What Matters Now

impact

ISSUE 18

What matters now

18 December 2020 kearney.com EDITORIAL

“Life can only be understood backwards, but it must be lived forwards” SØREN KIERKEGAARD

What a year. One, I am sure, many of us would like to forget As always, if you or simply pretend never happened. But, with a new year upon want to discuss us, and as many of us enter further lockdowns in the run-up any of these top- to the holidays, I’d like to take a moment to share a couple of ics in more detail, personal reflections about how this monumental year has re- we are here to talk. shaped the way we think about leadership. Very best seasonal Without a doubt, this pandemic truly exposed our vulnerabil- wishes from Oslo and ities and divisions at every level. It made us question what it I look forward to our con- is about our societies and cultures (including workplace) that tinued collaboration in 2021. creates so much room for inequality, inefficiency and insecurity, and what role better leadership might play in bridging Thank you, these gaps, especially during turbulent times. As I discussed Geir Olsen previously, a crisis is often used by bold leaders as a trigger to explore new ideas and initiatives that over time may prove to be more effective, impactful and sustainable than those that preceded them. Over the past few months, I have had the pleasure to engage with the next generation of leaders who are using empathy as a foundation on which to build connectivity and cohesiveness at a deeper and more personal level than ever before. They ac- knowledge openly, often through the sharing of their own experiences, that it’s OK not to be OK, that we’re living in challenging times, and that everyone has their own battles to fight. But they also recognize that they have the opportunity, and a responsibility, to infuse a tone of compassion and gratitude into their company culture, through having open and honest conversations, recognizing and rewarding individual or team contributions, investing in upskilling and reskilling their workforce, and providing the required mental and emotional support mechanisms their team’s need in order to bring their best selves to work each and every day. As author, Margaret Heffernan says, “The only thing we know about the future is that we do not know the future.” But what we do know as a result of this pandemic is that people need to feel safe, seen, supported and inspired. As leaders, we have a responsibility to address this need with full gusto. Let’s use the events of the past year to reflect on the actions we need to take now to ensure our people and organizations thrive in the future. In this week’s Impact we identify 5 trends reshaping our world right now, look at the need for greater resilience in our supply chains, discuss how to double down digitally to be ready for an economic upswing, share our predictions for the future of the GEIR OLSEN credit industry, and outline the profound changes afoot that HEAD OF EUROPE are set to usher in a new era for consumer goods companies. CONNECT WITH GEIR GLOBAL TRENDS 2020 - 2025

TEXT BY ERIK PETERSON

The Great Shakeout – Five trends shaping our world

It has certainly been a year for the books. COVID-19 has accelerated existing global trends. You only have to A pandemic has shaken the globe, protests look at some of the Council’s global trends from last year for exam- against structural racism have spread ples. Going cashless has become a priority for many countries as internationally, and the world has entered more and more people shop online, the loneliness epidemic has reached new heights as lockdowns and social distancing have be- the worst financial crisis since the Great come the norm, and re-skilling is becoming more important than Depression. As these crises of health, society, ever in the light of sky-high unemployment and as automation ramps and economics converge, we are heading up to offset productivity losses during the pandemic. Amid this up- into a potentially turbulent next five years. heaval, some sectors, businesses, and groups are benefiting while others are being left behind. A “great shakeout”—the unifying theme of the trends we’ve identified for the next five years—is underway, which will reshape the ways in which we live and do business. Though used primarily in business and economics to describe industry consolidation, “shakeout” applies to more than the commercial sector in these unprecedented times. Indeed, we’re seeing increased bankruptcies, mergers, and acquisitions that are likely to pick up 3 speed and cause ripple effects across society. But this is just one as- Stranded segments of society pect of the changes underway. Governments are also embattled fis- cally and monetarily, struggling to support suffering families while undergoing the parallel challenge of building up domestic self-sufficiency to become more resilient for future crises. As governments Over the next five years, growing inequality—exacerbated by COV- become increasingly constrained, individuals and families through- ID-19—will lead to further marginalization of stranded segments of out the world are struggling to make ends meet. As a result, “strand- society, including minorities, low-skilled workers, students, chil- ed segments” will emerge, including minorities, low-skilled workers, dren, working mothers, and others. Reintegrating them will be a students, children, working mothers, and others who are battered by tall order in a weak economic environment, but it behooves gov- the economic and social woes caused by the virus. As these and oth- ernments and businesses to work together to re-skill and reposition er groups feel the acute burden of the coronavirus, food insecurity these important groups in society. will continue to rise in advanced and developing economies. Emerg- ing markets will be particularly vulnerable to this trend given their existing hunger rates and heightened economic woes. It is this con- vergence of world events impacting society right now on which we have based the five most significant trends we believe will most dra- matically reshape the global outlook and operating environment in 4 2021 and beyond. Rise in food insecurity

The Five Trends: A global food crisis is on the horizon, with disproportionate down- side implications for emerging markets. Food supplies are tighten- ing due to trade restrictions and COVID-induced production disruptions, and incomes are falling amid economic turmoil. The five-year 1 outlook suggests the situation will get worse, resulting in changes in the food industry, widening inequality between countries, and Embattled governments depressed productivity overall.

