Building the Modern Profit Center: How to Embrace Digitally Enabled Products

Johnston: Let's first talk, Ruth, about market forces. You've alluded to this, but what's prompting CPGs to embrace digital now in ways they might not have in the past? We know that data is important, but is it all about the data? Is everything about the data?

Thomson: Well, why now? There's several factors there. Firstly, consumers are ready for this and expecting it. Think of what I've said about sports and fitness and other market sectors. Quantified self-movement has been around for a long time and the expectation in consumers' minds that you can monitor personalized experiences is already there. It's not like CPG has to create a new behavior from scratch; they’ve got to piggyback on what is already there. 

Another point is that CPG needs to do this. The industry hasn't still had the way in which you can create and build a brand shift so much over the years. We've long gone in the era of television ads, and now how to reach consumers is far more fragmented. This is a tool that can be in your toolbox for how to reach consumers and build a brand. 

A third point is that the technology is available now. It's not like you've got to create anything from first principles. The tools are there, you've just got to understand how to use it as an industry. 

You asked about data. Is it all about the data? No, but that's an important part of the story. What we are seeing — I'd be interested if the others agree with me — in the CPG sector, is that a lot of them have almost got their houses in order by digitizing existing systems and what they have in-house. Now, they're looking to add the consumer as part of that story. They're looking to bring them into the conversation. 

This is exploding what we used to think about traditional research methods in terms of how we can learn about how consumers want to interact with products.

Let's discuss the CPG perspective a little bit as digitalization is top of mind for all CPGs at the moment. Jonathan, how are you seeing CPGs address this in a broader digital thinking when it comes to building a consumer solution ecosystem?

Reeves: Ruth, thanks for your challenge, it's an interesting one on data — how we leverage data and bring in the consumer. Take a step back in CPG. Over the last 10 years, we've seen CPG trying to become even more consumer-centric or customer-centric than before. We’re beginning to see strategies around getting more consumer-centric or customer-centric in all brands and products. The reality is, if anything, things like COVID and sustainability have accelerated the need for CPGs to think more than just the consumer pain point.

Think about the pain point. Take laundry as an example: the real pain point is that no one likes doing laundry, and maybe my mother likes ironing — that's probably a limited group of people. It's the same as cleaning the toilet. On the to-do list on a Saturday morning or a Sunday morning, no one has “I want to clean the toilet” at the top. If we only look through the pain point, we only resolve it with a product. Organizations such as Unilever and P&G have learned to move beyond that. It has to evolve and become more than just a product. 

What we're doing as CPGs is looking beyond the product and into what consumers are looking for, which number one is value my time, help me spend less time doing non-value-added activities. Consumers are prepared to invest more money and time into experiences and all of these things.

A great example of this is Oral-B. Part of the aim of that Oral-B activity was how do I give people an experience when they clean their teeth? It's not just, "by the way, you need to clean your teeth for two minutes." It's the fact that to engage children while cleaning their teeth they could play a tune or link it to some music – there could be a Spotify list for cleaning your teeth. 

These are experiences in themselves. It's the same, for example, when you look at laundry services because resolving that pain point in offering a laundry service is the ultimate aim. Ultimately, it's not a hidden secret that at Henkel we look at services. For example, if you don't want to do your laundry, somebody else will do it for you. We see in emerging markets that actually that happens very routinely.

I like the comments around the ecosystem because that doesn't happen on its own. We're starting to build capabilities that as an organization we hadn't built before. Before we were very good at taking ingredients, adding the value, putting it in a bottle, and selling it at an increased price. I'm not trying to minimize what CPG does, but that's the essence of fast moving consumer goods. What we're looking for is that they want more, they're smarter.

Darren is a great example of someone who's come from a non-CPG into CPG bringing new skills and capabilities. It’s the ability to look at ourselves and say, "we need to do this differently." We’re beginning to act differently and look at pain points in more of an experiential way to offer alternative solutions.

Johnston: Darren, you have that perspective from both industries. A lot of different sectors are embracing digital. What's different about it for CPG, especially when it comes to the challenges and the opportunities?

