INDUSTRY OVERVIEW: What CPG Companies Need to Address in 2010
By Les Moeller, Ed Landry, and Luis Quintiliano, Booz & Co.
While the CPG industry fared better than most other sectors of the global economy during 2009, it was hardly immune to the effects of the financial crisis that began in September 2008: a substantial loss of wealth worldwide, very tight consumer and corporate credit conditions, delayed private investments, and a pullback by consumers in discretionary spending and big-ticket purchases.
Improvement in the economic environment is finally allowing companies to redirect their attention back to deep-seated structural and demographic changes. For example, in mature economies, people age 55 and over are becoming the largest population segment, with considerable spending power. And a growing segment of consumers is seeking products that promote health and wellness, such as “organic” or “earth-friendly” goods. Meanwhile, improved standards of living in emerging economies are swelling the ranks of the middle class. To better serve them, modern stores armed with the latest technological advances are sprouting up next to mom-and-pop shops.
The retail landscape is experiencing dramatic shifts as well. Retailers are simplifying product assortments to boost their margins and make shopping more convenient for consumers who prefer limited-assortment formats such as dollar stores. Retailers are also trying to come to grips with how best to integrate online channels that have grown significantly over the past few years.
In light of these trends, it’s no longer sufficient for CPG companies to introduce minor tweaks to established products to meet next year’s targets — there simply isn’t enough real estate in the store for them. So, CPG companies must now focus on deepening their relationships with retailers and on gaining greater insight into point-of-sale data and the shopping habits of their consumers.
The problem is that few CPG companies have mastered the capabilities they will need to make these adjustments. Most organizations aren’t properly structured to respond quickly to changes in demand. They don’t have the right touch points to reach consumers and glean valuable information about their shopping behavior. Their distribution networks aren’t set up to reach an increasingly fragmented customer base. And they haven’t yet formed the partnerships with media marketing companies, suppliers and others they will need to backfill gaps in their own capabilities.
CPG companies need to address their capability gaps, particularly in three broad areas: empowering their organizations, building the supply chains of the future and modernizing marketing programs.
Empowering the Organization
In today’s increasingly complex organizations, work is typically spread across three operating entities: the corporate center, individual business units and a shared services center. Yet, in many cases, the corporate center is still looked upon as the ultimate arbiter of day-to-day operations, with divisions frequently calling on headquarters to make decisions both big and small. Because of this, many organizations have become slow-moving bureaucracies. In these instances, C-suite leaders have less time to spend on setting strategy, understanding key drivers within their business and putting the right people in critical positions.
Many companies can do better. In the coming year, CPG companies should spend part of their focus addressing the four levers of organizational effectiveness: gaining a deeper understanding of the company’s existing and future core capabilities as a foundation in designing the organization; assigning decision rights; defining new performance measurements; and aligning incentives and rewards to these new performance measures.
The Supply Chain of the Future
As consumer behavior shifts across markets, re-engineering the supply chain will be critical to stay abreast of these changes and reach an increasingly fragmented customer base. Supply chains are already under increased pressure to deliver lower costs and offset generally rising costs for raw materials and energy.
That pressure may be dialed up even further as governments around the world put a price on carbon emissions and establish new regulations on waste byproducts. Large swings in exchange rates are contributing as well by driving shifts in demand and changing the economics of production. At the same time, as CPG companies emerge from the recession, they need to stay ahead of the curve on longer-term changes in demographics and consumer behavior to ensure their own future success.
Today’s supply chains were built on yesterday’s blueprints, in a world where low energy and transportation costs, cheap labor, relatively inexpensive raw materials, and scarce environmental regulations were fixed assumptions. The supply chain of the future, by contrast, will require different capabilities to make it leaner, greener and more tailored to manage increasing complexity.
Due to public demands for environmentally sustainable business practices, companies will also need to rethink their choices in product design and process technology. This is particularly true in the case of the ingredients they use, the packaging that is required, and the amount of materials and energy consumed by manufacturing processes. They will also need to realign their supply networks to build more flexibility and adaptability into their processes while reducing their carbon footprint.
