ISG Provider Lens™ Retail & CPG Services - Business Transformation Services - U.S. 2023

Convergence and transformation in the retail and CPG industries in the post-COVID-19 era

Increasing similarity between retail and CPG

In today’s consumer markets, retail and consumer packaged goods (CPG) companies are becoming alike in their operations and aspirations due to changing consumer behavior, technological advancements and market dynamics. Notably, CPG companies are adopting a direct-to-consumer (D2C)  sales approach to widen their customer reach through own-brand stores and online channels. Some major CPG brands aim to achieve more than half of sales through D2C channels. Even the companies that do not pursue D2C sales are improving their customer relationships through loyalty programs, highly personalized marketing and offers redeemable at stores.

The lines between traditional retail and CPG companies are also blurred as many retailers are developing their private-label brands, promoting and selling them directly to consumers in-store and online. Omnichannel commerce utilizing mobile, social, Internet and in- person sales and marketing is thus vital to retailers and CPG companies. New IT approaches like headless commerce based on micro-services architectures are paving the way forward.

Pandemic recovery driving transformation with customer behavior adapting to the new normal

The COVID-19 pandemic forced many retail and CPG companies to adopt digital technologies to meet the changing consumer demands rapidly. E-commerce platforms became a vital channel for sales, prompting increased investments in online storefronts, mobile apps and omnichannel capabilities. Traditional brick-andmortar stores also implemented technologies like contactless payment systems, selfcheckout options and in-store pickup solutions to enhance the overall shopping experience.

Companies continue to consolidate and refine the changes made to help them evaluate the performance of the implemented strategies and assess further developments. Customer behavior continues to evolve as customers rediscover in-person shopping or discover new preferences, such as quick commerce for instant fulfillment from dark stores or micro-fulfillment centers. It is necessary for firms to implement functional models like buy in-store and return online (and vice-versa) to boost customer satisfaction. The pandemic also highlighted the significance of supply chain robustness and efficiency with changing customer behavior. The availability of goods, foodstuff layout and store promotion have never been more paramount.

Consequently, retail and CPG companies rely on IT services to digitalize and optimize their new customer-facing and supply chain processes. Technologies like IoT sensors, blockchain and cloud-based supply chain management systems are beneficial for tracking  inventory in real time, improving visibility, automating processes and ensuring product traceability.

Customer experience as the key focus of digital innovation

In recent years, retail and CPG companies have focused on enhancing the customer experience by utilizing IT services. Personalization has become vital, with companies leveraging customer data to offer tailored recommendations, promotions and loyalty programs.  AI and ML models are increasingly becoming important in improving performance in all of these, driving better customer support through automated support services and better knowledge of customers to personalize responses. Meanwhile, VR and AR technologies  provide immersive shopping experiences, allowing customers to visualize products and try them virtually before purchasing.

Automation and robotics are other critical innovation areas where service providers can provide valuable expertise and solutions. Retail and CPG companies increasingly leverage automation and robotics to streamline operations and reduce costs. Automated warehouse systems, RPA and autonomous delivery vehicles can improve order fulfillment, inventory management and last-mile logistics efficiency.

Cloud-based AI and analytics to drive better decisions

Retail and CPG companies increasingly leverage the data they collect on customers via analytics and business intelligence tools to gain insights into customer behavior, optimize inventory management and improve operational efficiency. They utilize advanced analytics techniques such as ML and AI to analyze large volumes of data and make data-driven decisions in demand forecasting, store layout and supply chain optimization.

The pandemic underscored that many organizations’ analytics and decision models were inflexible and based on out-of-date assumptions. It paved the way for a significant movement to retool and refresh their analytics capabilities using the latest AI-supported technologies and leverage new cloudbased data architectures, empowering the organizations’ models with power, speed and flexibility.

Cloud-first as the new normal

Cloud computing has become the default platform strategy for retail and CPG companies, offering them scalability, agility and potential cost savings. Most organizations have a mix of public, private and hybrid cloud, which is set to continue for the foreseeable future.

Organizations are migrating much of their IT infrastructure and business applications to the cloud, enabling them to handle increased online traffic, store and process large amounts of data, and leverage cloud-based services for functions like inventory management, CRM and analytics. Service providers play a crucial role in devising strategy, highlighting best practices, managing cloud transformations and operating the resultant infrastructures.

ESG agenda as a top-level issue for retail and consumer executives

ISG research has shown that environmental, social and governance (ESG) issues and initiatives are now a top priority for retail and CPG company executives as they aim to reduce their carbon footprint, demonstrate ethical goods supply and creation, and reduce  waste.

The main reasons for ESG to trend as a significant aspect for firms include the following:

• Consumer demand: Consumers increasingly choose to buy products that are produced in an environmentally and socially responsible manner. This shift is leading to a growing demand for sustainable products, and companies that do not opt for sustainable or ethical practices in their operations, products and services risk losing market share.

• Regulatory pressure: Governments worldwide increasingly regulate businesses to address environmental and social issues. It has led to a growing compliance burden for businesses, and companies that are unprepared for this are at risk of being fined or even shut  down.

• Investor pressure: ESG factors are increasingly being considered by investors when making investment decisions due to a perception that these can facilitate business success and an ethically driven desire to invest in companies committed to sustainability.

ESG initiatives rely heavily on IT systems for reporting, supply chain monitoring and other functions, and IT service providers are in a prime position to provide advice and solutions. Notably, many IT service providers in this study have their own ESG policies, particularly a move to reduce their carbon footprint toward net zero.

Security and privacy as fundamental needs for every retail and consumer business

The importance of cybersecurity and data privacy is growing with increasing reliance on digital technologies for sales and marketing channels and the ever-mounting use and distribution of data and AI models to inform business decisions and drive processes (particularly consumer data).

The cyber threat landscape widens, and criminal activity becomes ever more sophisticated. Retail and CPG companies are engaged in a constant race with bad actors to ensure their security measures and technologies are up-to-date and can continue to protect their data against cyberattacks and fraud, and also to ensure compliance with data protection regulations such as the General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA). They often rely on service providers for advice, support and implementing relevant technologies and strategies.

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