1. Consumer goods industry trends
Manufacturers of consumer packaged goods (CPG) face tw o key challenges in 2015. The first is continued slow or negative
grow th in people’s disposable incomes. The second is changing consumer attitudes tow ard productsand brands, as the the
great fragmentation of consumer markets takes another turn. In response, companies must dramatically shift the route they
take to reach consumers in terms of both product distribution and communications.
In many markets, consumer w ageshave been static for five years. Even w hereeconomies are starting to performbetter, the
squeeze on after-tax wages, especially forthe middle class, younger people, and families, is depressing consumer spending.
Although grow th in developing countries is still better than in the United States and Europe, a slow down in emerging countries
such as China — w here many companies had hoped for higher sales — has translated quickly into low er-than-expected
consumer spending grow th. We expect continued weaknessin consumer disposable income regardless of which waymacro
GNP uncertainties break.
Meanw hile, w hat we callthe great fragmentation is manifested in consumer behavior and market response. In both developed
and emerging markets, there is a w ider variety among consumers now than at any time in the recent past. Grow th is evident
both at the top of the market (w here more consumers are spending for higher-quality food and other packaged goods) and at
the low er end (where an increasing number of consumers are concentrating on value). But the traditional middle of the market
is shrinking.
The peripatetic consumer
Further, individual consumer behavior is more pluralistic. We’re used to seeing, for example, spirits buyers purchasing a
premium brand in a bar, a less-costly labelat home for personalconsumption, and yet another w hen entertaining guests. But
this type of variegated shopping has now spread to the grocery basket. Few erconsumersare making one big stocking-up trip
each w eek. Instead, shoppers are visiting a premium store and a discounter as w ellas a supermarket, in multiple w eekly stops
— in addition to making frequent purchases online. In the recession, more shoppers became inclined to spend time hunting for
bargains, and as some traditional retailers either w ent out of business or shuttered stores, retailspace wasfreed up and w as
often filled by convenience stores, specialty shops, and discounters.
A decade ago, CPG companies had only a handfulof sales channels to consider: supermarkets, convenience stores,
hypermarkets in advanced economies, and traditional small and large retailers in emerging and developed countries. Since
then, various discounters have made significant inroads, including no frills, low variety outlets, such as Europe’s Aldiand Lidl,
w hich sella limited range of private-labelgrocery items in smaller stores, and massive w arehouse clubs, such as Costco and
Sam’s Club, w hich initially operated solely in the U.S. but are now expanding internationally, as w ellas Makro in Europe. In
addition, dollar stores, specialized retailers, and online merchants are having an impact on the CPG landscape. Economizing
consumers have been pleasantly surprised by the savings generated by spreading their business among multiple channels, as
w ellas by the variety and product quality they find. We w illsee more and more such behavior, and continued experimentation
and innovation by retailers as they try to respond.
The result has been greater demand for more products and brands, w ith different sizes, packaging, and sales methods. At most
CPG companies, SKUs are proliferating, despite there being little increase in overall consumption. A better outcome can be
seen at smaller food and beverage suppliers, w hich are benefiting fromconsumer demand for variety and authenticity. A
recent Strategy& report found that in the U.S., small manufacturers (with revenuesof less than US$1 billion) grew at tw ice the
compound annual rate of large manufacturers (with revenuesof more than $3 billion) betw een 2009 and 2012.
More mixed media
Consumers’ media usage has also fragmented w ith the rise of digital content and the proliferation of online devices. Each
channel— fromthe Web, mobile, and socialsites to radio, TV, and print — has its ow n requirements, audience appeal, and
economics, needing specialized attention. But at the same time, media campaigns need to be closely coordinated for effective
consumer messaging.
Collectively, these shifts challenge the w ay CPG companies manage their brand and business portfolios, and callfor a
rethinking of their go-to-market approach, w ith an emphasis on analytics. Our w orkwith INSEAD show s that among business
leaders, applying analytics — especially for tracking consumer behavior and product and promotional performance — is
considered one of the most effectiveways to improve results and outpace the competition. But it’s not just about insight; it’s
also about using the insight w isely to determine how to manage costs. The more know ledgeable about customer needs and
preferencesa company is, the smarter and more focused it must be in managing its ow n economics to cost-effectivelydeliver
both variety and value to the squeezed consumer.
This attention to cost does not mean simply a pruning of the portfolio of lagging products, but realignment around a more
intelligently chosen set of brands that cover the spectrumof consumer needs efficiently, with minimal overlap. Indeed, the
ability to handle product line complexity cost-effectivelycan in itself become a competitive advantage. In many cases,
companies w illneed to expand the overallbrand and product footprint in order to reach imperfectly served consumer needs
and proliferating retail channels. They may have to serve premium channels, but also serve discounters — or outcompete
discounters with their ow n value brands. AsUnilever’s chief financialofficer Jean-Marc Huët described the challenge in a
recent earnings release, “We’ve learned from the previous economic crises the importance of having such value brands in the
portfolio that can capture some of the dow ntrading that inevitably happens w hen disposable income levels fall.” We think this
w illbe a persistent requirement. In some instances this w illmean breathing more life into neglected products to balance the
brand portfolio.
In the same w ay, as companies move to cover more retail channels, they need to simplify trade terms and promotional
spending. Managing the w ide variety of outlets and marketing opportunities is not a simple, cut-and-dried activity. Over time
and especially during the recent recession, marketing and promotion campaigns have proliferated and overlapped as CPG
companies have desperately chased limited sales volume. Rationalization and simplification are overdue. Current practices add
cost for both CPG companies and retailers, far beyond their contribution to industry grow th. Analyticscan help w ith this job too.
They tell you w hich marketing effortsworkand w hich are failing, and w hy, as wellas w hich single campaign can do the job of
severalinitiatives.
2. Large CPG companies may also need to minimize and concentrate their business portfolios to succeed in a more fragmented
marketplace, rethinking entire categories of brands. Kraft Foods’decision to split itself into tw o in 2012, spinning off its instant-
consumption-oriented snackand confectionary brandsinto Mondelez International, w as an early and prominent example.
Recommended by : Steve Rogers ( steve_rogers2014@outlook.com )