Crises of rising inequality, climate change, and now COVID-19 are converging to place unprecedented levels of fiscal and politi- 5 cal pressure on governments throughout the world. As fiscal defi- Industry consolidations, cits persist through 2025, national governments increasingly con- mergers, and strained by stock of debt and fewer economic policy prerogatives acquisitions will turn to local administrations and the private sector for support to maintain public trust. The economic disruption brought about by the pandemic has weakened finances for businesses across the world. This trend will result in a wave of industry disruption and consolidation as stronger companies acquire weakened rivals, technologies, or assets—with pri- 2 vate equity, big tech, and the energy industry poised for the biggest shakeouts over the next five years. Push to national self-sufficiency The private sector will have a large role to play in combating all these crises, especially given the strain governments will be under to fund greater domestic innovation and manufacturing as economies The pandemic has served as a wake-up call to national governments around the world fight to recover. on the need for self-sufficiency and resilience in the face of crisis. Though the challenges posed by these five trends may seem daunt- As governments move to improve their domestic capabilities in key ing, there is reason for optimism. With periods of great upheaval come sectors—healthcare, technology, food, energy, and manufactur- opportunities for growth, change, and—most importantly— collabora- ing—the private sector may find opportunities for increased collab- tion. The great shakeout is likely to be painful, but if leaders in business oration with government. Too much government intervention, how- and government learn the essential lessons from the pandemic, there’s ever, could stifle innovation in the long run. no reason why the world cannot emerge stronger and more resilient from the experience.

To read the full Global Tends 2020-2025 report please click here Connect with Eric OPERATIONS

Building resilient supply chains

Foreword to an article Before COVID-19, only a few companies distribution, manufacturing, product port- published in MIT Techno- were at the forefront of building a resilient folio/platforms, and financial/working capi- logical Insights Review supply chain. Most were focused on con- tal. The results help the company to set a on 24 November 2020. structing a cost-effective supply chain to new course for long-term supply chain re- deliver products on time with the lowest silience. cost. The pandemic, however, has exposed Since digitalization is a key driver of resil- TEXT BY SUKETU GANDHI AND weaknesses and difficulties in handling dis- ience, a central aspect of the stress test is STEVE MEHLTRETTER ruption—underscoring the imperative to a deep dive into the company’s digital infra- build a supply chain that is resilient. structure and processes at each link of the A resilient supply chain makes more acces- supply chain. The stress test shows not only sible this goal of delivering on-time perfor- where digitalization is sufficient but reveals mance. But more important, when fortified where it needs to be enhanced. by the latest digital technology, it also helps Digitalization throughout the supply chain a company avoid disruptions before they can provide granular and timely information occur by sensing unanticipated crises and to empower better decision-making. It also rapidly pivoting in response to the chang- unites historically disconnected parts of ing environment. the business around the world and increas- To discover how resilient its supply chain is, es visibility across the entire supply chain. a company needs to conduct a comprehen- With the large quantities of data it gathers, sive stress test that shows its strengths and digitalization allows for more accurate pre- vulnerabilities. This stress test examines dictions of potential crises and greater agil- supply chain resilience along several di- ity in responding to disruptions that could mensions: planning, geography, suppliers, occur anywhere. Understanding the growing need for digital- Overall, supply chain resiliency helps com- ization, companies are making the challeng- panies simplify their operations so they can ing shift to Industry 4.0 tools (including au- work efficiently with minimal components, tomation, IoT networks, AI, and robots) and production stages, and partners, and helps smart manufacturing solutions. With these them better manage the remaining com- digital tools, companies are: plexity that cannot be eliminated. Balanc- ing the quest for simplicity while reducing • Achieving better inventory management, risk (through managing complexity) is key smaller warehouses, and less energy con- to building and sustaining a resilient sup- sumption ply chain. • Designing standardized product containers that can be produced, filled, and shipped in a seamless factory-to-consumer supply chain • Participating in the same-day or next-day delivery of goods • Building fulfillment centers within produc- ers’ and suppliers’ warehouses to optimize Connect with Suketu assets while distributing inventory risk Connect with Steve

To read the full article published in MIT Technological Insights Review on 24 November 2020 please click here CONSUMER GOODS