Adams: It’s interesting to hear Jonathan's comments, particularly around pain points, ecosystem, etc. I’ll build on that a bit, but I want to go wider in terms of digital, and then bring it down to the challenges and opportunities within CPG. Many different sectors and organizations have been attempting to address how to leverage digital, how to bring that in, how to augment the core product, how to augment that consumer engagement. It's been a relatively short journey; we're talking 10-15 years. In the scheme of things, it's a relatively short journey. 

Remember, back in 2019, financial services and insurance companies were trying to work out how to engage by this emerging online channel. It's not that long ago, but some of the core questions that we're often asked include: How do people in the organization embrace digital? What are the areas of transformation? As Ruth pointed out, digital transformation is a major topic. 

There's a lot of different avenues to that, but more fundamentally, the question that keeps getting asked is how do I begin augmenting the core of the business using digital to create incremental growth? All while, at the same time, creating an environment and capabilities to expand into new areas in the future. That's somewhat the balancing act that goes on within organizations. Companies don't want to diversify and disrupt the organization so much that it loses the call while still developing the second and third horizons.

That's been the driving force of innovation in these organizations over the last 30, 40, 50 years. There are these very embedded principles and ways of working.

When confronted with shifts and changes going in — whether consumer-led or environmentally-led by things like COVID — organizations and industries go through a fundamental shift and have to challenge the ingrained practices and mindsets. That's inherently why startups can be quite powerful in certain areas because they don't have those entrenched principles that they need to deal with. 

Let’s focus on this process mindset concept. I'm expanding on Jonathan's comment about the process of product innovation. As a bit of a contrast, before moving into Unilever, I spent six years at Phillips. For those of you who are not aware, Phillips has been going through a transformation into a healthcare company, and in particular digital health.

From a pain point perspective, if you talk to hospital staff, a nurse in an ICU, or a doctor, they can articulate very well what those critical pain points are for them on any given day. They know how they should be delivering health and wellbeing in a much better manner. They could talk to you about where the breakdown and processes occur, etc. 

What is probably less obvious is the innovation process to solve that because it's an incredibly difficult place to innovate. There's high regulation, an incredibly entrenched process — we’re talking about hospitals, where in the U.S. the healthcare system is difficult to change. There's so many embedded ways of working, making it a very difficult area to innovate in. 

Then, I move to CPG and see that the challenge and opportunity from a point perspective is less clear. If you're looking at home care, there's pain points around not wanting to clean the toilet or do laundry. But if you dive deeper and look at what that future innovation is, it’s difficult to talk to the consumer as they're not going to have that necessary perspective. 

There is a challenge around gaining those core insights. I don't mean the top insights around, "I have frizzy hair or I want my hair to be stronger." I’m talking about the fundamentals that are driving certain practices and behaviors. 

The opportunity that exists off the back of that is that innovation in a CPG environment is also relatively “simpler,” compared to digital health. Health where you have better access to data: a growing access to both first- and third-party data, less regulatory constraints, easier to test and validate concepts, and go-to-market is more established. 

It's now a combination of products and services that are creating value. This is the world that we now operate in. As an example to contextualize it, think about your own lives and what you go through. Think about Peloton.

Peloton is no longer just a bike, it’s classes, personalized training, apparel, accessories, membership, challenges — there’s a whole ecosystem built around that. Cars, Tesla — it's no longer just a car, it's charging, upgradeable features, entertainment, community. 

To bring it to CPG, think about makeup. It’s no longer just makeup, it's skin analysis, AI vision, shade matching, virtual try-on, expert engagement — all these things are now starting to come in and augment the core product, but also augment the experience that the consumer is having and deliver key value.

This is the world that we now find ourselves in. It's the principles that need to be driving us — that changing process, changing mindset. Then, the ability to deliver on that more than a product, comes down to three things: 

1. Ecosystem thinking, which is starting to think about platforms that have distributed services and additional devices, hardware attached to it, that have retail components. That ecosystem thinking is incredible. 
2. The underlying data network, where we're entering that phase, where data is the engine. The lifeblood of the ecosystem innovation engine as it were. 
3. That mindset shift, which is the culture of innovation and how that permeates through the organization. It is often articulated by a digital-first mentality. 

Those three elements inherently contain the opportunities, but also challenges facing CPGs who are starting to make that digital link.

Johnston: Jonathan, I'm curious to get your take when looking at advantages. What advantages do CPGs have over startups in this space? We often hear startups can move more quickly, but the larger companies are carrying distinct advantages. Can you talk about how they pertain to this topic?

