Invest in the three HFS innovation Horizons to conquer consumer goods and retail disruption

The consumer goods and retail (CGR) industry is grappling with the trifecta of supply, demand, and operational disruption, finds a recent HFS survey study in partnership with Genpact. To combat that disruption and be the future leaders of the CGR sector, firms must make investments and drive innovations that can solve problems and achieve business outcomes. You’d think that wouldn’t need stating, but here we are.

Exhibit 1 shows the CGR industry faces multiple macroeconomic headwinds, such as inflation, cybersecurity, and supply chain disruptions, severely impacting supply. More than 60% of CGR firms find it challenging to keep pace with the changing nature of demand. Adding to demand disruption are changing consumer expectations (rise in social commerce and direct-to-consumer), digital and e-commerce shifts (sudden change in the composition of sales between online and physical stores), and the need for a safer in-store experience post-COVID.

The industry feels compelled to overhaul its product mix to stay relevant. This supply–demand imbalance doesn’t allow companies to operate optimally. Most surveyed firms rate their ability to operate effectively across the CGR value chain as average or below average.

Exhibit 1: A perfect storm is brewing within the Retail and CPG (RCPG) industry

Sample: 302 retail and CPG executives across the Global 2000 enterprises
Source: HFS Research in partnership with Genpact, 2022

CGR companies investing across the three HFS innovation Horizons are best positioned to combat the onslaught

The study looked at several investment and innovation areas for CGR firms to survive, thrive, and lead in the market. We categorized our findings and associated insights into the three HFS Horizons for the CGR industry depicted in Exhibit 2.

HFS Horizons showcase a forward-looking market landscape aligned with three categories of incremental value that enterprises should aim for continued success. Horizon 1 is the elementary step focusing on digital (functional) modernization, followed by Horizon 2 and Horizon 3, which focus on enhancing the experience and unlocking new sources of value, respectively. Firms investing in Horizon 2 or Horizon 3 innovation must also continue to invest in the previous Horizons to reap benefits. The study found that only 6% of CGR firms currently invest across the three Horizons and are well-placed to lead the industry’s future.

Exhibit 2: The three tiers of innovation correlate with RCPG firm maturity

Sample: 302 retail and CPG executives across the Global 2000 enterprises
Source: HFS Research in partnership with Genpact, 2022

Horizon 1 leverages enabling technologies to drive digital modernization

Horizon 1 investments are crucial to driving business agility and improving customer retention. CGR firms are investing in modernization initiatives, including cloud migration, SaaS implementation, cybersecurity, and app modernization. They intend to use technology to modernize corporate functions such as F&A, sourcing and procurement, IT, HR, and customer service.

They are also building more sophisticated and unified order management systems to handle increasing order volumes and provide a seamless omnichannel experience. These measures ensure that CGR firms remain afloat in these challenging times.

Horizon 2 propagates end-to-end value chain alignment to drive unmatched customer experience

Horizon 2 initiatives aim to create modern value-based supply networks and enable a seamless customer value cycle. CGR firms are moving from linear supply chain networks to networked and autonomous supply chains to achieve modern value-based supply networks.

To enable a seamless customer value cycle, firms invest in digital commerce to improve post-sales service and support, find new advertising media, sales and marketing personalization, and marketplace channel optimization. These measures ensure that CGR firms can meet and, in many cases, exceed customer expectations (shortening the need-to-fulfillment cycle, consistent omnichannel experience, and faster delivery) required to thrive in the market.

Horizon 3 advocates driving new sources of value and growth through innovative business models

Here, the focus shifts from technology to business, where CGR firms combine technology implementations with thoughtful business initiatives to create an effective business model. For example, some CPG companies are adopting new business models like direct-to-consumers. The recent HFS POV report, CPG firms close the customer gap by going direct, sheds more light on this topic.

Horizon 3 also looks at dimensions such as leveraging data as an asset and embracing sustainability as a determinant of brand value. With respect to the latter, leaders are enforcing sustainability measures to maintain the viability of their brands. Recycling and sustainable packaging, product visibility and traceability, responsible sourcing, and designing “green” stores are some of the top initiatives in this area. These initiatives ensure that CGR firms remain ahead of the competition and maintain a long-term sustainable advantage.

The Bottom Line: CGR firms should make strategic technology investments with a coherent focus on business outcomes to simultaneously lead and be resilient in challenging times.

Many current macroeconomic challenges were born as the world recovered from the two-year pandemic. The chronology of events—the recession immediately following the pandemic—will likely change how the CGR sector responds to the supply, demand, and operational disruptions. Unlike historic recessions, where technology investments largely dry up, we expect CGR firms to maintain a cautionary stance but invest in critical areas where concrete business value and outcomes can be proven. We will likely see more investments in CX and hyper-personalization, new business models like direct-to-consumer (DTC), supply chain resiliency, and sustainability. The CGR industry has realized that not innovating is not an option anymore.