Supply chains to embrace the

TEXT BY JOHAN AURIK, BART VAN DIJK, sharing economy BENOIT GOUGEON AND GILLIS JONK The digital revolution is changing supply chains beyond recognition, with supply chain professionals routinely using data to rapidly auto- mate planning and administrative processes and operational tasks. But in the consumer goods industry, more profound changes are afoot that are set to usher in a new era of shared supply chains. Consumer value is fragmenting and fast: shoppers are shifting from buying off-the-shelf products in mass retail outlets to purchasing increasingly tailored products, services, and experiences in ever short- er life cycles. Manufacturers and retailers, often spurred by new entrants, are look- ing to move closer to the consumer, investing in omnichannel and direct-to-consumer (D2C) operations. As they invest in, and focus on, innovation and market-facing capabilities, consumer packaged goods (CPG) companies are unlikely to make the massive investments required to also digitize and flex the supply chain, particularly as innovative solutions are needed to improve the economics of en- vironmentally sound last-mile delivery in cities. Faced with these challenges, CPG players have begun to decouple supply chain assets and operations from their customer experience and innovation activities. Rather than bringing about the demise of supply chain management, we believe the digital revolution will lead to increased growth, new innovations, and massive investments in an increasingly pooled or contracted third-party manufacturing (3PM) and third-party logistics (3PL) supply chain industry.

Almost limitless and convenient consumer goods It took Jeff Bezos and Jack Ma some time to bring Amazon and Aliba- ba to scale, but now their almost limitless and convenient platforms of choice, coupled with next-day or same-day delivery, have put a bomb under the old push supply chain pipeline. With advanced analytics, it is now feasible to connect the cross-func- “With advanced analytics, it is now tional dots along supply and value chains from consumers to suppliers in real time and at a granular level. This paves the way to auto- feasible to connect the cross-functional mate forecasting, planning, sales, and operation planning processes dots along supply and value chains and decision-making. More importantly, it provides for new levels of from consumers to suppliers transparency and control over end-to-end operations enabling the in real time and at a granular level.” fulfilment of increasingly tailored and personalized consumer needs. New indie brands typically use these capabilities to create new consumer value. In the beauty industry, for instance, ColourPop, Kylie, Tata Harper, Tula, and ScentBird are all challenging established industry players by focusing on designing new products and experiences and creating deep consumer intimacy. Everything else—manufacturing, online shopping platforms, and D2C delivery—is provided by third parties. By contrast, incumbent manufacturers’ complex matrix organizations generally limit entrepreneurial speed, agility, and resilience. Their fixed asset base in both manufacturing and logistics is increasingly a hindrance to growth, their distribution is geared toward the traditional retail model, and they lack the flexibility and the local density to tap into the D2C business. In response, some established players have resorted to acquiring start-ups. But they haven’t yet re- solved how to grow their core portfolio.

A shift to innovative, flexible, and scalable solutions Traditionally, consumer goods’ supply chains were designed to han- dle large batch sizes and centralized production, while retail channel distribution relied on central warehousing and full truckload logistics. This model is now giving way to shared asset networks, consist- ing of localized highly agile production facilities and highly flexible and scalable distribution networks. In addition to being closer to the market, production will be mas- sively automated. In cities in particular, last-mile delivery needs to become economical (it isn’t at this point) and comply with local planning and environmental restrictions. Although economies of Developing shared supply chain networks creates a new industry, focused on flexibly and efficiently delivering consumer value

SUPPLY CHAINS ARE SHIFTING TO CUSTOMER-CENTRIC, SHARED MODELS Source: Kearney Analysis

CONSUMER CONSUMER

Sell Sell Shared supply chain networks

1. Plug and play configuration to

Retailer Distribute drive flexibility, speed, and focus Distribute Distribute 2. End-to-end sensing capability Distribute to guide execution Distribute to allow Make 3. Frequent pivoting systematic try-fail-learn-scale Make Shared supply Shared chain networks 4. Partnering to allow better Make Make strategic focus

Buy Buy • Increased customer focus and reach

Producer • Lower capital employed and investment avoidance Brand Brand • Increased efficiency and agility • Maximization of options for effective Innovate Innovate and sustainable solutions

scale will still play a role, they will become much more challenging to achieve and won’t be attainable within the boundaries of a single consumer goods company.

