Ten Key Trends Disrupting The Global Consumer Product Business

– Think Tank: McKinsey & Company 

Report summarized by : Bummary

Introduction

Consumer product companies (CPG) have been the most successful lot in terms of total shareholder returns in the last century. However, their unique advantage of scale, first to capture the mass developing economic marketplace and long-term brand value are all strategic advantages that are slowly waning. To stay relevant, firms need to adopt new ways to differentiate in the market and create omnichannel, not to be confused with multi-channel sales processes and systems.

Key Insights

  • A broad overview of the current business model and how it has benefited CPGs and allowed them to generate 15% annual aggregate returns for 40 years straight.
  • Waning organic growth opportunities in the current model, and why organic growth is crucial for business success in the FMCG space.
  • The ten key disruptive trends for consumer product companies as they brace themselves for the digital disruption: 
    • The millennial crowd
    • Digital and omnichannel is the way
    • Small brands will continue to capture customer attention
    • Product value proposition will be central for success
    • E-commerce giants have redefined customer journeys and they will continue to dominate the landscape
    • Discount sellers have found a unique way to hurt major brands and their price strategy will hamper CPG margins
    • Mass-merchants will feel the heat and businesses will continue to squeeze
    • Local market competition will intensify
    • Activist investors will build pressure for profits
    • M&A and acquisition will become costlier as firms jostle for strategic value additions

The old model was solid but will no longer work

CPG companies have forever focused on five key areas for value creation. Here’s a quick break-up of the model:

  • Building and promoting brands with mass market appeal
  • A distribution strategy focused on last-mile connectivity through grocers
  • Early penetration into developing markets and creation of localized categories
  • An operating model focused on consistent execution and cost reduction
  • M&A as a tool for strategic value additions and brand overhaul

Early brand building exercises allowed these firms to build a separate identity viz. other non-branded competitors. This allowed CPG firms to generate on average 25 percent higher gross margin than other similar players in the market. Aligning their supply chains to reach the last grocer in town has allowed FMCG players to reach a mass market of people quickly, and at scale. Early adoption of developing markets was another keystroke for the firms as it allowed them to ride the growth in these economies and generate stupendous revenue growth on the back of these specific market performances.

However, the long and successful model is now starting to show signs of waning. Real organic growth adjusted for inflation, foreign exchange and M&A spends between 2012-16 show-startling trends of decline in revenue growth.

McKinsey’s analysis of 290 listed FMCG companies show average revenue growth of 2.5 percent, and for large companies this growth is only 1.5 percent. In comparison to real GDP world growth of 2.7 percent during 2012-16, large companies grew only 55 percent of GDP.

Declining growth isn’t because there’s less demand but a result of digital disruption

McKinsey’s survey found that millennials on average are four times more likely than Gen Xers to avoid buying food from ‘big food companies’. Why?

Millennials are born in the age of internet. They are obsessed with research and resist marketing to make decisions to buy. In the US, the millennials are on average 9 percent poorer than Gen Xers and thus for them internet and word of mouth is a key source to make decisions to spend their money.

Companies and consumers are both consuming and producing tons of data every day. Some FMCG firms have started making initial forays into digital but they’re still a long way to go full scale at using the full possibilities of the digital to re-create their sales & marketing designs. Technologies like AI, IOT and ML are now mature enough for companies to adopt and build consistent customer experiences across the board and this is the most critical component of success.

 

Smaller brands are capturing consumer’s attention by aligning their communication and products to the millennial mindset

Digital marketing and a robust understanding of the millennial market are the driving forces behind the growth of a plethora of smaller consumer brands hitting the market and capturing the bulk of growth against more favored larger competitors.

Larger firms and their market research teams have failed to find these brands largely because of their excessive reliance on syndicated data, which fails to cover many online and digital channels the new age brands are using for go-to-market.

However, PE activity in this space is robust. The last three years have seen deals with cumulative value of $5.5 billion in the small brands space. Retailers too are noticing these brands and are giving more of their shelf space as these brands have a cult following, don’t cut margins for market share growth and provide retailers the much-needed revenue push they seek.

Here are the top five reasons why the FMCG category is poised for disruption due to small brands:

  1. Their ability to charge high margins.
  2. Strong customer centricity and emotional hook ups with consumers.
  3. An easy to outsource value chain.
  4. Low regulatory barriers.
  5. Low shipping cost as a percentage of product value.

