By Eugene Roytburg, Managing Partner and Lana Klein, Managing Partner
Over the past four years, the growth of CPG sales in the U.S. stalled at under 1%, in contrast to 7% growth between 2006 and 2011. Volumes are mostly stagnant or have declined in many categories – in some cases, sharply. In addition, growth has slowed dramatically in key emerging markets. These statistics are a result of several fundamental drivers.
Fewer People & Slower Growth
First, the number of consumer product consumers is stagnant due to flat population growth. Birth rates in Western Europe are below the replacement rate, for example. And without migration, most countries in Europe (with the exception of France, Ireland and Norway) are projected to have negative population growth. In the US, birth rates in 2016 were 14% lower than in 2008.
Economic hurdles have also had an impact. Despite the global economic recovery, wages have stagnated for the two lowest-income quintiles. And help from emerging markets, which fuelled CPG a few years ago, has also dried up as GDP growth in those markets has slowed. Additionally, currency weakness in many emerging markets has impacted consumer purchasing power to compound softness in CPG sales.
Shifting Consumer Preferences
Against this backdrop, consumer attitudes, tastes, needs, and behaviors have also shifted. E-commerce upended shopping behavior and levelled the playing field for small companies, helping them reach consumers more easily than in the past. Buying power has shifted from the baby boom generation, which is well understood by marketers, to the more fickle Millennials, who often shun large brands in favor of newcomers. As a result, small, upstart CPG companies have captured 3% market share from larger players over the past few years.
Consumer behaviors are also becoming less homogeneous. Increasingly, they’re polarizing into “low involvement” and value-seeking buying on the one hand, and highly-selective purchase behavior on the other. To complicate matters further, some consumers show both behaviors – depending on what category they’re shopping for. As a result, large brands are under threat of death by a thousand cuts, losing share to “low involvement” and to a host of smaller, innovative brands who cater to increasingly fragmenting consumer tastes.
Traditional CPGs vs. Digital Natives
So, where can manufacturers find growth in this environment? In many niches across different verticals. All categories show the same pattern: The emergence of niche and micro-segments – largely dominated by start-up brands – taking share from established mainstream products.
So, why can’t established brands adapt? Here are a few reasons:
- The innovation process in large CPG firms isn’t set up for the new environment. It’s slow and risk-averse, with a relatively large “hurdle rate” favoring initiatives that don’t venture too far from the core business. Sure, many companies recognize this and try to become more nimble. The problem, however, is that incremental improvements are usually too weak to change the massive “cultural DNA” of large companies and produce a meaningful shift.
- Many companies are still laggards in e-commerce and digital – at least compared to relative newcomer brands like Dollar Shave Club (later bought by Unilever), who are often digital natives and have entire operating models rooted online.
- Brand Equity – traditionally a huge asset – can play against large brands with long-established mainstream perceptions when they try to venture into a new niche. Small start-up brands have an authentic story that’s typically better aligned with the needs and attitudes of their target consumers.
How Can CPGs Compete?
To survive in these conditions, large CPG companies need to re-think the ways they look for growth opportunities. They must shift their mindset, culture and operations to succeed in a changing environment.
- Develop capabilities to quickly identify growth opportunities. With landscapes shifting so rapidly, traditional category segmentation and a “future will be like the past” approach should be replaced by robust analytics that can quickly scan for emerging growth niches and discern fads from longer-lasting opportunities. These opportunities span the intersections of categories, accounts, product attributes and consumer segments, to name a few.
- Develop a strong acquisition strategy and execution. This is an obvious route that many firms already pursue. But the devil is in the details — creating the ability to rapidly and effectively identify suitable acquisition targets. Another important point is determining optimal deal size. While smaller acquisitions are likely to deliver higher growth rates, incremental revenues may be too small to move the growth needle. What’s more, they require deep resources for execution. Finally, it’s vital to design a post-integration strategy to preserve the entrepreneurial spirit of the new brand, while using corporate muscle to scale it. Hormel (Muscle Milk®, Applegate®, Justin’s®, Wholly Guacamole®) is one company that does this especially well.
- Invest in start-ups like venture capital funds do. Many corporations are engaging with start-ups through internal corporate venture capital arms that invest directly in these types of companies . Nestle, Chobani, General Mills and PepsiCo are some who’ve launched “accelerator” units to participate in growth and support start-ups. Kraft has launched a business unit called Springboard, for example, to develop what the company describes as “disruptive” food and beverage brands. The unit is actively searching for emerging, authentic brands and looking to build a “network of founders.”
- Finally, take a more agile and differentiated approach to your brand portfolio. Ask yourself: Where are unmet needs in your categories? Do consumers care or need anything innovative, or have all meaningful problems and needs been addressed? Too often, the growth targets in mature spaces are unrealistic and driven by inertia. They’re unlikely to produce much growth. Yet, firms keep pouring money into marginally incremental innovation, rather than looking for new spaces.
Ultimately, the current environment for CPG brands is a zero-sum game. Everything from slow population growth to unfavorable economic factors — which have given rise to a new breed of digital competitors — is putting pressure on them. To compete, CPGs must adapt and force growth opportunities through innovation and a more differentiated approach.