Supply chains start to decouple For CPGs, decoupling their manufacturing and delivery assets and operations can allow their supply chains to innovate, optimize, and, where needed, consolidate. The benefits can be substantial: • Enables focus and room to invest in and grow new value pockets and increased consumer intimacy “As an interim step, established players • Enables increased leadership focus, organizational flexibility, and may launch arm’s length operating speed of decision-making models, creating separate majority- • Frees up capital employed, avoids investments, and drives im- owned entities and inviting proved market valuations • Allows for shared, economical, innovative, sustainable, leading select partners.” D2C solutions

The drawbacks, on the other hand, are not easily overcome: • Timing depends on the category or product characteristics (for example, freshness, value, dimensions, weight), demand and deliver profiles (for example, urban, rural), and market (developed or emerging). • Transformation will take many steps and time. • Scale, know-how, risk management, and competitive considerations all need careful thought. As an interim step, established players may launch arm’s length operating models, creating separate majority-owned entities and inviting select partners. For 3PM, change management and strategic control will be the key challenges, whereas for 3PL, creating new solutions will be the focus (see figure). New kids on the block: shared supply chain networks The emergence of new supply chain models will result in the growth of contracted or pooled 3PM and 3PL industries with the following characteristics: • Both 3PM and 3PL networks will be technology-driven. They will rely on a combination of strong strategic partners, including technology, logistics density, and manufacturing expertise, to drive innovation, global reach, and speed. • But 3PM and 3PL networks will differ in terms of economics and organization; the former will resemble a network of assets, where scale is less important than before, while the latter will be driven “As most established consumer goods by scale at the local level. Substantial financing will be required to companies were built for the era of free up the capital employed in consumer goods companies, man- mass consumer goods, it is time ufacturers, and retailers alike, and to make substantial investments to reconsider their business models, in new make and deliver networks. beginning with the supply chain.” • Trade, regulatory, and environmental considerations will likely play a substantial role in the development of the industry, including developing sustainable and economic D2C solutions for cities. More than 100 years ago, Ford owned rubber plantations to supply its tire factories. Today, most car makers rely on third parties for a large part of manufacturing and assembly. Conversely, Ford and other OEMs are now getting involved in the distribution of cars, rather than relying solely on independent dealers and distributors. As economist and Nobel Prize winner Ronald Coase famously conclud- ed, the level of vertical integration of a company or industry depends on the transaction costs. As most established consumer goods companies were built for the era of mass consumer goods, it is time to reconsider their business models, beginning with the supply chain.

Connect with Johan Connect with Benoit Connect with Gillis

E-MAIL: Connect with Bart

This is the first of a series of articles in our “New dawn for Consumer Goods companies” series. Click here to for articles released to date. DIGITAL TRANSFORMATION

After lockdown comes opportunity: get ready TEXT BY SEBASTIAN SCHOEMANN, SABINE SPITTLER, MIROSLAV LAZIC for a 2021 recovery AND JOHANNA TYBUS One positive by-product of COVID-19 has shift gear and prepare for an improving busi- been the significant acceleration in digi- ness climate. Those who already embraced tal transformation. Albeit through necessi- digital will see the rewards from their invest- ty, many companies set up dedicated task ment and experience further stretch, while forces, invested in infrastructure and chal- those who missed the opportunity will face lenged their own business models to digitize enhanced competition and realize quickly their sales, operations and ways of working. that customer needs and market dynamics As a result, they have learned much about have shifted for good. (See Figure 1) launching and evaluating new measures, piv- No matter where you are currently, it’s time oting and iterating their approaches – fast. to think recovery and use this time to lay the There’s no doubt that those who grabbed the foundations for success in a world with new digital opportunity benefitted in the short digital standards. term, while others had to rely on financial re- Leaders across industry are asking them- serves to survive. However, after only a short selves how to jumpstart their business going window to catch their breath, the arrival of into 2021 and they are faced with three main a second lockdown has meant a number of challenges: “No matter where you businesses, especially in industries such as After going above and beyond during the are currently, it’s time tourism, catering, cyclical retail and trans- 1 crisis, how do you use your pandemic to think recovery and portation, have been challenged once again. learnings and short-term gains to set you up use this time to lay The situation is different depending on for mid-term growth? the foundations for whether or not you are in B2C or B2B. For ex- How do you maintain employee motiva- success in a world with ample, while some large retailers (e.g. in DIY 2 tion and engagement through a second, new digital standards.” and home décor) can potentially look for- winter lockdown? ward to decent financial results, other outfits How do you re-evaluate and determine like plant engineering companies are faced 3 the right strategy, organization struc- with empty order books. ture and capabilities to take advantage of a But, there is light at the end of the tunnel recovery, while ensuring that the evolving with an economic upswing forecast for 2021, needs of your customers are at the heart of in which consumers will be more willing to your decision making process? spend across currently depressed categories, and industrials benefitting from post- There are 3 fundamental steps leaders need poned investment. So, after hedging 2020 to take to tackle these challenges to gain revenues and profits, companies will need to ground in a recovery. (See Figure 2)

Figure 1 While bracing for a socially distant winter, companies must prepare for a fade-out of the pandemic.

