The benefits of digital investments in consumer products are unequivocal.

When we analyzed 80 consumer product companies, the findings clearly showed a link between technology leadership and business performance. Companies that populated the top quartile in share price growth; revenue growth; profit growth; and environmental, social, and corporate governance scores grew their technology investments by an average of 18% over the past five years compared with 8% for those in the bottom quartile.

The tech focus has been critical in propelling companies past their competitors during two earlier waves of digitization—first to automate routine processes and then to digitize channels and supply chains. Now, a third wave of digital investments that enable companies to differentiate threatens to further widen the gap between leaders and laggards. In many ways, this wave of tech, which is aimed at delivering a competitive advantage in critical digital capabilities such as sales, marketing, and innovation, is the trickiest but the most important in predicting a consumer product company’s fate. And it is turning the decades-long technology marathon into a sprint.

The past 10 years have seen a 20-times surge in data availability and a 75% drop in cloud computing costs during a time when consumers, customers, and employees increased their demands for everything from smoother digital purchasing options to better traceability. Now, the emergence of generative artificial intelligence (AI) opens vast new territory for advancement. For example, brands that can help retailers grow and create joint value through AI-powered predictive revenue growth management capabilities will have a substantial edge over competitors. Consider how the $14 billion, Denmark-based dairy Arla uses AI to improve commercial planning and net revenue management. The company leverages leading-edge data and technologies to make better commercial decisions that maximize value for its farmer owners, customers, and consumers.

On average, top-quartile consumer goods companies spend 60% more as a percentage of revenue on consumer, customer, and innovation capabilities than bottom-quartile companies, according to Bain research. These companies are racing to develop everything from substantially more sophisticated pricing based on AI to faster and better-informed testing and innovating via digital twin virtual simulations. Already, 25% of consumer goods companies are now experimenting with AI-led design modeling and innovation, according to our research (see Figure 1).

Figure 1

Leaders are using tech to differentiate and outperform

While many consumer product companies can visualize the digital future of their industry, too many tell us that they lack a clear view of the what and the how when it comes to using digital to differentiate. Also, they readily acknowledge the gaps in their talent and operating model. For example, the top-quartile companies have grown their tech teams three times faster compared with bottom-quartile companies over the past three years (see Figure 2). Further, these top-quartile performers have adapted a far more flexible and agile approach to digital change delivery, with about 60% of them now relying on a cross-functional product operating model (see the Bain Brief “Upgrading Your Technology Operating Model: Six Themes for Success”). Companies also tell us that their ability to scale digital capabilities at speed is limited by architectural shortcomings as well as by heavy technical debt with fragmented foundations and poor data quality.

Figure 2

Consumer product company leaders outperform laggards on digital intent and resource allocation

What will it take for consumer product companies to capture the future? In the third “digitize to differentiate” wave, winners will focus on five imperatives: making AI the first line of decision making; creating two-way, personalized touchpoints everywhere; using generative AI and digital twins for hyperefficiency and agility; building a real-time transparent data river; and harmonizing foundations to scale at speed. We’ll look at them one by one.

• Make AI the first line of decision making. The best companies will take advantage of expanding AI capabilities to make better decisions, such as what the next best ingredient in a product should be, what the next product to introduce should be, what the next best SKU on the shelf should be, or what the next best promotion to offer should be. For example, they’ll use it to improve net revenue optimization, relying on newly available retailer data and AI tools to find out what products and promotions behave the best.
• Create two-way, personalized touchpoints everywhere. Companies will take advantage of the sharp rise in consumer touchpoints to personalize and reach the growing population of consumers who use digital channels to discover, consider, and purchase products. Sixty-five percent of consumers research products online, and 30% buy online. These numbers have doubled over the past three to four years. This creates an enormous need for brands to target online consumers with personalized content—an opportunity enabled by generative AI’s lower content creation costs.
• Use generative AI and digital twins for hyperefficiency and agility. The next frontier of efficiency and agility created by generative AI helps leading companies make giant leaps in everything from digital content creation to customer service. Also, the best companies scale their use of digital twin simulations in R&D and supply chains.
• Build a real-time transparent data river. Bain research found that 75% of consumers in developed economies are willing to pay a premium for sustainably sourced brands. By creating a supply chain data river, brands can prove the provenance of their products and ingredients to both customers and consumers.
• Harmonize foundations to scale at speed. The current digitization wave and impending move to SAP S/4HANA provides a great opportunity to build harmonized foundations and to improve foundational data quality to scale use cases at speed.

But outperforming by creating digital advantages will be tricky for most companies. Even among leaders, only one out of two achieves 80% of their digital transformation project target, according to our research. The single-biggest reason behind lagging companies’ failures: falling behind on digital ambition setting. Other key challenges involve inadequate operating models, poor technology architecture, talent issues, and the common struggle to balance serving today’s basic technology needs with those that will be critical for gaining an edge in the future.

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How Consumer Product Companies Are Adopting AI

The industry has yet to fully embrace the vast opportunities for real benefits.

How to win this race?

In our experience, companies can get a leg up if they thoughtfully identify their priorities and establish a digital roadmap. That typically starts with business and digital leaders working together to set a digital ambition that directly links digital priorities to the business case as well as the required technology and data capabilities.

Success also requires an operating model that fosters business and technology collaboration as well as an Agile development approach that accommodates work in small increments with persistent funding as opposed to long projects that have a limited margin to course correct along the way.

Companies need to build a similarly flexible and radically simplified tech architecture, eliminating tech debt by making build vs. buy choices for key technology solutions. That means a significant step up in investing to harmonize foundational data; building a modular, intelligent, and resilient architecture with lean core enterprise resource planning; and leveraging the move to SAP S/4HANA to do so. It also means building (or buying and building) for differentiating capabilities, such as promotions optimization, while buying for everything that is a commodity. The best companies will push the envelope on global solutions but allow local customization where it is critical to win in a particular market.

Making strides during the third wave of digitization requires companies to design employee value propositions to ensure that they can compete in the battle for talent. The best companies will use in-house talent for key roles in differentiated capabilities and use strategic partners or vendors for more commodity-related capabilities, niche skills, or to meet temporary workload peaks. They’ll upskill leaders in digital fluency and elevate technology roles.

So the path to outpacing competitors in digitization’s third wave is straightforward: Build a digital roadmap aligned to strategic imperatives, strengthen technology capabilities, and modernize foundational data and core systems. If history teaches us anything, it’s that the pioneering consumer product companies that are already making these investments will emerge as winners.