By Lino Casalino
Shifts in consumers’ budgets and shopping habits are fundamentally changing the market for consumer packaged goods (CPG). Long gone are the days when manufacturers were concerned mainly with winning grocery stores. For sustainable growth, CPG executives need to rethink their company’s approach.
Historically, population growth and gains in consumer spending provided reliable fuel for CPG expansion. That has changed. The number of consumers in developed countries has either flatlined or fallen. Birth rates in North America and Western Europe are below the replacement rate. Moreover, the majority of consumers in mature markets have, until 2016, endured more than a decade of stagnant wages, leading to slower consumer spending. These trends are consistent with the Canadian market.
At the same time, consumer needs and habits are shifting, and CPG firms can no longer make the same assumptions about mass-market shopping activity. They could once rely on a large, relatively homogeneous group of middle-class consumers who would purchase staples and even a luxury or two at mid-priced stores. But this uncomplicated consumer market has fragmented into two camps: survivalists and selectionists. Survivalists are cutting back and looking for value. Members of this group, which includes a vast and growing number of retirees, are stretching their budgets by limiting themselves to value retailers, such as Costco, as well as online outlets offering lower prices.
By contrast, selectionists can afford to be choosy and “select” products they perceive as being of much higher quality. CPG companies offering premium-price items have made inroads with this group through namesake stores, such as Godiva Chocolates. The result is that the discount and top-end companies are increasing their market share, while retailers in the middle — and the CPG companies that service them — are suffering.
Faced with these challenges, many CPG companies have embarked on aggressive cost-cutting campaigns. While these can improve both profit margins and stock price, the benefits of cost-cutting can be short-lived and ultimately leave companies unprepared to take advantage of marketplace opportunities, which are the real keys to growth. For sustainable growth, CPG executives need to rethink their company’s approach and focus on the following strategies:
Align your portfolio to growth
Instead of making cuts across all brands to reduce costs, analyze your portfolio and ask whether the products you offer align logically with the market categories and niches your company is focusing on. By identifying the rationale behind your portfolio, you can avoid reacting opportunistically to changing markets with hastily developed brand extensions, new products, or acquisitions.
Small brands, big profits
Small players are outperforming the competition in 18 of the top 25 CPG categories, including the largest and most consolidated, such as dairy, bakery, snacks, and ready meals. Consumers choose these brands because they offer a connection to local growers, the promise of healthy ingredients (Bob’s Red Mill), or a quirky story (Ben & Jerry’s). To take advantage of the benefits smaller brands generate, large CPG companies can build or buy their way to faster growth.
Think global, act local
A “one-size-fits-all” approach will no longer work in the global market. Brands that want to do well in emerging economies in Asia, Latin America, and the Middle East, where demographic trends offer more potential for growth, must tailor their products to local demands.
Clearly, plenty of hard work awaits CPG companies as they re-evaluate their strategic biases and redesign their operating models for a far different business environment. But as a starting point, CPG companies have two imperatives: take the profit margin challenges seriously because they are not going away, and recognize that you cannot buy your way out of trouble through cost-cutting alone. Companies able to do this will likely learn that they can outperform in the CPG market.
Lino Casalino is PwC’s national CPG leader, based in Toronto. Contact him at [email protected] or visit www.pwc.com/ca/food