“USING THIS PANDEMIC TO EXECUTE AN ACCELERATED DIGITAL TRANSFORMATION ALLOWS COMPANIES TO GO INTO THE RECOVERY WITH HIGHER COMPETITIVE STRENGTH AND NEW CAPABILITIES.”

Accelerated Recovery

1 S T 2ND LOCKDOWN LOCKDOWN

Focus on BUSINESS BUSINESS

SENTIMENT SENTIMENT surviving

Focus on thriving

Q1 2020 Q2 2020 Q3 2020 Q4 2020 2021

Source: DIW Konjunkturbarometer und ifo Wirtschaftsprognose 2021 Figure 2 1 2 3

Reflect and absorb Make remote success last Set-up the organization progress for our teams for recovery

How can we take these achieve- How can we stay motivated How can we participate in the re- ments and learnings and make them through a second lockdown covery and start 2021 with strength- strengthen us in the medium term? during the winter season? ened capabilities?

1. Reflect and absorb progress working capabilities to support resellers and Just as the crisis uncovered the need for gather critical insights on sales data. By pool- immediate action in some areas, it also re- ing multi-market response to the crisis, it was vealed how well organizations can adapt able to harmonize communication across all when they really need to. Leaders need to markets, clearly identify the reasons behind use this momentum and the confidence it changes in online behavior, and ultimate- built to lay the foundations for a comprehen- ly double online conversions. Smart think- sive digital transformation: ers will now go one step further and transfer 1. Evaluate growth initiatives, then refine the learning and know-how gained by these and readjust your existing strategy for the teams into the rest of the organization. And coming months for companies who have yet to invest in on- “In March, 52% of We saw many explorative initiatives dur- line sales, digital operations and new ways of consumers said that ing the pandemic. For example, the deliv- working, this second lockdown presents an they expected to ery arms of retailers invested in infrastruc- opportunity to catch up. continue shopping ture to cope with the increased demand and for a certain time experimented with extend- 3. Invest in upskilling online beyond lock- ed delivery windows. The learnings of these As organizations adapted to the first wave of down, and in a recent pilots will be essential to digest in the com- COVID-19 – by getting into e-commerce, de- Kearney study this ing months and plan the new year and its in- veloping new digital B2B sales channels, or had risen to 65%.” itiatives accordingly. When doing this, we even launching new business models – it re- recommend companies to further lean into vealed a number of skill gaps. It also revealed the experimentation approach and get or- that it’s more important than ever for initia- ganizations to think how to run pilots regu- tives to succeed: while spending on digital larly, adapting quickly to client needs. projects is growing by more than 20% each year, two out of three initiatives still fail, with 2. Use the task force experience to make capability gaps being a major contributor in longer-term changes more than half of cases. It is essential that or- During the pandemic, many businesses es- ganization take action now to address these tablished digital task forces to double down capability gaps by establishing what skills on online sales. One global consumer goods are actually needed, and then investing in company, for example, focused on improv- reskilling/upskilling the workforce to boost ing the online experience, using its remote your organization’s capabilities. Figure 3 A holistic approach is required to foster a digital mindset, enable agile execution, center the customer at the heart of everything, and Remote Work create strong partnerships. The benefits to this approach are immediate, which is criti- Barometer cal given today’s tighter deadlines and budg- ets. And with organizations competing so May November % value fiercely for digital talent, the next project re- quiring additional skills is likely to already be on the roadmap. Remote working is seen less positively now than during the 1st lockdown 2. Make remote success last HOW DO YOU FEEL ABOUT WORKING FROM HOME? COVID-19 also served to accelerate the trend (POSITIVE ANSWERS) towards home working and, after six months or so of this new setup, we can see that employees have broadly fallen into one of two camps. For some, although business might 60 45 be booming, working remotely has taken its toll emotionally and mentally, while others are quite content and want to make it a permanent fixture. This split among employees came across strongly in our recent remote work barometer, carried out during the sec- Work-life integration and lack of social ond lockdown (see figure 3). contact is still a struggle for many What’s quite clear is that home working is WHAT ARE THE ADVANTAGES AND CHALLENGES now here to stay to some degree. Employ- WITH WORKING FROM HOME? ees’ views on support and benefits like flexible working hours will not revert to pre-pandemic levels and will ultimately influence their choice of job – and employer. 20 15 Making home working work is about more than providing chairs and screens, however. Giving employees the chance to use their Struggle with State that their biggest skills and realize their potential impact will unplugging after work issue is loneliness boost morale and set your workforce up for the lasting changes caused by the pandemic. Keeping employees connected and en- gaged in a remote working environment will Employers are not reacting to suggestions continue to be a focus area leaders need to to make remote work better keep at the top of the agenda. WHAT DID YOUR EMPLOYER DO TO IMPROVE WORK FROM HOME? 3. Set up for recovery Although some of 2020’s trends and behaviors will no doubt dissipate with the crisis (such as the need to check local stocks of 41 16 toilet paper), others, like remote working and online shopping, are here to stay. In fact, we see a clear uptrend with the latter: In March, Nothing Provide home office 52% of consumers said that they expected to infrastructure continue shopping online beyond lockdown, and in a recent Kearney study this had risen to 65%. This is especially interesting given the in- Employees increasingly want the choice itial lifting of restrictions, which allowed to work from home shoppers to get back into brick-and mortar

