purchase it, to be delivered by the time you arrive home that evening. In the meantime, you book that last-minute weekend away, thanks to the holiday tracking app that tells you when the perfect deal becomes available. And by the time you’ve arrived at the office, you’ve not only watched your favourite celebrity chef prepare a delicious meal – you’ve ordered their meal kit to turn up before your friends arrive for dinner that same evening.
If it sounds like a confected caricature of a gen Z consumer, that’s probably because it is. Leaving aside the fact that in a global pandemic, most of us haven’t been commuting anywhere (or enjoying a social soiree) for quite some time, precious few people are so digitally enabled and brand-obsessed their every waking moment is spent in a frenzy of consumerism.
Read any of the reports on the ‘new consumer’, or listen to the multitude of marketing podcasts purporting to address their desires, and you would conclude the whole world is slurping down soy lattes on their way to a spin class. Consultancies and authors have a vested interest in selling the idea that the fundamentals governing who buys products and services have changed irrevocably in just a few years.
And yet, they’re not entirely wrong. It has been consistently well-documented that the coronavirus has accelerated and embedded trends – including the shift to digital retail – that were already becoming established. It’s just that the nature of such change, and its origins, is more nuanced, and more complex, than a simple soundbite can capture.
Understanding it is an issue every organisation needs to embrace – from FMCG companies selling physical products to financial services firms attempting to entice a new generation and a public sector that must serve the needs of a fast-changing populace. And, of course, it is mission-critical for supply chain professionals, since every shift in demand means an equal reaction in the relationships and logistics that underpin consumer relationships.
Experts spent years positioning the ‘new consumer’ as part of a generational shift: most recently, we were told that generation Z (roughly, those born between 1996 and 2012) held a set of beliefs that were radically different to those of their parents and needed entirely different brands and products.
Most serious commentators now regard this as an unhelpful exaggeration. As Jonathan Trevor, associate professor of management practice at the University of Oxford, UK, has put it: “Organisations have created a rod for their own back by buying into this myth that there’s generational difference and that they need to react to it.”
But there is one key generational difference that bears scrutiny: younger consumers are more fragmented, and less easily definable, than any previous cohort – which means it is arguably tougher to find solutions that scale. There is plenty of evidence to back this hypothesis, and demographics offer a good starting point. By 2050, analysis suggests 30% of the UK will be part of what is currently classed an ethnic minority. Already, the US is close to a tipping point where it is more than 50% non-white.
In developed economies, the younger generation is less likely to define itself as heterosexual and far more likely to be diagnosed with a mental illness. Its life choices fracture among fascinating lines – while the median age to marry and have a child has risen in both the UK and US over the past three decades, the number of parents (and spouses) who fall far outside that average is growing as people either plunge into adulthood early or wait until their late 30s or beyond.
This, perhaps, is the true story of gen Z (and, to an extent, the millennials who preceded them). There are fewer ‘averages’ out there and more distinct outliers. When McKinsey studied more than 4,000 US consumers, it found that the bottom 40% of earners had seen their discretionary income fall in the 10 years to 2017, while the top 20% were noticeably better off. Importantly, despite its booming economy, the same pattern can be discerned in China. Meanwhile, overall levels of home ownership in the US have fallen around 4% in the past decade.
It has never been harder, then, to pinpoint an ‘average’ consumer – they are not necessarily a parent, a homeowner, white, or flush with cash. They’re not eating avocado on toast in a hipster cafe, either: Deloitte says the under-30s spend more on health, housing and education than baby boomers, though again that figure masks significant disparities, with the highest earners more likely than ever to travel or spend money on luxury entertainment. They’re not even young – in the UK, Capital Economics has estimated that two-thirds of retail spending growth in the next 10 years will come from those aged 55 and over.
One area that does demonstrably cut across all demographics is the shift to digital. The willingness of consumers to spend online was noteworthy, of course, before coronavirus but has been phenomenal in the past 12 months. “The pandemic has been an accelerant of many trends,” says Brian Hindo, partner at growth consultancy Innosight. “In particular, it has seen a massive value transfer from the physical to the digital across multiple industries.”