E-commerce players have shown consumers a new way to realize value and FMCG needs to up their game

Alibaba, JD.com and Amazon have all shown the power of building customer first digital experiences. The new way to connect with customers have disrupted traditional channels of delivery FMCG has been banking on for decades, and now to create value digital first and omni-channel experiences for customers is the only way for CPG companies to avoid a catastrophic fall.

Focusing on the omni-channel, digital first, and small brands combo could help FMCG firms generate incremental value in times of major disruption resulting from the changing customer needs and preferences.

Beauty products segment is a perfect example of this. In the color cosmetics space, born digital brands have already captured 10% of the market and are growing at the rate of four times than established incumbents in the segment. Digital has emerged as the key distribution channel for these alternate brands and Youtube saw a whopping 1.5 million beauty related product videos generated each month.

Local players who understand the market well will continue to squeeze dominant FMCG players for market share

FMCG companies generated a bulk of their growth from an early entry lead in developing markets. However, these markets are still ripe for robust growth. Some accounts measure the potential sales value at $11 trillion by 2025. The potential for growth has attracted many large local players to step up on their game to grab a piece of this market. To quickly scale, global FMCG companies need to build agile organization decision structures, and allow localized leadership to make decisions at regional and national levels. Further, go-to-market tactics in the developing world need a different approach than the west. Mobile will continue to play a critical role and discount, as a strategy to capture market is going to dominate.

Finally, M&A to spur organic growth through tight integrations will be a key enabler but the emergence of deep pocket PE firms in this space willing to fund high risk small brands will push up valuations and make the M&A market expensive for acquisitive growth.

Excellence in the developed marketplace, leapfrogging in developing markets and hothousing premium niches are going to be the key factors driving the new operating model

The way to lead in the new marketplace needs a transformative approach and a tiered growth model. Here is the breakup:

  • Build a three tier portfolio strategy
  • Agile operating model for growth

Tier 1 – Building functional excellence in the developed marketplace

Treating technology as core competency rather a cost center is the most critical element of change. Companies are becoming functional experts at leveraging the power of analytics and early adoption is visible in the area of marketing, programmatic M&A, and fine tuning revenue growth management through the deployment of big data tools.

CPG companies have been historically operating through decentralized sales channels. Creating consistent experiences and leveraging e-commerce will be the key to break the silos and build a process that could harmonize trade terms across markets.

Leveraging technologies in the back office, supply chain and sales & operational planning will play a key role in improving and drive down costs through continuous innovation.

Tier 2 – Category formations in the developing markets

To succeed in capturing the $11 trillion market opportunity in developing nations, CPG firms need to bring their most successful innovation, and not ‘has been’ solutions to the market. These markets won’t follow the typical growth trajectory seen in the west and a digital first omni-channel sales strategy will be critical for success in the business.

Tier 3 – Leveraging the power of smaller brands 

Developing specific niches to leverage the power of smaller brands for value, price and premium margins should be a critical strategy for success in tomorrow’ uncertain world. This can be done through a combination of having an in-house incubator for new niches, and a focused M&A strategy to keep adding new product segments to your business.

Applying this three tier model needs a restructured organization system based on the now famous agile methodology. Agile isn’t some buzzword but a process where matrix driven approaches give way to cross-functional and semi-autonomous teams. It’s about looking at your company as one big organism with multiple systems each operating under the guidance of a central system but also working autonomously to keep the whole organism empowered.

The agile organization differentiates itself from the top. It needs to give up dictatorial mentality in favor of a servant leadership approach.

An agile organization operates on two fronts, first is a dynamic front, and two a stable backbone. The dynamic front is a set of small focus cross-functional teams working with each other to achieve pre-set objectives. The team coordinates with one another to organize, segregate and structure their deliverables and goals amongst themselves, and then coordinates with one another to achieve these objectives.

The common backbone is where rights & responsibilities, expertise, core processes, shared values are determined which drive the dynamic front to swiftly take decisions and achieve objectives.

The agile organization deploys new age technology and has a strong emphasis on rapid iteration and collaboration to reduce costs and achieve growth objectives.

Final thoughts

  • To survive in this age of disruption companies must do the following: 
    • Take stock of your current state and identify areas of current and future transformation.
    • Stack the old model against the new and identify changes where you need to prioritize effort to achieve business success.
    • Make an action plan for organization-wide transformation and development of an agile organization.

Time is running out for CPG companies as industry specific divisions are continuously getting blurred. Competition emanating from smaller brands are creating a challenge and to beat competition firms need to reinvent their business models to adopt omni-channel distribution and build consistent customer experiences. This cannot happen unless the organization is ready to go bottom up and walk towards an agile structure.

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