FROM WHERE WOULD YOU PREFER TO WORK stores, followed by fewer closures in the sec- AFTER THE COVID-19 LOCKDOWN? ond lockdown. And, if we dig a little deeper, we can see that new behaviors are coming into play. While many consumers cited rational reasons, such as comfort (57%) and 28 35 15 16 fewer trips to the mall (53%), 60% now say they don’t need to see a product in store be- Option to work Work from home fore buying it, vs. 24% in March. Trust in on- from home full-time line shopping is on the rise, and 36% think Figure 4 Sustained online shopping demand is driven by permanent behavioral shifts – which are likely here to stay

1 Respondents who changed their purchase behavior due to Covid-19 (n = 311 in March, n = 265 in November) 1 WHY ARE YOU SHOPPING ONLINE MORE? % value Source: Appinio Survey, Kearney

BEHAVIORAL SHIFTS

57 53

44 42 39 36

More comfort Less desire for trips Better selection of Better prices of Fear of contracting Online shopping through home to the city center/ products online products online COVID-19 has become a habit delivery a shopping mall

All categories benefit from increased online demand – setting the stage for a real online growth explosion in the coming years

1 Respondents who changed their purchase IN WHICH CATEGORIES WILL YOU CONTINUE TO SHOP ONLINE MORE behavior due to Covid-19 (n = 265 in November) AFTER TERMINATION OF COVID-19 CONTAINMENT MEASURES? 1 Source: Appinio Survey, Kearney

% value 2019 online category share 2020

57 55 2x 47 Potential increase 41 in ecommerce sales 36 35 in key categories

24 23 24 24 19

7 7 5

Electronics & Apparel & Pharmacy & Books, toys, DYI, furniture, Grocery Weighted technology shoes personal care other hobbies garden average “Doubling down now digitally will enable organizations to take advantage of the impending recovery, where online beats offline, new capabilities are key and customer centricity is more essential than ever.”