Ask UK consumers whether they will continue their digital habits once the pandemic has subsided, as Deloitte did in 2020, and the answer is decidedly affirmative. In particular, contactless payment, in-app ordering, click and collect and live chat have been positively embraced since necessity forced them upon us.
In the US, according to Retail Touchpoints, use of buy-online-pick-up-in-store (BOPIS) services was up 17% between 2019 and 2020, while online grocery ordering was 57% more prevalent. Digital provision of financial services has positively exploded over the same period, attracting investment from the most austere institutions: Nutmeg, which offers online investment management, is now partnering with JP Morgan Asset Management, while hello bank!, launched by BNP Paribas, claims to be the largest mobile bank in Europe, with significant customer take-up in Germany.
More profoundly, our transactional thinking has become digital. We see viewing a smartphone or visiting a website as the obvious starting point for any purchase: smartphones were used in one third of retail sales in the US in 2018, says Forrester, while Salesforce found that 82% of consumers consulted the internet while they were in a store, of which one in 10 decided to make a different purchase to the one they planned.
Digital is a discernible mindset shift, but it is also a broad one. Which more specific trends will prove to have longevity? And how many of the excited pronouncements of cultural commentators are simple reactions to the extraordinary circumstances of the pandemic rather than longer-term changes in behaviour?
Paul Martin, KPMG’s UK head of retail, believes the re-emergence of the home as the epicentre of both emotional and financial investment is more than just a fleeting idea. “Home is the new hub,” says Martin. “With more people spending time at home, we predict a more permanent shift to a blended model of office and home working. This has an impact on food to go, hospitality and food delivery.”
There are other significant knock-ons. The notion of home ‘zoning’, the explosion in DIY and the rise in nesting items for the home all look likely to be trends with legs. “All indexes show people are investing more in beautifying their homes.” says Martin, who adds some have built up significant cash to splash, with plans to spend on ‘mid-ticket’ items, such as a new kitchen.
That’s all well and good for those with homes to beautify, but what about younger consumers? Health, in their case, may be seen as a more pressing investment, particularly given the threat to wellbeing that was made all too real by the coronavirus. Certainly, the US$7tn global health and wellness economy is expected to grow significantly in the near future. Remote healthcare consultations and a growing use of wearables are just two attention-garnering trends.
Home fitness and digital mental health are of huge interest, as the months-long waiting lists to get a premium Peloton static bike or the soaring demand for the Calm mental health app attest. “The interface between health and tech is where money is going to be made,” says consumer psychologist Paul Marsden, of the ‘human-first’ Brand Genetics consultancy.
This extends to a wider interest in doing the right thing through the consumer choices we make. This year’s Veganuary in the UK, where individuals are encouraged to give up meat and dairy for a month, was by far the largest ever. More broadly, according to YouGov, more than a quarter of the UK population say they deliberately only buy products from businesses that boast ethics and values they agree with.
A recent McKinsey survey also found that millennials were almost four times more likely than baby boomers to avoid buying products from what they perceive as ‘big food companies’ often due to interests in shopping local and welfare activities.
Even so, we should be careful about conflating a growing interest in ethical behaviour with ethics as the predominant mentality of an entire generation. When Deloitte asked more than 4,000 members of gen Z in the US why they made consumer choices, many mentioned ‘alignment with core values’ and ‘trustworthy brands’. But the three biggest drivers? Great deals, availability of products and convenience.
Convenience and complex consumers
The new consumer is picky, and in many ways less loyal and less forgiving. They know the power they wield with a mediocre review. They will send back items that don’t meet their needs without a second thought and increasingly will not countenance deliveries that take more than 48 hours.
Some of the trends in consumer behaviour cut across each other. A fear of future economic hardship and a resulting drift to value, such as that offered by discount supermarkets Lidl and Aldi in Europe, is a driver of shifting loyalties. While the discounters actually saw their growth rates slow in the UK in 2020, their headroom to expand still looks high, says Martin, who believes they could represent a quarter of the market by 2025. Indeed, Lidl’s parent company is already the largest supermarket owner in Europe and the two discounters have 40% of the market in countries such as Norway.
