The CPG industry is in a state of turbulence. Smaller, more tightly focused companies are emerging and outpacing the larger players. Digital technologies are creating new ways for CPGs to connect with consumers. Center store is shrinking as consumers shift to produce-dominated diets. Online retailers like Amazon are delivering levels of service personalization and convenience difficult to contest with.
In the midst of unprecedented change and unpredictability, there are five ways forward-thinking CPGs are paving the way to an evolved organization able to sustain growth:
1. Define Digital Strategy
93% of C-level CPG executives think digital technology will disrupt their organization over the next 12 months, but only 20% confidently agree that their business has the right people to define their digital strategy, according to a Forrester Digital Organization Study of more than 200 CPG executives. While digital disruption is broadly recognized, organizations lack the people and skills to support. In order to recruit the right digital talent, companies must develop strategies for retention and succession that account for the high demand for digital talent across industries. They must creating highly dynamic and rewarding job experiences and HR practices that offer continuous growth and learning opportunities. They should also look internally for those with leadership and influencing skills as needed to rally team support, rather than focusing on those with digital experience alone. Once a digital strategy has been defined and the right talent recruited, this strategy must then be driven forth by the CEO – not marketing, in order for it be viewed as an imperative organizational initiative. CEOs need to work together with digital and business leaders to create a connective structure that places digital at the core of the company.
2. Build At-Scale Localization
Both national and global CPGs are battled with how to organize and localize their marketing for different markets. They know they need to deliver diversified offerings and retailer engagement to different markets, but require the efficient technology and processes to innovate and create at-scale. Success requires adapting current capabilities to unique market conditions and determining which capabilities are applicable in multiple regions, where the company can leverage scale across regions, and where capabilities can be bought or borrowed through partnership structures. A candy manufacturer was able to meet this challenge by building a decentralized R&D system to cater to local tastes and leverage procurement of local raw materials, supplemented by processes and forums that quickly transfer successful products and ideas from one market to another. Another food manufacturer runs global strategic business units (SBUs) that drive R&D and marketing strategies centrally, while allowing tailoring to local needs. This company built a streamlined process through which managers in each country engage with the SBUs to tailor offerings and marketing to local needs. Other companies are investing in localized marketing technology that allows them customize in-store and digital marketing to specific retailers and markets on-demand.
3. Create a Leaner Operational Model
As CPGs face changing customer expectations, growing product portfolios and regional market demands, they must develop new operational models to address these complexities. Fit-for-purpose models are proving to be the most effective. In a “fit-for-purpose” model, operations are built around the specific markets the company expects to see most profitable growth from. The organization and cost structures are then aligned around the strategic choices each market faces. Successful operating models should also focus on a defined set of key categories and differentiating capabilities. Larger players, such as Unilever and P&G, are shifting their focus away from size and towards creating and leveraging scale in a few critical capabilities. They are divesting of non-core business units and struggling brands, and instead focusing on a narrower group of core brands. In addition to creating narrower focuses, senior leadership must be made accountable for growth. Colgate Palmolive, General Mills, Hershey, Kellogg’s, Mondelez and Newell Rubbermaid are just some of the CPG companies that recently have appointed a chief growth officer.
4. Re-Examine Offshoring
While outsourcing/offshoring previously emerged as a viable strategy to reducing cost and creating advantage, today, it is being reexamined and reversed by many. General Electric is adding new production lines in its appliances facility in Kentucky after decades of moving production offshore. Whirlpool and many other manufacturers are also investing domestically. Drivers of this trend include rising wages in lower-cost countries, higher fuel costs globally, and lower natural gas costs in the U.S. Additional drivers of bringing the workforce domestic is that allows for improved collaboration, greater ability to link product development and design, and centralization of the supply chains. The trend is not restricted to manufacturing though. Many clients are looking closely at elements of general and administrative costs as well, making the choice to bring more elements back in-house, and finding they can be both more effective and more efficient.
5. Adopt a Culture of Productivity
Companies like Church & Dwight have been successful in developing a work culture of productivity. Church & Dwight’s value proposition rests on a portfolio of brands — both premium and lower-cost — that hold leadership positions in niche categories. The company acquires brands with residual equity in these categories and adds value by enhancing their distribution. They focus on a small set of power brands at a time, supported by pioneering innovation — sometimes leading, sometimes following, depending on their position in the category. These investments are enabled by aggressive overhead cost management, often described as a “private equity–like” financial culture. Other companies, such as Kellogg’s and Mondelez, have developed their own forms of productivity focus, such as comprehensive margin management, zero-based budgeting and lean-focused centers of excellence, and have embedded these focuses deeply into their cultures.
6. Increase Retailer Collaboration
The top five largest sellers of private label food and grocery items in North America (Walmart, CVS, Kroger, Costco, Walgreens) had combined private label sales of $85.6 billion in 2011. This number increased by more than 50% in 2013 to $138.4 billion, and has continued to rise. Due to the growth of private labels, CPG companies are seeing retailers increasingly turning into competitors. In order to compete, manufacturers need to deliver not only improved products and value-added category insights to the retailers, but innovative ideas across merchandising, promotions, shopper marketing and supply chain that support the consumer goods they carry. CPGs need to emphasize joint business planning with their retail partners and elevate retail collaboration to the board and CEO agenda. A pioneer in this area, Procter & Gamble set up a team to get closer to its largest customer, Walmart. This team addresses product development, supply chain, marketing and sales issues to ensure that P&G’s entire organization is aligned to Walmart’s needs and has grown P&G’s Walmart business from $400 million to more than $10 billion.
7. Act on Emerging Markets
Between now and 2020, 95% of the world’s 800 million in population growth will be in the developing world and 1.4 billion households there will be earning middle-class incomes. As a result, 78% of companies expect to gain market share in emerging markets and 45% of companies on Fortune’s Global 500 list will hail from emerging markets by 2025, according to a study by The Boston Consulting Group, “Time to Reengage with, Not Retreat from, Emerging Markets.” The focus is no longer just on the BRIC countries (Brazil, Russia, India, and China) though. In fact, India and Brazil have lost some of their appeal as of late, with Eastern Europe, Latin America, Mexico, and Southeast Asia now on the radar for capturing market share. Companies with a global footprint are hawking the opportunities in developing markets, but effective participation in global markets depends on factors such as unique demand characteristics, the ability to extend brands or acquire or build relevant local brands, the regulatory landscape, and supply chain infrastructure.
Through the design of a deliberate, lean, fit-for-purpose operating model, coupled with continuous improvement to drive efficiency and effectiveness, CPGs can build their right to win in both challenging emerging and existing market environments. No one operating model works best for all though, and CPGs should do away with benchmarks and establish their own unique set of principles that can allow them to advance a defined set of differentiating capabilities that work to deliver unique consumer brand value. When every aspect of the operational model is working to support the delivery of this defined value, companies can turn industry evolution to their advantage and force competitors into less attractive corners of the market.