this new habit will last, shaping the retail in- ate the services and products the provide to dustry in the months to come. In fact, with meet these demands, and stay relevant, has various segments seeing an uplift in online become priority number 1. shopping, the market expansion opportunity There’s no doubt that digital transformation could be 100% for web-based channels. has become a business imperative. There will be no “going back to normal” in 2021. Dou- This accelerated shift to online is playing out bling down now digitally will enable organi- across industries, which means to be in with zations to take advantage of the impending a chance of setting up for recovery, compa- recovery, where online beats offline, new ca- nies must ask themselves three fundamental pabilities are key and customer centricity is questions: more essential than ever. 1. How do we cater for consumers’ changing needs? The authors wish to thank Annalena Dierks, 2. Which capabilities do we need and how Roberta Roeller and Alexander Mix for their do we adapt the organization? valuable contributions. 3. Which tools & technologies do we need? In these uncertain times, taking an experi- mental approach, and running agile pilots across your business to test, learn, launch Connect with Sebastian and iterate solutions quickly is essential. Connect with Sabine With consumer demands evolving daily, the Connect with Miroslav need for companies to constantly re-evalu- Connect with Johanna CREDIT Who’s the consumer now? The next generation of consumers will define the next generation of banking. It’s therefore From Boomers to vital to analyze its newest customers. In the wake of the 2008 financial crisis, trust in traditional banks diminished; since then, lend- Zoomers: Predictions ing has expanded. In the United Kingdom the market was opened up to new challeng- for the credit industry ers such as Metro Bank which, in 2010, be- came the first new high-street bank in Brit- ain for more than 100 years. Not long after, digital players such as Monzo and Starling TEXT BY KRISHNAPRIYA BANERJEE, STEPHEN WHITEHOUSE, Bank entered the market, initially with pre- DENITSA YANEVA paid cards, and then introduced seamless personal loans available through their apps. Thanks to the capabilities afforded to them by big data, challengers are now able to pro- “Credit,” Oscar Wilde once observed, “is a The COVID-19 pandemic has left us all in the vide a seamless lending process that can be young man’s capital.” He may have been re- new normal. But when it comes to the cred- completed within minutes. Services such as ferring to matters of reputation rather than it market, we’ve reached an inflection point: Klarna, Clearpay, Laybuy, Afterpay, and Pay- spending habits, but at a time of unprec- now there’s No Normal. While Boomers con- Pal’s Pay in 3 offer installment credit with no edented financial crisis his perception is tinue to take up credit in traditional ways, interest. Many e-commerce websites have poignant. It has, arguably, never been hard- the Zoomers (Millennials and Generation Z of added these payment options, which have er for young people to accumulate enough working age) require far more innovative of- been shown to increase conversion rates, es- capital to support themselves and save for ferings. They consume credit in ways that will pecially for expensive purchases. the future, and it’s set to become harder still. transform the entire credit landscape forever. In future, this speedy process seems set to accelerate due to a combination of artificial tries, may disappear altogether. In a world- intelligence (AI) and machine learning (ML) wide snapshot of 2020 bankruptcies, Global in scanning the social media accounts to Finance notes “iconic brands and companies which those taking out credit have allowed that have flourished for over a century are access. For example, a young person’s eli- being damaged, wiped out, or transformed gibility for credit could be assessed and ap- all around the globe as a result of the ongo- proved through swift analysis of the prod- ing pandemic.” ucts they have on display in their Instagram Currently the true extent of how many peo- profile. The potential this offers is hard to ple are going to be out of work is disguised overstate. A series of startling statistics re- by state intervention. A no-deal Brexit could veals that 31 percent of consumers are al- further complicate matters—under 25s in ready using social media to browse for new particular worry that an end to freedom of “When the current items to buy (Aimia); 71 percent of consum- movement will limit their career options. The credit cycle ends and ers are more likely to make purchases based UK government’s furlough scheme will be the dust settles, on social media referrals (Hubspot); 74 per- continuously available until March 31, 2021, cent of consumers rely on social networks to when the Chancellor’s intervention meas- there may be very help with their purchasing decisions (ODM ures are scheduled to end. few neobanks left Group); and 78 percent of consumers’ pur- In the UK, fourth-quarter 2020 loan impair- as consumers turn chases are influenced by companies’ social ment charges are being adjusted “as worse to the incumbent media posts (Forbes). economic expectations feed into banks’ banks that are modeling.” Barclays, HSBC, Lloyds, NatWest, too big to fail.” Zoomers versus Boomers and Santander may be “well positioned with- Only a small segment of Millennials entered in their ratings to absorb moderately high- the world of work before the 2008 crisis, er-than-guided credit loss charges for 2020” after which the global economic outlook but they’re also bracing for was extremely precarious. Unlike Boomers, impact. When the current Zoomers entered an extremely competitive credit cycle ends and the jobs market, with limited employment op- dust settles, there may be portunities attached to low salaries and a very few neobanks left as high prospect of redundancy. Many are sad- consumers turn to the in- dled with unprecedented amounts of stu- cumbent banks that are too dent debt. big to fail. Pre-COVID-19, it’s perhaps not surprising that Some predict a banking cri- they weren’t consuming loans like Boomers, sis on the same epic scale who grew up in an atmosphere more condu- as 2008 but even if such a cive to long-term financial stability. Zoomers disaster is averted, job se- crave flexible solutions that meet their rapid- curity is likely to become ly changing needs, so partnerships between more elusive than ever, with traditional lenders and disruptors in the an attendant rise in zero credit space will prove essential to survival. hours contracts. If reces- The era of No Normal spells disaster for any sion-like conditions are trig- brick-and-mortar–based endeavors that gered for a protracted peri- don’t adapt and innovate quickly. od, spending among consumers is likely to be curtailed and focused on essentials. This