This is an edited version of a presentation given at the Consumer Goods Forum in Kyoto, Japan, on June 7, 2023.
Leading consumer-facing businesses place a lot of emphasis on listening to consumers, as they should. Consumer sentiment and behavior can be fast changing, confusing, and sometimes contradictory. Today’s consumers, for instance, are both trading down and selectively splurging. They’re buying big, established brands and exploring newer, smaller ones. Many of their buying decisions are a matter of “and,” not “or.”
Staying attuned to these trends in consumer behavior can be difficult for companies, but doing so is absolutely critical—even (or perhaps especially) when the ands seem paradoxical. Quick decision making on how to meet consumers’ expectations in this world of ands must be at the top of a company’s agenda.
In addition, businesses must prioritize a series of ands themselves to grow profitably and outperform competitors. This article outlines the ands that we see playing out in consumer behavior, along with the ands that business leaders need to act on.
Four trends in consumer behavior
Many of the insights I’ll be sharing with you are powered by ConsumerWise, McKinsey’s proprietary solution that tracks and analyzes both consumer sentiment (what consumers say and how they feel) and consumer spending (what they actually do)—thus providing a 360-degree view of today’s consumers. ConsumerWise currently spans ten markets; by the end of 2023 it will expand to 20 markets, covering 90 percent of global GDP. Our latest ConsumerWise research reveals that consumers are engaging in the following four ands. It also reveals that trade-offs are false choices.
Trading down and splurging selectively
Consumers are both flocking to value and buying premium products and services. Worldwide, approximately two in three consumers are trading down by buying cheaper brands or private-label products. In Europe, 84 percent of consumers perceive branded products as having similar quality to private labels. In China, consumers are becoming more value conscious and aggressively seeking discounts and promotions.
At the same time, 44 percent of consumers around the world (and 60 percent of Gen Zers and millennials) say that they plan to splurge, particularly on purchases that are experiential or provide immediate gratification—think restaurants or travel. Regionally, intent to splurge closely aligns with economic optimism: 77 percent of Indian consumers plan to splurge, compared with only 26 percent of Japanese consumers. In short, consumer spending is falling globally, and midpriced goods and services are most at risk. Shoppers who splurge in some categories may seek value in others, which means companies must develop a detailed and nuanced understanding of trends and segments.
Shopping everywhere and all at once
The majority of consumers now use at least three channels for each purchase journey. And while 75 percent of consumers want a seamless omnichannel experience, only 25 percent are satisfied with the experience that retailers provide. Omnichannel excellence is especially important given that omnichannel consumers are at least 1.25 times more valuable than their single-channel counterparts.
Consumers are also increasingly adopting new shopping channels. More than 60 percent of US and Asian consumers plan to continue using channels that they first tried during the COVID-19 pandemic, such as grocery delivery or social commerce.
Finding comfort in familiarity and exploring brand promiscuity
Traditionally, big brands have dominated the consumer landscape, especially during times of uncertainty. In the US market, big brands grew 50 percent at the height of the pandemic. But consumers are also trying new brands: one in three consumers did so in the past three months. Gen Zers and millennials are especially susceptible to brand switching, as they are five times more likely than older generations to believe that newer brands are better or more innovative than established brands.
In general, consumers are now purchasing a repertoire of products to fill specific needs, instead of purchasing just one product. To illustrate: whereas ten years ago a typical household would have had just one type of milk in the fridge, a household today might buy cow’s milk, high-protein milk, and a plant-based alternative such as almond milk or oat milk—each for a unique occasion.
Demanding sustainability and affordability
Consumers are gravitating toward sustainable products: 84 percent say that sustainability is a very important factor in their purchase decisions. However, 50 percent say they’re not sure whether they would pay a premium for sustainable products in times of inflation.
Still, products making sustainability-related claims are growing faster than products that make no such claims. Companies face the challenge of striking a balance between sustainability and price, which is especially critical in an inflationary environment.
Three business imperatives
In addition to keeping their finger on the pulse of the ever-more-demanding consumer, businesses should respond to these trends with their own ands. Companies need to be uncompromising in the following three areas.
Choose growth and manage uncertainty
Approximately 60 percent of top-performing CEOs are concerned about an economic downturn. Even amid the highest global inflation since the 1970s, rising interest rates, geopolitical tensions, supply chain disruptions, and volatile commodity prices, investors continue to expect profitable growth above the historical average. Against this backdrop of uncertainty, CEOs have a unique opportunity to make distinctive decisions that lift their companies above competitors. Fortune favors the bold, and pursuing growth must be a conscious, strategic choice.
Companies are more likely to outperform peers when they pursue multiple pathways to growth, including expanding into new categories and new geographies. Changing global demographics, in particular, are unlocking new growth opportunities. Consider that Africa will account for more than half of global population growth in the coming decades, and that GDP for both China and India continues to climb in global rankings. Companies that successfully expand into new geographies are 22 percent more likely to achieve above-market, accretive growth.
Build scale and pursue personalization
Companies that wish to keep up must speed up—and scale up. The pandemic created a greater chasm between retail leaders and laggards: more than 90 percent of growth in retail market cap was driven by 25 large, tech-forward retailers. We expect further market consolidation, accelerated by the end of cheap capital.
But scale must not come at the expense of personalization. The bigger your company, the better you should get at localizing and personalizing your offerings. More than 70 percent of consumers expect personalization and are frustrated when companies don’t deliver it. Companies that excel at personalization generate 40 percent more revenue from those activities than average players.
Grow your core and expand your ecosystem
Historically, more than 80 percent of consumer companies’ growth has come from core offerings. Clearly, nurturing the core isn’t optional—and we’ve found, in fact, that many companies underestimate the core’s growth potential.
But as consumer behaviors diverge, companies must seek to become indispensable in consumers’ lives by expanding beyond products and into a range of services. Companies would do well to start pursuing “share of life,” not just share of wallet. Traditional sector barriers are falling; McKinsey research suggests that one-third of global GDP will soon come from ecosystems (which are networks or partnerships that cut across different industries). And consumers are receptive: for example, 60 percent of European consumers say they’re willing to buy services from retailers they trust. Companies can also tap into B2B opportunities—an excellent example being the rise of retail media networks, which generate a significant amount of incremental revenue and operating margins as well as generating valuable new consumer insights.
Consumers today live in a world of ands—they’re much more demanding and less willing to make trade-offs. Businesses, too, should live in a world of ands. If they take an uncompromising stance on the three aforementioned imperatives, the payoff will be above-average growth and healthy margins.