Reeves: Yes, I'll lean on my experience in venturing, as well. When I was in a startup and in the startup world — I’ll give you reflection from one side and then the flip side of the corporate world. In the startup world, you're always looking to raise capital, either for a private equity or venture fund.

A lot of them, depending on what you're doing, will come back to you and say, "Well, we know where the cash is; the cash incorporated in CPG, go talk to FMCGs because they're sitting on a bulk load of cash and your product would be a real fit for their portfolio." That gives you an idea of what, from a startup world, people are looking at.

The second one, from a startup perspective, is that you need to scale. At some point you've tested your hypothesis, got your first trial, maybe got your first revenues, you're looking to try and get to second and third revenues, you've iterated the product mix, and you've gone beyond product market fit. Then, you start looking at what the key elements are of my scale. 

CPG has a lot of relationships with big players globally. It has the brands and the supply chain. Actually being able to get volume deals on raw materials production capacity, logistics capacity, even simple things like joint warehousing and how much savings that could bring to a startup. These are all things that CPGs can bring to the table. 

However, look at it through the lens of the startup. What CPG has to look at is I don't believe one can live without the other, and Darren alluded to the ecosystem. When you start mapping out the ecosystem and how to respond in terms of platform economies, those ecosystems of partners naturally involve startups. Why? Because startups can iterate testing and probe things in high risk, higher return areas that CPGs may not want to go into. 

What you find is that the best relationships occur when CPGs invest in companies and areas that they wouldn’t naturally go into, but will disrupt themselves with if they don’t. Those are the interesting investments and partnerships.

The other piece of the pie is the fact that startups are interested in working with CPGs, as long as they're able to continue to be a startup — that's an important mindset to have. As Darren mentioned, the ability to have data, build that data lake, and leverage it is probably easier at startup scale because CPGs struggle with the country's GDPR challenges, how to deal with first-party data, and leverage that first-party data. 

Whilst operating with data, they are operating either in markets where they're less restricted, or they have the ability to, at low volume data, be able to get greater insights. 

Johnston: Aditya, as we're talking about CPGs, there must clearly be differences. There's no one size fits all, even if you're a CPG versus a startup. Can you talk us through some of the differences across CPG categories when it comes to challenges and opportunities for digitally connected products?

Sehgal: A lot of it comes down to something that's very basic: the economics of the transaction and the economics of the product. For example, think about pet food or baby formula, these are businesses that can be built bottom-up. What does that mean? Let's say a consumer decides to buy dog food, pet wet vitamins, or human vitamins. In category, if they decide to buy a particular brand, that’s about $1,500 per year.

Therefore, if you're looking to create a business of a million dollars, you need to find 1,000 customers, and if you're looking to create a business of a billion dollars, you need to convince a million customers. The way to convince a million customers is for each transaction because it's worth $1,000 to you. You can invest in the relationship, in funding and insights, but also the benefits and the connection with customers, which is meaningful for that consumer to make that decision. 

On the other hand, if you're selling toilet soap, each transaction is going to be 10 pens to create a billion dollars of sale. So you look at the population of a country and think, I need to get to 20-30% awareness, of which 1% will convert. These people will buy wherever they want, and there will be millions of transactions. However, each transaction is not big enough for me to invest in to convert people at that level. That’s a very top-down mass market philosophy. This is typically the philosophy that the CPG model follows that was pioneered with the soap opera.

Most CPGs are good. Depending on the unit economics of your product, you can have more juice to invest in digital transformation, build that digital connection, and the intimate human connection that comes from great data connection, which then builds a motor around your product. 

That's a big differentiator between CPG categories. You'll see some categories have high value, but low weight being great categories for e-commerce, but also for funding digital disruption.

The second thing is CPGs have thought that innovation relates to products for too long. This may be true in some old words, but what happens today is whenever you take a product and add a layer of data to it, it creates something new. For example, thermometers. In North America, there is a brand of thermometers that Reckitt works with quite closely, called Kinsa. Essentially, there is a large number of homes that have disconnected thermometers. 

What happens is that there is a real-time map that is created on what is happening with the flu, COVID, and what is happening with temperature. This allows specific micro-targeting down, even under a zip code, in terms of advertising, but also retail activation and inventory planning. The whole system is linked up.