COVID-19 disruption might limit the uptake of credit options by The impact of the pandemic on the glob- Boomers, who are secure in their homes and, al economy and, in particular, the need for in some cases, able to live off their pensions credit, has caused unprecedented upheaval. and savings. Zoomers, however, may need to By July 2020, Lloyds Banking Group an- take out credit to afford these essentials, es- nounced it had supported 1.1 million custom- pecially as they’re far less likely to own their ers through payment holidays, 750,000 of homes. which remained in force. Digital banks expe- Those in their late teens, twenties, and early rienced turbulence too—the challenger bank thirties will have fewer savings to fall back on Monzo stated its revenue streams had “been while the Bank of Mom and Dad may become significantly impacted by the pandemic.” constrained. Faced with a sudden cash-flow Barclays reported in the second quarter of squeeze, flexible credit arrangements could 2020 that its “UK and US cards stage-two become integral. coverage ratios increased to 28 percent and 24.5 percent respectively from 21.6 percent Credit in the new normal and 21.3 percent in 2019.” The shift away from cash, which was acceler- If the aftereffects of 2020 prove as enduring ated by the crisis, is also fueling the adoption as those of 2008, lending needs will increase of credit. According to our latest research, exponentially among younger customers. more than one-third of US consumers are Stable jobs, particularly in the service indus- very or extremely likely to use cash less fre- quently as a payment meth- led to $736 million outstanding balances by od post-pandemic. This will September 2019. The speedy growth of dig- probably blur the bounda- ital-only banks such as Nubank, Revolut, and ries with credit. Kakao will continue. The potential of partner- An increased uptake in ships in this space is highlighted by PayPal e-commerce is creating de- teaming up with a number of British retailers mand for buy now, pay later to offer its Pay in 3 service, including Crew arrangements that provide Clothing, French Connection, Robert Dyas, installment credit with no and Ryman. interest. This means Zoom- –– Make it personal ers are now consuming Personalization is highly desirable as young- credit in ways they may not er consumers want to exercise greater con- even recognize. The pros- trol over the management of their financ- pect of formally applying es and tend to seize on credit offerings that for a loan or credit card al- adapt to rapidly changing needs. Innovative ienated many. But when a products offered by challenger banks may Klarna, ClearPay or Pay in 3 payment option fundamentally alter how Zoomers view the pops up next to a product they want to buy availability of credit. Monzo, for example, on a website, offering the chance to have it allows its customers to choose and change immediately but paid for in manageable in- their repayment dates for no fee. “The need for stallments, credit suddenly becomes a high- –– Roll out rewards mobile-first, personal- ly attractive prospect. Loyalty points and gamified rewards are a ized, transparent credit Before the pandemic, Kearney’s own data key differentiator. For example, in June Klar- proposition will be showed that more than 60 percent of Millen- na introduced a reward scheme called Vibe nials and 57 percent of Generation X were al- for its American customers: with it, they ac- felt even more as the ready taking up buy now, pay later offerings crue points for every $1 they spend. The pro- economic conse- and over a third had done so on more than gram allows customers to unlock new re- quences of the one occasion. From January to June, when wards as they spend more. pandemic continue to so many enterprises were losing customers, –– Talk transparency linger even after Klarna captured the business of almost 14 Transparency in all these new modes of cred- quarantine measures million. Growth has been especially strong in it will be necessary, not only for customers come to an end.” the United States (550 percent) and the Unit- but also for international regulators. To date, ed Kingdom (120 percent), compared to the just one-third of US Millennials hold credit same period last year. cards, indicating a vast untapped customer It seems clear that buy now, pay later is be- base. Most cite lack of control and transpar- coming key for credit and retail. PayPal re- ency as their reasons for eschewing credit sponded last month by launching Pay in 3. arrangements that are much more popular “What we’ve seen over the last six months or with older members of the American popu- so is a significant rise in the shift from physi- lation. New enterprises such as Starling Bank cal to digital transactions across the whole of are capitalizing on this need for clarity, allow- the UK retail base,” Rob Harper, PayPal’s UK ing customers to borrow as much money as director of enterprise accounts, told CNBC. they have in their overdraft, a process that This is particularly pronounced among rarely takes more than five minutes. The de- young people. In fact the enthusiasm with tails are then stored in an app that shows at a which teenagers in particular are taking ad- glance exactly how many payments are left, vantage of buy now, pay later credit arrange- for how much, and when they’re charged. ments is prompting calls for the introduction –– “Giving credit where credit is due is a very of regulation by government. rewarding habit to form.” Loretta Young While the pandemic took all players in the Accept it: there is no normal credit market by surprise, the coming eco- There are various ways to appeal to the nomic fallout cannot; survival depends on Zoomer in future, particularly in terms of of- adapting now before it hits. The need for fering them mobile-first, personalized, re- mobile-first, personalized, transparent cred- wards-rich, and transparent solutions: it proposition will be felt even more as the –– Mobile first (even when stores reopen) economic consequences of the pandem- A startling 66 percent of the entire global ic continue to linger even after quarantine population now owns a mobile phone and measures come to an end. Any business that there’s a growing expectation that this will hasn’t fundamentally reimagined its credit continue to increase. Though the mobile-first offerings must do so now. trend affects every demographic, it’s particularly marked among the young who organ- ize much of their existence through smart- Connect with Stephen phones. Apple introduced Apple Card in the Connect with Krishnapriya second quarter of 2019 and its rapid uptake Connect with Denitsa ABOUT US

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CREDITS

Concept, editing, design SZ Scala GmbH, Munich Dominik Wüchner, Moritz Gaudlitz, Ellen Verick, Iryna Baumbach

Photos and illustrations All images by Kearney

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