Deloitte's Conroy Sees Challenges Driving Changes

by Karl Greenberg, Jan 6, 2012, 3:01 PM

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The structural challenges confronting the consumer products business in the United States this year go well beyond consumer post-recession sentiment. Pat Conroy, vice chairman and U.S. consumer products leader at Deloitte, offers his take on key issues that consumer product companies will face in 2012. He also has some recommendations.

In his consumer-products industry outlook for 2010, Conroy points to higher commodity costs as a structural challenge for consumer food, beverage, personal goods, household goods and apparel brands, because of supply-and-demand uncertainty and imbalances, and higher supply costs.

The vanishing middle class and congealing of a permanent poor in the U.S mean consumer diverging consumer segments. Conroy says that at the low end are consumers who still feel the recession, and at the high end are consumers who are seeking discounts while shopping premium selectively to splurge.

As part of this, a big boom for dollar, discount and online channels -- including mobile channels -- is eroding traditional retail and share of the market and established mid-market brands. Consumer product companies have expanded to dollar markets, developing channel-specific brand extensions, and smaller product packages to meet target prices. They have, said Conroy, "refined their supply chain for unique distribution requirements, and embraced the very different point-of-sale environment present in dollar stores."

Conroy suggests that brands can address the divergent rich man/poor man market by developing distinct product and marketing strategies for diverging consumer segments. "Consumer product companies can revamp their product lineup at the low end with value brands, and at the premium end with distinct innovation. Retailers and brands are understandably reluctant to pass on commodity cost increases via price increases or fewer promotions at the low end of their product lineup," he said.

Just as critics have long derided the major Hollywood studios for having lost their ability to cultivate and produce great stories (preferring endless franchise pictures dominated by special effects) Conroy says the consumer product market will be dominated by "proliferation of minor product extensions and 'me-too' products." He said such horizontal product extensions kill investment in products that could expand markets and compel consumers to change the way they enjoy and emotionally connect with brands.

In terms of grabbing the tiger's tail of volatile upstream commodity prices, Conroy says companies will, by necessity, "develop sophisticated commodity and currency hedging to help manage risk and align the treasury group more closely with procurement, research and development (R&D) and brand teams."

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