Adding a layer of data onto a product, then doing gymnastics with processing that data and applying an AI engine on that completely changes the preposition. CPG companies are starting to learn that product innovation is the base level of innovation. Business model innovation is actually at a higher level. If you innovate on the business model, that bonds multiple product innovations.

If you happen to be stuck in a category, which is struggling to embrace data-driven operations because of the way the unit economics of the category works, start thinking about how to address the business model and change that round. With a new business model, you change the dynamics of your category, which then transforms your business.

Johnston: It's interesting you bring up Kinsa thermometers. We did a story on them and if I recall correctly, using the data from that, they were able to identify $2 million in new revenue opportunities. Darren, how does this vary depending on the different CPG categories?

Adams: I’d like to play off the second comment about business models because this is incredibly important. Interestingly, even though my team is relatively new to union leaders — less than a year old — we've been able to work across the entire organization. We've seen a fair amount of change and how this can be applied. For those of you who are not familiar, Unilever has three different divisions: beauty and personal care, food and refreshment, and home care. It sets the scene around the three different groups that we've worked across.

One of the fundamental ways we've approached it is beyond the initial product organization and enhancement. What are those ultimate business models that we're starting to push into and the implications of those? Look at them from two perspectives: the operational view and the emotional view. Creating new value is inherently how I've seen the difference between the three categories. If you're looking for personal beauty and personal care for instance, there's inherently a much stronger consumer engagement process through that.

It's an emotional space to play in the way of people's appearance, how they look etc. Our ability to deliver value is a little more accentuated in that space because people are more willing to try, more willing to experiment, and potentially more willing to trust and give over data that's going to further improve the services and capabilities you deliver to them. There's a bit more leeway in that perspective. There's also more channel engagement, or cross-channel engagement, really.

From that perspective, we come in from an emotional perspective on how we start to build more value in the backend. Look at something like home care, by contrast, and it is driven by this avoidance of tasks — the things we have to do, but don't necessarily want to do. 

It's a slightly different process as you're starting to look at the operational aspect of it. Take laundry for example: how would we bring greater efficiency to the laundry process? How are we ensuring that you are not having to clean things twice, or alternatively, how do you take laundry completely out of the home? It's very much a functional relationship. Then, you can trust the food and refreshment business, which is largely driven by logistical and supply chain aspects. 

Take ice cream, as another example. How do you ensure that an ice fridge is full of ice cream when the weather changes? It's an environmentally-driven product — if it's a warm day, you sell more ice cream — how do you ensure that the product is where it needs to be at the right time?

When looking at those areas, the approach to using digital to augment the offering, or solve the problem that's inherently there, slightly differs. It's interesting how the team is having to perform acrobatics around that over the business by switching the direction and tools that are used as well as thinking more carefully about what the critical pain points are and how to meet them from a more emotional and consumer engagement, or even potentially from an operational perspective.

Johnston: Jonathan, can you tell us about how or why Henkel is innovating in this space and why they've determined it is valuable for them?

Reeves: Remember, there are teams looking at the core and getting the core. There's always a conversation that 1% growth in the core is bigger than any innovation we can generate. If we assume the core is growing, then we can get that working. The reality is, if we don't look at what's going to disrupt us, then somebody else is going to disrupt us. It’s all about the confluence of lots of activities happening, which is around the growth of data, more demanding consumers, demand and experiences.

Henkel is looking at it because CPG operates in a world where we are looking for behavior change. If you're in foods and looking to try and deliver healthier foods, then you're trying to convince consumers that healthier food is better for you. If you are in home and personal care products, you're trying to convince people that your personal care regimen is better than what they had before because it's anti-wrinkle, going to help you age better, or going to make you look more beautiful, younger, whatever it may be. It's all about behavior change. 

Brands have to step up to the plate and say, "If my brand is going to stand up for behavior change, it has to do more than just give me liquid in a bottle or a nice nutrient beauty spar solution. It has to do something more." This is why we're looking at things that are more plugged into consumers' lives.

It was interesting Ruth, the whole thing around Nike and evolving, how Nike has moved its brand and its positioning. The way it's moved from a lifestyle brand to a technology driven brand. Why did they do it? Because people are expecting more. They're not expecting trainers to tell them they had a good run today, but they are looking at how it can be relevant for their lifestyle.

