Economics & Markets

The three key economic shifts consumer companies will need to heed to succeed

By Andy Gardner
Investment Manager, Global Equities - Equities Sydney, Australia

Changing customer expectations and leaps in technology are driving structural changes in the consumer economy. This is disrupting old business models but creating fantastic opportunities for companies that embrace it.

By being aware of three key economic shifts – data and analytics, mass customisation and direct to consumer business models – investors can be better informed to identify companies which can sustainably expand their economic profits over time.

1. Data and analytics

Data can potentially empower consumer brands to know who their customers are, where they live, where and when they shop, when they use their products, who they use them with and when they are likely to re-purchase.

Consequently, the consumer economy is being transformed as leading brands are directing their business models to capitalise on their data advantage.

Sportswear companies for example, may offer the fitness enthusiast a free app that delivers value beyond a product purchase. However, this also yields extensive personal data that will help make the customer journey more meaningful – and potentially more profitable for the brand.

These brands have completely re-designed the bricks and mortar experience, by focusing on fewer, but more elaborate flagship stores which are built to engender a sensory experience, showcase innovation, deliver an intimate and dynamic environment, and serve as a platform for forging a closer relationship between the brand and the consumer.

Far from being distinct and separate, these ‘brand temples’ instead complement the online retail space by seamlessly integrating the in-store environment with the app, enabling the consumer to view supply chain information, utilise in-store services to check availability or delivery times, check-out instantly without engaging with a staff member, or customise items to precisely meet their personal tastes.

2. Mass customisation

When Henry Ford disrupted industrialised manufacturing by the large-scale introduction of the production line in his auto factory, what followed was a quantum leap in industrial efficiency but also the mass-standardisation of products and retail chains.

But consumers now favour personalisation over mass produced, and in response manufacturing is shifting from rigid and process-driven to flexible and agile, facilitated by advances in technology. For example, car companies are now able to offer customers an almost infinite number of variations on their standard models, based on technical specifications, accessories and colour schemes, to name a few.

However, some companies are struggling with this shift. Many consumer packaged-goods companies have outsourced manufacturing, which leaves them particularly vulnerable as those very same third party providers are also able to build product solutions for new and emerging brands that are more agile and innovative.

3. Direct to consumer business model

The switch to e-commerce has given rise to disintermediation on a large scale as brands seek to build direct relationships with customers. This shift to eliminate wholesalers and retailers from the value chain offers large global brands the opportunity to improve margins.

It also presents smaller businesses, such as low-volume manufacturers of homeware products or craft beer, the chance to connect directly with their market. Previously large brands found that being able to control shelf-space in store meant controlling the market, but shelf space on the internet is infinite.

This direct relationship, especially when supported by data and technology, allows better management of inventory and supports new product innovation. The growth of social media has further supported this direct business model as engagement becomes easier and endorsements more valuable.

Winners and losers

These structural shifts in the economy have enabled innovative businesses to capitalise on changing consumer expectations. There are signs that some established brands understand and are evolving to embrace these changes, while the market is also seeing disruptive entrants emerge along the value chain.

Yet people will only share information with certain technology platforms, brands and organisations, so companies must think as deeply about trust as they do about technology. In many respects, trust provides the social license to innovate and test and learn with cohorts of loyal customers. Consumers also expect brands with whom they share their data to deliver ongoing value outside the transaction and are no longer satisfied with a generic sales message or one that has made assumptions that are incorrect and cause frustration.

Those companies who can adapt and evolve are likely to be the winners rather than the losers in this changing world.

 

Co-contributor: Courtney Ross 

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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