Tuesday, May 24, 2005

Consumer Products Industry: Too old to experience growing pains?

The evolution of the consumer products industry occurred during the 20th century, experiencing the highest growth rates from the 1950s to the beginning of the 1980s. As the signs of the subsequent slowdown began to emerge, companies began to respond with large-scale consolidations. More recently, companies have turned to cost-cutting measures in order to improve their bottom line results, but the fact remains that the industry’s average annual revenue growth rate has stagnated in the last 10 years. Most consumer packaged goods (CPG) companies today anticipate revenue growth rates of only 3 to 5% per year and are struggling to define new growth strategies.

Recent publications from two prominent management consulting firms explore the issue of where consumer products companies can look to now for growth opportunities. Steffen M. Lauster and J. Neely of Booz Allen Hamilton have developed the assertion that the future of the consumer products industry lies in “recentralization” and focusing on core competencies to reestablish growth. The counter-argument from Peter D. Haden, Olivier Sibony, and Kevin D. Sneader of McKinsey & Company is that companies have already extracted most of the benefits of this strategy and need to begin investigating other avenues for growth.

Consolidation has been a common response to the slowdown within the CPG industry. Lauster and Neely argue that this strategy has its flaws because mergers rarely deliver synergies and, as a result, many CPG firms have become a smorgasbord of unrelated businesses that could not possibly benefit from significant commonalities in their value chains. They cite the example of Unilever, which, even after a series of recent divestitures, still has approximately 400 brands under its umbrella. Companies like Unilever have arguably lost their business focus, and are therefore faced with the challenge of adhering to a core strategy; historically, companies that stick to a consistent strategy outperform their peers in the long term. Lauster and Neely believe that firms need to consider which capabilities contributed to their past success and redevelop their strategies to fit these strengths. Heinz is one example of a company that has shed some of its excess businesses with the sale of its former food brands to Del Monte in the interest of regaining its focus in condiments.

In recent years, discount retailers and warehouse clubs have taken a bite out of the ability of CPG companies to sell and leverage their brand power. Wal-Mart, for example, due to its size and buyer power, has convinced its suppliers to limit spending on advertising and marketing so that it can offer low prices to its customers; this tactic threatens the brand loyalty that CPG companies have built over time. Gregory Melich, a Morgan Stanley analyst, agrees that CPG firms can only hope to succeed by “working with Wal-Mart through increased efficiency, reducing promotional and distribution costs.” Warehouse clubs such as Costco have had a negative impact on innovation and product proliferation due to their narrow product selection – a warehouse store typically carries only one brand in a category. For these reasons, Lauster and Neely believe that CPG firms must commit to their core strengths in order to better maintain their brand equity and promote continued growth.

Haden, Sibony, and Sneader suggest that consumer products companies must take their strategies beyond their core capabilities and seek new paths to growth. They suspect that most of the benefits from reestablishing core brands and improving productivity have already been reaped. The McKinsey team proposes several options that CPG companies should explore, once they have identified their core functions: 1) improve execution in order to build capabilities; 2) target emerging markets for future growth opportunities; and 3) develop value segments to serve mature markets.

Haden, Sibony, and Sneader identify brand marketing to be a key factor in driving the success of a CPG firm. With pressures from discount retailers to keep marketing costs low, the greatest challenge to these companies is to find more efficient allocations of funds for these functions. Firms may rely more heavily on non-traditional forms of advertising such as banner advertising on the internet. Interactive marketing has potential advantages over conventional advertising in that 1) it is cheaper and faster than television and direct mail and 2) online interactions can reveal more about a company’s client base and may allow marketers to make more informed decisions about where they spend their marketing dollars.

Few companies with a presence in emerging markets such as Brazil, China, and India have reached their full potential. Many target a small segment of the population in these countries that can afford expensive consumer products, leaving the majority of the market share to local companies that cater to the average consumer. In order to become truly global players, major CPG firms must make it a priority to tailor their products to meet local needs.

Lastly, the McKinsey team asserts that, while some companies have enjoyed success with premium product lines, there has been a shift to value segments in many CPG categories in the mass market. This trend has been perpetuated by the growth of discount retailers and has prompted many manufacturers to develop private-label lines in addition to their branded lines. Those brands with a smaller share of the market or those who find it difficult to maintain leadership positions due to high marketing and advertising costs may find the private-label option attractive.

In our opinion, both of these articles address valid observations of the CPG industry. However, we also feel that the diversity of the firms within the industry makes it difficult to make general recommendations for successful growth strategies. A strategy that works for one firm will not likely work for another; for this reason, individual companies must concentrate on what has worked for them in the past and build on prior successes by employing a mix of the strategies recommended above, and should also continue to strive for more unorthodox and innovative methods for success.

Charlotte Ho

Reshma Patel

Matthew Rodrigues

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