On the other hand, the caprices of a significant cohort of more affluent consumers may result in lavish spending and a drift to new luxury choices in some segments, adds Matt Jochim, a partner at McKinsey specialising in supply chain, consumer goods and retail. “There is some complexity and nuance. Some segments will treat themselves, spending more on wine and quality food.” Consumers’ relationship with brands is increasingly complex. On the one hand, Apple, Google, Alibaba, Netflix and Facebook continue to cement their centrality in consumers’ lives. “Apple took a decade to get to a trillion-dollar valuation company, and six months to get to a two-trillion dollar company,” says Marsden. “Big tech has really benefited [from coronavirus].”
Amazon looks set to be perhaps the biggest winner of all from this era of disruption. Exploding retail sales are its most obvious fillip to date but its march into other domains is also significant, including its broad advance into the healthcare sector – ranging from tie-ups between its Alexa home AI and the NHS, or ambitions to crunch data at scale from medical records and its online pharmacy plans.
At the same time, recent surveys have found millennials tend to perceive newer brands as more innovative, and that more than 60% of gen Z consumers are attracted to smaller “new” and “fun” brands. This is not necessarily a counter-intuitive finding. The tech giants may not be small, and they’re only occasionally fun, but they are simply too convenient to ignore.
Two words – ‘Netflxification’ and ‘Primeification’ – have entered the lexicon to illuminate this phenomenon. The first describes Netflix’s ability to serve people what they want, when they want it through an intuitive and user-friendly interface, backed by a subscription.
Meanwhile, Amazon Prime’s mission to wrap a membership service into the provision of everyday items has been truly revolutionary: the last estimates, from mid-2018, suggested around 60% of Amazon customers in the US were members of Prime, which offers premium delivery. The advantages for the business are clear – on average, those 95 million consumers were spending $1,400 annually with Amazon, compared to $600 for non-Prime customers.
In return, Amazon offers these premium consumers platinum service. And that plays into an intrinsic mentality, says Marsden: we will spend more, and spend it more often, with services that make consumption easier and more pleasurable, which almost certainly means delivering through an online channel.
That’s good news for Amazon and other disruptors with subscription-style models. But it is having a real material effect on more traditional businesses, particularly larger conglomerates. McKinsey’s research on organic growth rates illustrates how: it found the average consumer goods company has been growing at 2.5% annually, but businesses with more than US$8bn in annual revenue grew at only 1.5%. Those under the $2bn mark were twice as rapid in their growth.
This trend, adds McKinsey, can be seen particularly starkly in the cosmetics sector. Broadly speaking, digital-first brands that sell their wares online represent about 10% of the market and are growing roughly four times more quickly than their traditional rivals. Studies have found 169 billion YouTube views are accrued annually for beauty-related videos – but the vast majority are for user-generated clips rather than content produced by brands. Large cosmetics firms might be financially profligate but they are struggling to stay relevant under the weight of such conversations, forcing L’Oreal, for example, to invest in an app called Makeup Genius to allow users to create their own looks online.
Clearly, offering a truly multichannel experience is the future across multiple sectors. For many retailers in particular, that means finding new partners fast, says Martin. “Retail was about sourcing great products, shipping them and seeing if you could open more stores. Now you need multiple routes to market but most businesses are still based around the physical business model. Increasingly, they are competing against platform businesses like Ocado, Boohoo, Alibaba and Amazon.”
“The biggest challenge companies face is disintermediation,” adds Hindo. “They are already torn away from their consumers and with consumers being more digitally oriented that is exacerbated. Retailers are getting disintermediated by the big delivery players and a lot of FMCG companies are in the dark because they don’t have a relationship with their customer.”
Shaking up bricks and mortar
Martin points out that median profitability for UK businesses was around 6% before the pandemic but currently stands at 1%. The easiest way to tackle that problem is to radically reduce operating costs, which means trimming ranges, premises and workforces. Increased automation and a switch from investing in store openings into technology and supply chain will be of the essence.