Finally, CPG leaders will need to engage in larger collaborative networks to better understand sourcing decisions and share information on new production processes and technologies.
Marketing 2.0
Across the globe, consumers are migrating away from traditional paid advertising toward “below-the-line” media and marketing programs that put them in direct contact with consumers. This shift is giving rise to a new generation of customized marketing platforms, transforming the way in which consumers experience advertising and establish relationships with brands.
Digital marketing platforms are a big part of this strategic shift; they are redefining what it takes to succeed in building brands and reaching customers. Companies will need to use emerging technology in new assets such as databases, Web sites and branded content. They will need to develop new analytical models to measure the effectiveness of media spending. And they will need to manage the integration of advertising planning, media buying, promotions management and other tasks currently handled by multiple agencies.
CPG leaders are distinguishing themselves in the consumer marketplace not by the success of single campaigns but by achieving greater sophistication in the development of such marketing capabilities.
Companies that build these capabilities will find their marketers can play a more strategic business role. Yesterday’s marketing organizations stuck to tactical functions to support strategic decisions that had already been made. Tomorrow’s marketing leaders will help set the strategy for major advertising, promotions and public relations campaigns, and serve as growth champions in the development of a company’s brands, products and new businesses.
In the coming months, CPG marketers should look to shift their creative and media strategies to fully capitalize on the online opportunity and make digital media a bigger priority in their brand strategies. Mass marketing will continue to play a role in driving increased awareness, but marketers will need to develop their presence in channels that not only drive greater brand awareness, but also open up new insights into consumers.
Establishing the “Right to Win”
The marketplace has repeatedly shown us that successful companies with a few distinct, best-in-class capabilities earn superior returns. Every company has the ability to create or fortify its own differentiating capabilities. With signs increasingly pointing to economic recovery, now is the ideal time to identify those capabilities and align a growth strategy around them. The economic downturn created a new set of issues for CPG companies to address, but the recovery won’t remove the deep-seated changes that are transforming the industry, and will continue to do so for years and decades to come.
Les Moeller is senior partner, Ed Landry is partner and Luis Quintiliano is principal at New York-based global management consulting firm Booz & Co. They can be reached at [email protected], [email protected] and [email protected].
While the CPG industry fared better than most other sectors of the global economy during 2009, it was hardly immune to the effects of the financial crisis that began in September 2008: a substantial loss of wealth worldwide, very tight consumer and corporate credit conditions, delayed private investments, and a pullback by consumers in discretionary spending and big-ticket purchases.
Improvement in the economic environment is finally allowing companies to redirect their attention back to deep-seated structural and demographic changes. For example, in mature economies, people age 55 and over are becoming the largest population segment, with considerable spending power. And a growing segment of consumers is seeking products that promote health and wellness, such as “organic” or “earth-friendly” goods. Meanwhile, improved standards of living in emerging economies are swelling the ranks of the middle class. To better serve them, modern stores armed with the latest technological advances are sprouting up next to mom-and-pop shops.
The retail landscape is experiencing dramatic shifts as well. Retailers are simplifying product assortments to boost their margins and make shopping more convenient for consumers who prefer limited-assortment formats such as dollar stores. Retailers are also trying to come to grips with how best to integrate online channels that have grown significantly over the past few years.
In light of these trends, it’s no longer sufficient for CPG companies to introduce minor tweaks to established products to meet next year’s targets — there simply isn’t enough real estate in the store for them. So, CPG companies must now focus on deepening their relationships with retailers and on gaining greater insight into point-of-sale data and the shopping habits of their consumers.
The problem is that few CPG companies have mastered the capabilities they will need to make these adjustments. Most organizations aren’t properly structured to respond quickly to changes in demand. They don’t have the right touch points to reach consumers and glean valuable information about their shopping behavior. Their distribution networks aren’t set up to reach an increasingly fragmented customer base. And they haven’t yet formed the partnerships with media marketing companies, suppliers and others they will need to backfill gaps in their own capabilities.
CPG companies need to address their capability gaps, particularly in three broad areas: empowering their organizations, building the supply chains of the future and modernizing marketing programs.
