Consumer-packaged-goods (CPG) companies in Southeast Asia might one day look at today’s market as the lull before the storm. While online purchases of physical goods have been slow to catch on in the region, new technologies, competition among sector leaders, and changes in consumer expectations are likely to accelerate the process. Incumbent CPG companies should prepare for this inevitable shift, taking the opportunity to safeguard their revenues and profits and adjust their business models to align with the new reality.

The value at risk for CPG companies is consequential. Globally, comparing the periods 2001–05 and 2011–15, McKinsey found that consumer-sector losses in economic profit, measured by return on invested capital, ranged from 7 percent in the food sector to 18 percent in household products and beverages (Exhibit 1). When comparing these periods, economic profit dropped between 20 and 40 percent in some industries in Europe and North America, despite efforts like zero-based budgeting. The fall in absolute economic profit only partially reflected the decline, as invested capital had simultaneously increased.

Digital has driven much of the loss in these markets by enabling the rise of small brands, accelerating channel shift, and facilitating ever-increasing demand from consumers. It did not have to be this way, however. Digital has just as much potential for value creation. Indeed, while large CPG companies in these markets have lost value, nimble disruptors (for example, Beyond Meat, the Honest Company, and innocent) have created billions of dollars of economic value by using digital to grow their businesses. We see latent potential in Southeast Asia. While some of these trends (such as the penetration of e-commerce and the impact of global giants, such as Alibaba and Amazon) have been less pronounced in Southeast Asia, others (including growth of the millennial demographics, greater demand for convenience, and generally increased digital savviness) are quite noticeable.

Domestic companies in Southeast Asia and multinationals with operations in the region will both have to prepare to face the full breadth of these market changes (Exhibit 2). Otherwise, our analysis suggests, CPG companies in the region could lose up to a fifth of their value.

In addition, digital super wholesalers — for instance, Bukalapak of Indonesia — mimic Alibaba’s Ling Shou Tong in consolidating B2B purchases through a limited set of apps. The growth of these intermediaries presents CPG companies with another powerful stakeholder in the value chain.

In this complex landscape, while the ultimate winners remain unclear, consolidation and the rise of ecosystems appear inevitable. Alibaba CEO Daniel Zhang, for instance, has declared Thailand a priority for its first conquest outside China, and other corporate leaders have made similar pronouncements.

Also, substantial funds have been flowing into Southeast Asia’s digital economy. Between 2015 and 2018, capital raised by digital ventures increased more than tenfold. Altogether, $24 billion was invested in digital efforts in the region during that period, primarily in ride-sharing and e-commerce platforms. Indeed, Chinese giants Alibaba and Tencent, among others, have entered most Southeast Asian markets and backed local champions, as a rapid consolidation occurs around a handful of core companies (Exhibits 4 and 5).

New digital technologies will reshape every industry globally, and CPG will not be different. The combination of digital-savvy consumers, the penetration of smartphones, and the commitment of digital giants and unicorns makes us believe that e-commerce will leapfrog more advanced countries. Three factors combine to hasten the CPG transformation:

Data. CPG companies and retailers collect an unprecedented amount of data, including information drawn from transactions, that can help create nuanced consumer profiles. In one aspect, these data can create “segments of one” — detailed knowledge of individual shoppers that provides clear competitive advantages.

Computing power. Stronger, cheaper computing power allows companies to analyze data at new depths and generate unprecedented insights. With this power, for instance, companies can model and predict consumer demand for very small segments, informing decisions in areas such as innovation and pricing.

Consumer intimacy. CPG companies can now communicate directly with consumers over multiple channels, engaging in two-way conversations that can influence purchasing decisions and augment traditional marketing.

These tectonic shifts present an unparalleled opportunity for CPG companies. The changes not only can open access to hundreds of millions of consumers across Southeast Asia but also can be the source of critical competitive advantage. The global companies that can draw the most valuable insights from the data, create robust distribution networks that use new technology, innovate faster, and cater to local tastes, among other efforts, will create a clear edge in the market.

Amid the pressures related to digital technology and the likely growth of online retailing, CPG companies active in Southeast Asia must begin preparing now — if they haven’t begun already — for the inevitable market changes. Our research and experience, both globally and within the region, suggest four crucial requirements for maintaining and creating value in this environment.