But it’s equally vital to understand which consumer behaviours are transient, affected primarily by pandemic panic, and which are genuinely longer lasting. Online shopping, says Martin, is the “ultimate convenience” and therefore will outlast any short-term change in consumer behaviour, for example.
The best clues to how the post-pandemic consumer might behave arguably come from China. Having seen its economy rapidly rebound following the highly restrictive lockdown it put in place, the country spent the second half of 2020 returning to normality – and deciding which of its new ways of working and spending would stick. Take, for example, the property market. When lockdown hit, viewings went virtual, with the largest virtual reality showroom seeing traffic increase 35-fold in a month. Even today, the number of virtual viewings is well above pre-pandemic levels. Similarly, enterprise communication platform DingTalk, the Chinese equivalent of Slack, has doubled its user base to 177 million even since workers returned to offices.
Some things, however, have changed. While entertainment has rebounded to an extent, young consumers have tempered their enthusiasm for socialising with a newfound financial prudence. McKinsey says 42% of Chinese millennials say they will save more of their pay packets post-Covid, and will increase spending on insurance and other financial products. Interestingly, however, bricks and mortar retail is not suffering as much as many commentators expected: indeed, by the end of 2020, it had largely returned to pre-crisis levels.
No small change
This all has profound implications for supply chains. Direct-to-consumer retail – from businesses large and small – is creating new patterns in logistics and packaging. Suppliers face greater demand volatility as channels become more fragmented. The bricks-and-mortar store may become a conduit in the supply chain, rather than just one of its termini. Stock rooms will need to hold extra inventory for digital purchases, either for click-and-collect or for packing and shipping direct to customers’ homes.
“The store is becoming an extended part of the supply chain,” says John Morris, head of CBRE’s industrial and logistics and retail divisions, in a report by CNBC. Repurposed warehouses and logistics hubs will also require smarter inventory tracking technology and with e-commerce sales continuing to proliferate, leading inevitably to more returns, will need more space dedicated to this purpose.
At a higher level, agility will need to be hardwired into business models and operating procedures, says Hindo.
“The ability to execute even more flexibly will be even more important. Agility and the ability to innovate the business model have become critical capabilities to deliver at scale.
“We are in a world where, even after the pandemic ends, there is a feeling that we may not be 100 years from the next big disruptive event. Having that resilience and agility built into your business model is going to be a differentiator.”
It all means a dramatic redesign of and investment in procurement and supply chain processes, says Martin. “For decades, [businesses] have spent capex on stores. Now they need to funnel it into better automation technology and supply chain capabilities. That end-to-end collaboration is more advanced in automotive and aviation. In food, from farm to fork, there are lots of handover points that are not optimised at all.”
Businesses are starting to wake up to this. In China, for example, retail giant Alibaba has a ‘new retail’ strategy which envisages not just a different consumer experience but a new supply chain too. At its popular Hema supermarkets, it has integrated warehouses into stores so staff can work seamlessly across both, filling online orders at the same time as they serve customers in person.
In every sector, it is not just the processes that face radical change, but also roles, partnerships and relationships, adds Hindo. “It does create the need to co-operate across the value chain a lot more than you used to because in the responses we have been talking about – connecting with end consumers – there are a whole load of people up and down the value chain that are involved with that.”
However the pandemic and its aftermath play out, it is clear we will enter a period of deep change affecting not just the superficial aspects of consumer interaction but the huge logistical operations behind them. That will be painful and challenging for procurement professionals, just like their counterparts elsewhere in organisations. The small changes in behaviour we see among consumers booking their next getaway online, in this context, are the tiny ripples that lead to epoch-defining changes in business.
But is there an upside to it all? Definitely, say the experts. “Being allied to the P&L decision makers, being less reliant on forecasts and history and more on the realities of demand enables you to better respond as things unfold, giving you greater agility.”
The strategic aim of becoming closer to the heart of the business, which procurement has been edging towards through demonstrating its value consistently over the decades, has never been closer. It’s just a shame it has taken such a tumultuous event to get here.