Empowering the Organization
In today’s increasingly complex organizations, work is typically spread across three operating entities: the corporate center, individual business units and a shared services center. Yet, in many cases, the corporate center is still looked upon as the ultimate arbiter of day-to-day operations, with divisions frequently calling on headquarters to make decisions both big and small. Because of this, many organizations have become slow-moving bureaucracies. In these instances, C-suite leaders have less time to spend on setting strategy, understanding key drivers within their business and putting the right people in critical positions.
Many companies can do better. In the coming year, CPG companies should spend part of their focus addressing the four levers of organizational effectiveness: gaining a deeper understanding of the company’s existing and future core capabilities as a foundation in designing the organization; assigning decision rights; defining new performance measurements; and aligning incentives and rewards to these new performance measures.
The Supply Chain of the Future
As consumer behavior shifts across markets, re-engineering the supply chain will be critical to stay abreast of these changes and reach an increasingly fragmented customer base. Supply chains are already under increased pressure to deliver lower costs and offset generally rising costs for raw materials and energy.
That pressure may be dialed up even further as governments around the world put a price on carbon emissions and establish new regulations on waste byproducts. Large swings in exchange rates are contributing as well by driving shifts in demand and changing the economics of production. At the same time, as CPG companies emerge from the recession, they need to stay ahead of the curve on longer-term changes in demographics and consumer behavior to ensure their own future success.
Today’s supply chains were built on yesterday’s blueprints, in a world where low energy and transportation costs, cheap labor, relatively inexpensive raw materials, and scarce environmental regulations were fixed assumptions. The supply chain of the future, by contrast, will require different capabilities to make it leaner, greener and more tailored to manage increasing complexity.
Due to public demands for environmentally sustainable business practices, companies will also need to rethink their choices in product design and process technology. This is particularly true in the case of the ingredients they use, the packaging that is required, and the amount of materials and energy consumed by manufacturing processes. They will also need to realign their supply networks to build more flexibility and adaptability into their processes while reducing their carbon footprint.
Finally, CPG leaders will need to engage in larger collaborative networks to better understand sourcing decisions and share information on new production processes and technologies.
Marketing 2.0
Across the globe, consumers are migrating away from traditional paid advertising toward “below-the-line” media and marketing programs that put them in direct contact with consumers. This shift is giving rise to a new generation of customized marketing platforms, transforming the way in which consumers experience advertising and establish relationships with brands.
Digital marketing platforms are a big part of this strategic shift; they are redefining what it takes to succeed in building brands and reaching customers. Companies will need to use emerging technology in new assets such as databases, Web sites and branded content. They will need to develop new analytical models to measure the effectiveness of media spending. And they will need to manage the integration of advertising planning, media buying, promotions management and other tasks currently handled by multiple agencies.
CPG leaders are distinguishing themselves in the consumer marketplace not by the success of single campaigns but by achieving greater sophistication in the development of such marketing capabilities.
Companies that build these capabilities will find their marketers can play a more strategic business role. Yesterday’s marketing organizations stuck to tactical functions to support strategic decisions that had already been made. Tomorrow’s marketing leaders will help set the strategy for major advertising, promotions and public relations campaigns, and serve as growth champions in the development of a company’s brands, products and new businesses.
In the coming months, CPG marketers should look to shift their creative and media strategies to fully capitalize on the online opportunity and make digital media a bigger priority in their brand strategies. Mass marketing will continue to play a role in driving increased awareness, but marketers will need to develop their presence in channels that not only drive greater brand awareness, but also open up new insights into consumers.
Establishing the “Right to Win”
The marketplace has repeatedly shown us that successful companies with a few distinct, best-in-class capabilities earn superior returns. Every company has the ability to create or fortify its own differentiating capabilities. With signs increasingly pointing to economic recovery, now is the ideal time to identify those capabilities and align a growth strategy around them. The economic downturn created a new set of issues for CPG companies to address, but the recovery won’t remove the deep-seated changes that are transforming the industry, and will continue to do so for years and decades to come.
Les Moeller is senior partner, Ed Landry is partner and Luis Quintiliano is principal at New York-based global management consulting firm Booz & Co. They can be reached at [email protected], [email protected] and [email protected].