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Living La Vida VUCA

Living La Vida VUCA

We are living in a VUCA world, explained Daniel Bone, Insights Director at IRI, during last week’s State of the Industry presentation to a virtual audience of 3,000 people from the FMCG sector.

VUCA stands for volatility, uncertainty, complexity and ambiguity and the acronym describes the times. It is an environment, Mr Bone explained, that makes for ‘tough trading conditions’.

“Nothing is as it seems when looking at a singular data point. There is dichotomy in data,” he said.

For example, while household consumption is currently strong, the looming and likely prospect of an increase in interest rates could put a lid on that in a heartbeat.

But for now, Chief Commercial Officer, for Australia and Asia Pacific, Alistair Leathwood is optimistic about the opportunity for retail over the next quarter. He painted a picture of shoppers with a sustainability mindset, those who were looking for convenience, ‘better for me’ choices and self-expression.

He said: “Shoppers have … developed a strong sustainability mindset which is driving a shift in expectations and preferences. Easiness is now prominent in the minds of shoppers – they want convenience, easy solutions and indulgence all mixed into one for a fair price.

“Not surprisingly, online shopping is continuing to grow. Shoppers are wanting personalisation and becoming more attune to the value of functional foods in supporting overall health and wellness. The boredom of the pandemic and lockdown in some states also revived the fun and appeal of new novelties for shoppers.

“On the surface, a lot has changed and will continue to change across the FMCG sector however there are some headwinds which need to be navigated such as supply chain issues, cost of ocean freight and packaging and labour shortages.     

Supply Chain

“Supply chain and labour shortages are the greatest economic risks to both suppliers and retailers,” said Paul Hinds, IRI’s Managing Director – APAC when he introduced IRI’s presentation.

Supply chain disruptions are expected to last well into 2022 as delta continues and new variants like omicron emerge.

Mr Bone talked through supply chain costs as they currently stand: container costs have increased by 52 per cent, packaging costs are up 40 per cent and oil prices are sitting at a three year high.

While those cost pressures have not yet hit the consumer basket, Mr Bone anticipates that they will in the first half of FY22, predicting mid-single digit price hikes for consumer goods at the retail level.

He suggested that suppliers and retailers will have to navigate this territory carefully. While retailers acknowledge that price hikes are coming – as both Coles and Woolworths did at their recent AGMs – the hikes will likely be implemented in a measured and steady way.

It is not a great position for retailers to be in, particularly when the shopper experience is already being negatively impacted by supply chain disruptions, like out of stock issues and long wait times for delivery of goods.

Mr Bone explained that this lack of availability “disrupts consumption habits, sales, trends and momentum”. The reality of VUCA comes into even sharper focus.

To counteract this, Mr Bone suggests that retailers should be encouraging pre-planning and pre-spend; bringing consumer spending forward ‘to avoid disappointment and missing out’. Events such as Black Friday are supporting this mentality.

 The Home 

Mr Leathwood honed in on the individual consumer, and explained how the role of the home has changed these past 18 months: “the home became the centre of our existence for locked down states,” he explained.

This led to the emergence of “Pandemic Pampering” as well as “fun, creativity and togetherness anchored in our home”.

In liquor, this was reflected in the continuing trend towards premiumisaion as consumers chose craft beer - up 17 per cent compared to last year, single malt whisky up 15 per cent, and Champagne up 20 per cent.

Glass spirits and RTDS have enjoyed the greatest growth over the last two years. Glass spirits grew 30 per cent in value by $1.2bn and RTDs by 45 per cent to the tune of $1.15bn, both well ahead of the curve when compared with beer which grew $772m and wine by $531m.

Staying at home means that for the middle class there is more available cash as they have not had to spend money on fuel nor holidays.

Mr Leathwood expects that this “pent-up demand and available cash for spending” will play out in a strong recovery across both the retail and hospitality sectors with “competition for share of wallet as mobility increases”.

Mr Leathwood also referred to a pervading mood of “revenge conviviality” which means that this Christmas, New South Wales and Victoria will likely kick up their heels in a major way.

“On-premise is expected to bounce back as 2022 will see a return to consumer spending on out of home hospitality entertainment,” he said.

In-home entertaining will continue and he suggests that there is plenty of opportunity for NPD with people open to trying new things both while they are in and out of the home with friends and family.

 Trends

Online migration is expected to continue as is the explosion in direct to consumer (DTC) trading.

Working from home is expected to continue as a reality for some time to come, and as such, consumer trade for local retailers and venues should continue to be strong

Senior Consultant at IRI, Brooke Oliver-Burnside also suggested that the trend to ‘Be a Better Me’ would continue. This of course comes as no surprise to the drinks industry given the explosion of no and low alcohol drinks, low calorie seltzers and the trend towards moderation being observed, particularly among 18-24 year olds.

Ms Oliver-Burnside also discussed the success of brands that ‘elevated the ordinary’ by providing consumers with opportunities for asserting individual style and self-expression as well as brands that tap into precise provenance and establishing strong community partnerships.

She cited Bundaberg Rum and Bundaberg Ginger Beer’s RTD as an example: "The new tinny combines the best of both worlds – locally grown ginger and white Queensland cane spirit – to create an alcoholic version of Bundaberg’s famous ginger beer."Australia's biggest selling rum brand bringing things right down to its homeland and capturing it in a can. A winning dichotomy if ever there was one.

 
  Photo credit is thanks to Heineken's global advertising campaign, Celebrations.  
  IRi Worldwide is an Associate Member of the Drinks Association.