You see investments from companies into MyRun or other apps that plug into more than just a pair of shoes. They're plugged into my lifestyle, which is, I want to get fitter, leaner, get more out of life. These are brands stepping up to the plate. In CPG, we own a lot of great brands: Unilever, Henkel, and P&G own a billion Euro brands. We need to do more that responds to consumer desires and needs. That's why we're doing it.

A great example is Coca-Cola. Coca-Cola launched the freestyle machine not because everybody wanted to mix their drinks, but also because the data they generate from these machines that are plugged into Atlanta is a wealth of information. The new innovations on new flavors are driven by consumer use in these freestyle machines and the data that's sent back to Atlanta. 

We've done the same. We've got historical data all the way back since 1845. We've got a lot of data on, for example, cleaning, which we've put together to plug into a chatbot with Bosch. Now, at your washing machine, you can chat to it through the chat bot. You can say, "I've got a ketchup stain, how do I remove it?" It'll use the data it has to guide you through the best solution, what temperature setting, etc.

Why is that relevant to Henkel? We have assets, such as data, that we've never used before and suddenly are finding channels to bring more relevance to consumers. That's what's important in this space: we're sitting on assets. Anita mentioned that we can generate assets, but we're also sitting on assets.

Johnston: It's about creating or helping build out more of an ecosystem using the data. There’s lots of opportunities, lots of great things are possibly ahead. Ruth, why is this so hard? All these great opportunities, what are some of the challenges that are specific to CPG?

Thomson: We’ve touched on the first point a bit already, but there’s organizational challenges. CPG has been set up over decades, in some cases centuries, to be optimized to pack, ship, and market high-volume mass-market products.

Digital is different across all functions of the business, not only in how ideas create a concept and test it, but then how to launch it. There’s supply chain differences, customer support. No one’s going to say their package is leaking, but now they’ll be saying, "How do I pair my device? How do I set it up so I can do this?" The groups we've seen have been the most successful in setting up separate groups to do this.

This is typical for lots of innovative things. How can you get a separate group that has the freedom to be able to innovate and do it? What doesn't work is when that has just a small budget to play around with concepts. They need to have the teeth and power to be able to innovate and execute to be able to do this properly. It goes without saying that it needs significant senior support.

It's recognizing what you can do through partnering. Jonathan talked about startups, referencing the work with Bosch, or for example, bringing in external groups, such as ourselves. We're working with lots of CPG companies to do this because at the beginning it is people that are exploring. It makes sense using outsourced resources rather than trying to do it all yourself.

You need to think about it as a complete system from the beginning to realize the consumer value and business benefit. How do you get a multifunctional team working together from the start? How do you measure the benefits of it as you go along? Think about the KPIs you're going to need to use when doing digital.

This is relevant for all talks of all forms of innovation. If using a benchmark against the existing incremental parts, doing something disruptive is hard. How do you compare and build out what you're doing in digital, as well as think about what different KPIs aren’t needed so that you don't trample things before you get going? There will be some real gems in there you want to get at the market.

Johnston: Aditya, since you can see the future, how can brands know when the time is right for them? How do they know when moving to a digital product is a bad idea, or know when the time is right?

Sehgal: This is a question where you don't actually need to know the future, you just need to know the present. The simple answer is: there is no time like the present for every brand to find the right digital solution. This does not mean doing what is obvious, doing it in a bad way, in a way that won't or doesn't work economically, or financially isn’t in line with the equity of the brand purely because it is fashionable to do something digitally. 

For every brand, step back and think: What is the purpose of the brand? What is the promise the brand makes to the consumer? What is the contract that the brand has with the consumer? Then, start thinking about how adding a digital layer or a layer of data can allow the brand to do magic, to fulfill its promise in a much stronger manner to improve its connection with that promise and with that consumer.

First, you have to understand the process, then the process has to be codified in the ERP. It's painful implementing both ways, but first have the understanding. Similarly, conceptualize how your brand can bring that added value and deliver its purpose, even though it doesn't do so today. Then, doing it will meet lots of resistance, but typically start small.

