According to a BCG benchmark survey, consumer packaged goods companies are devoting significant resources to IT improvements and innovation. The most significant area of investment? Artificial intelligence (AI).
AI in CPG is making companies more agile, better able to manage the supply chain, and opening up new opportunities to optimize pricing and promotion strategies (to name a few areas). In 2023, AI in the CPG industry promises to transform how CPG companies do business in several groundbreaking ways. Below, we list the most promising—and exciting—AI innovations that are moving the CPG sector forward, but first a note about changing consumer expectations.
Meeting Consumer Expectations
Consumers don’t shop the way they once did. They don’t interact with their favorite companies and brands in a linear way and they have high expectations for convenience, personalization, and sustainability. This extends to everything consumers buy and including all CPG categories—laundry detergent, pet food, frozen meals, deodorant, and on and on.
CPG companies are increasingly using ai marketing tools to deliver the kind of connected, personalized, and omnichannel experiences that consumers want. This extends to developing new products, personalizing recommendations, and optimizing inventory based on real-time information.
We learned a lot from the pandemic about how difficult it can be to accommodate demand when something happens to disrupt the way consumers buy things. While we can’t predict the future, AI is helping CPG companies better prepare for the unexpected. Here are a few ways that AI is transforming the CPG landscape.
AI for Trade Promotion Management
According to the Trade Promotion Institute, CPG companies spend about 11-27% of their revenues on trade promotions. Trade promotion optimization (TPO) helps companies spend their money more efficiently, so it makes sense that this is an area where AI and ML are making a significant impact.
Capabilities like using data to create what-if scenarios, conduct post-event analysis, and improve forecasting increase promotion ROI by about 5-10%. Using predictive analytics to better understand consumers' motivation and behavior across offline and digital retail channels enables CPG companies to improve their approach to marketing and personalization.
AI also facilitates intelligent automation of TPM tasks like data mining, deduction matching, and web scraping. This reduces labor costs and allows employees to focus on high-value tasks versus redundant, time consuming tasks like data entry.
AI for Supply Chain Planning
Traditional supply chain planning can’t keep up with the way consumers shop. Yet, McKinsey found that 80% of CPG manufacturers in Asia rely on traditional planning processes. These methods are increasingly inadequate, especially given market unpredictability and global events (like an unprecedented pandemic). This inadequacy can lead to product shortages, increased costs, and inefficiencies throughout the supply chain.
About 7% of CPG companies are moving away from outdated “point solutions” that aren’t integrated and transitioning to autonomous end-to-end supply chain planning. This method, which relies on AI and machine learning, uses automation to optimize sales and operations planning in real-time. It integrates data across systems and employs advanced analytics across the entire supply chain planning process.
By reducing human intervention and relying on automation for most tasks, autonomous supply chain planning makes CPG supply chain management more agile and proactive. According to McKinsey, CPG companies that successfully implement autonomous supply chain planning have seen revenue increases of up to 4% and inventory reductions of up to 20%.
Generative AI for Increased Productivity (and More)
Generative AI is still a relatively new technology and CPG companies—like most organizations—are in the process of identifying problems for it to solve. Despite its novelty, McKinsey recently noted that "generative AI is poised to unleash the next wave of productivity" in several key industries including CPG.
How productive are we talking about? Per McKinsey, generative AI could increase productivity in CPG by 1.2 to 2% of annual revenues. That amounts to an additional $400 to $660 billion each year.
Areas where generative AI shine include marketing optimization (e.g., using generative AI to create hyper-personalized messaging), data management and analysis, including generating actionable insights from real-time data, and improving customer service.
Generative AI is being used to create and test various product concepts. It’s helping customers visualize products in different colors, patterns, and fabrics. In the realm of support, conversational generative AI tools can "talk" to customers, for example, by helping them prepare a meal, choose ingredients, and find recipes.
AI for Pricing Improvements
According to a global survey conducted by MIT and BCG, CPG companies that use AI to refine their pricing strategies can boost EBITDA by 2-5%. Specifically, CPG companies can leverage AI-based analytics to reassess pricing across their brand portfolio, optimize pack-price structures, enhance mix management by focusing on high-margin products and channels. It can be used to boost promotion efficiency and fine-tune trade terms.
AI also helps improve pricing approaches by mining transaction data for better price differentiation and discounting, setting price metrics, levels, and overseeing price implementation.
The integration of AI in pricing doesn't replace human expertise but complements it. It allows pricing teams to use their own knowledge and judgement, while equipping them with the powerful advantage of AI-driven tools and analysis.
AI in CPG: The Future is Now
From redefining consumer interactions to optimizing trade promotions and supply chain management, AI in the CPG industry is driving innovation. The shift towards personalization, real-time data analysis, and proactive planning is making it possible for CPG companies to anticipate demand for their products and pivot quickly when needed.
Generative AI is no longer a concept relegated to the pages of science fiction books - it's a present-day reality offering the promise of much-improved productivity. As we move forward, it's clear that AI's role in CPG combined with human expertise and oversight, is rapidly becoming indispensable.
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