You'll do a small pilot, make sure it works, build momentum, and bring people with you. As you do that, you find an interesting solution, which is obvious in hindsight. We used to have two rules when I was in e-commerce and digital at Reckitt. No brand is an exception. You think your brand is an exception, that your brand can get by without digital transformation. 

The bad news is it can't. If you don't transform or start transforming your brand today, in five to 10 years from now it'll become irrelevant. It won’t intersect with consumers the way consumers want to intersect. You have no choice, but to interact with consumers digitally, because consumers today, unfortunately, are more ahead of digitization than CPG companies are. If you don't talk to them in their language, you'll get left behind. No brand is an exception, no market is an exception. The only question is: what do you change so that you make this happen?

Johnston: Disrupt or be disrupted. Darren, what is the pathway to building these smart products? A member of the audience said they originally thought they would build prototypes — then MVP 1.1, 2.0 — but they're finding they need to lay the groundwork first with something simpler, such as a website that has a login. It gives access to simpler engagements and builds on with smart products. What do you see as the best approach to launching smart products at scale?

Adams: I've come at this from two different perspectives. First, I’ll answer the question directly, then I’ll give some insight into some of the challenges. What you're wanting to do in that first instance is just a test. What are some of the assumptions and risks that you've identified in stepping into that arena? You're absolutely right, you're not going to jump straight into developing the product itself. You're going to start understanding what it is that needs to be delivered and what the best way is to deliver that. 

You may find that you don't need to build it, but would want to partner with it. There may be components within that you haven't thought about that need to be present in order to deliver a particular smart device, which haven’t cropped up yet — particularly if you're going into a new area. 

If you're thinking about the smart device itself, you would not do it justice in terms of what actually needs to be created to make that product successful. 

You need to think about other components, such as what the consumer interface is going to be. What is the expectation from the consumer of what that device is going to spit out? What's the data flow back and forth? Other devices that need to be connected to this, how are you going to fulfill refreshment of the cartridges or the device? How are you going to have a feedback loop? You need to understand how it's being used and how to enhance that. Those components are incredibly important.

From a personal perspective, innovating both internally and with external groups, be cautious about what your internal journey is like to ensure success. I’ve wrapped this up in the aspect of strategy, maturity, and business readiness. Working in innovation is not done in a vacuum, but by working with the business category you can understand what the trajectory and roadmap is, what the capabilities are, the appetite to work with other organizations, the resources etc. 

Are they resourced to do this? Otherwise, as you continue to go through this journey, you are going to be disconnected from the actual core of the organization. Understand business readiness.

Do you have an understanding of how you're going to sell this product, how to support  requirements around software? If you're going to need to introduce new versions, do you have the capabilities to do that? Do you need to find partners? These considerations also need to be in the background. It's not just about those steps and iterating the product itself.

Johnston: Aditya, what are some of the emerging technologies that will unlock further innovation in digitally-enabled products?

Sehgal: That’s a fantastic question. Since I decided to retire from Reckitt, it's the question that I've thought about for the last six months. 

The first surprise is something called tokenization. Everything where the value can be tokenized and traded, will be tokenized and traded, and this will create fantastic new business models. For example, think about the stock price of your company. That can be divided into 1,000 tokens. You could give 1,000 of a stock along with your product to your consumer. Many years later, when that 1,000 of a stock becomes very valuable to pay for your consumers’ child college education, she will thank you. But it didn’t cost you much; it was a small proportion of the value of the product that you sold. 

Another example of tokenization is today, when we advertise, we pay Google or Facebook. Instead, you can use something called the brave browser and something called the BAT (the basic attention token) to pay the consumer directly. You don’t need anybody in between. Now, would the consumer prefer to be paid directly to see advertising? Probably yes. Tokenization will completely change your world. 

The second one is AI. Everything that can be controlled by AI will be, which means that as human beings, we have to do things that add value that is different from the value AI will add. This will mean a dramatic change in how consumers interact with products and brands. It means that most of us will do our jobs and have to do something else. 

What we will end up doing is retreat or expand into the metaverse. It is in the metaverse where we will spend most of our time, as we eat, drink, play, and be whoever we choose to be. What is the value and proposition of brands and products? How do you bring it to life? How do you visualize it? It's not just about buying NFT today, but think about Decentraland where NFT island is. How can you create a product proposition with land in Decentraland that reflects the brand properties of your brand?