The pressure is on every CPG manufacturer worldwide. The small-to-medium CPG manufacturer faces the same pressures as the large companies, but has fewer resources to address them. However, the mid-size manufacturer must proactively address these pressures to maintain or increase share.
Elsevier Food International, Vol. 11, Number 1, February 2008
Olin Thompson

All CPG manufacturers face the same market pressures but larger companies enjoy some distinct advantages. For example, they have more power with major retailers. Their broad product lines, greater geographic coverage, and typically stronger brands result in customers finding it easier and more effective to deal with them than their mid-sized counterparts.
With the large retailers demanding specific business process and technology investments, the larger manufacturer has the advantage of being able to write off these investments over a larger volume. With the big manufacturers having many advantages, how does the mid-size CPG manufacturer compete and survive?

Retailer consolidation
From convenience stores to big box speciality stores to warehouse clubs, the big have become bigger while smaller retailers – from mid-size regional chains to the mom and pops – have been on a slide. Ten years ago, there were nearly 500 public retail companies in North America; today there are fewer than 300. “Size matters” is the rule that has driven consolidation. Today’s typical CPG manufacturers are seeing a greater concentration of demand in their top few customers. Often, the top five customers make up the majority of revenue – sometimes as much as 80 per cent.
Consolidation means fewer decision-makers with more power. Each controls a greater volume and market coverage. More importantly, a “no-thank-you” from one of the major retailers eliminates the manufacturer from a large segment of the business, with decreasing options to make up the lost opportunity and volume. The term ‘channel master’ describes the developing role of the major retailers and CPG service companies. A channel master controls access to the market, decides which products will make it onto shelves, what the prices will be, and how business will be conducted. 

Technology hurdles
In the business press, we frequently see articles about radio-frequency identification (RFID). Major retailers are increasingly setting technical and business process requirements and deadlines for their suppliers. No one doubts that RFID will be an absolute requirement in the future; in fact, the issue is not if, but when. However, RFID is just one element of a continuing process on the part of the retailers to drive costs out of the supply chain. Other elements have included electronic document interchange (EDI) and, more recently, data synchronisation such as UCCNet and EAN. These technology-driven requirements represent an ever-higher technology hurdle that manufacturers must clear to participate in the retailer’s sales success. For many, these technology demands benefit both the retailer and the manufacturer.
If a manufacturer wants to do business with Wal-Mart, it has to provide more than just product. It must also entirely meet Wal-Mart’s technology requirements. Wal-Mart is not an isolated example; it is just the one we hear about most often. Technology mandates also exist from Home Depot, Marks & Spencer, Target, METRO, CVS, and other major names. Often, a mandate is for the same technology but with individual twists.
Meeting Wal-Mart’s RFID requirements is not the same as meeting those of Target or Marks & Spencer. The manufacturer needs both the ability to meet the technology requirement and to tailor its response to the demands of the individual retailer. The retailer’s decision to do business with a new supplier is not only about product. Retailers look at the total cost of carrying a manufacturer’s product, and that cost includes non-product issues such as supply chain and customer service abilities. 

Private label
A study by the Gallup Organization found that 75 per cent of US consumers believe that store brands have the same quality, guarantee of satisfaction, packaging, value and performance as national brands. More than 90 per cent of all consumers are familiar with store brands, while 85 per cent say that they purchase them frequently. Store brands continue to be an important growth factor for retailers. In supermarkets and drug chains in particular, private label products now contribute an outsize share of new US dollar sales as matched against the performance of national brands. Market share for private label in supermarkets was nearly 21 per cent in terms of units and the products accounted for more than 16 per cent of total dollar sales. Market shares in drug chains reached a record 13 per cent in units and nearly 12 per cent of total dollar sales.
The drive to private labels has many impacts on the industry. Key among them is the market for branded products. With 50 per cent of Wal-Mart’s grocery sales coming from private label products, even those manufacturers that sell branded products through Wal-Mart cannot participate in 50 per cent of Wal-Mart’s volume. With both large and other retailers increasing their private label business, the competition to supply the remaining branded business becomes even more heated. However, for some manufacturers, providing the private label products represents a major opportunity. The competition to provide these private-label products is primarily driven by price and customer service. 

Retailer demands
Mid-size manufacturers with weaker brands have a larger challenge in gaining the channel master’s business. Mid-size manufacturers with weak brands or no brands at all must rely on smaller retailers and private label. In all cases, the mid-size CPG manufacturer must compete on many fronts. A major competitive tool is internal operations based upon strong systems. Reducing costs and improving customer service demands operational excellence. In today’s world, that means having in place systems that increase rather than hamper these abilities. Companies with enterprise resource planning (ERP) systems that were installed more than ten years ago often share a similar situation. These systems may have been an excellent choice at the time. However, comparing the impact of these systems on the business can be revealing.
In most cases, it has been necessary to augment the systems with extra efforts and side systems. These systems have often become a negative influence on a company’s ability to compete. Even with extraordinary efforts from the staff, gaping holes often exist between what customers expect and what can be delivered. Any company that has one of these older systems needs to ask whether the system is helping the company compete or is limiting its ability to provide customers with what they demand. These older systems often lack business process support for many functions. They were often designed in the mid- to late-1980s to meet the needs of 1980s-era CPG manufacturers. However, those needs have evolved and the systems were unable to adequately handle the new requirements. The base technology supporting these systems has also evolved, making them difficult to use and lacking flexibility relative to newer systems. 

Consumer demands
As anyone in the CPG industry knows, consumer behaviour is ever changing, and new preferences, fads, and fashions dominate many purchasing decisions. For example, sales of air fresheners rose 17 per cent between 2003 and 2004, while weight control product sales fell 12 per cent. In addition, families account for a very large proportion of total CPG spending. Societal changes and the demands of increasingly busy lifestyles mean that families are no longer a homogeneous group. Different types of families require different products to solve their everyday needs. Another example is the desire of consumers to look good and with the ageing of the population this means that the cosmeceuticals market is likely to increase quickly over the next five years. Older consumers will drive growth in this area through their adoption of anti-ageing products. To capitalise on this trend, manufacturers must understand the specific needs and expectations of this increasingly savvy and demanding consumer segment. 
To meet the demands of consumers and retailers for new products, the mid-size CPG manufacturer must invest in new product development. Consumer and retailer demand will not remain at the same level. While investments in new product development are required, the mid-size manufacturer must work harder to leverage these investments into the right product and getting that product to market at the right time. Today, that means having systems in place that allow both development and commercialisation of new products.
Will a new product be good for both the market and the manufacturer? One key to that question is setting the right price – one that the consumer sees as good value and the manufacturer sees as having the right margin. Deciding on a price that provides an acceptable margin should be easy, but too many mid-size CPG manufacturers lack the cost information to make informed decisions.
Quality costing information means the right pricing decision for new products and the ability to maintain margins on existing products.

Globalisation
The CPG industry long thought it was safe from the effects of globalisation. It reasoned that the barriers of transportation cost, shelf life, and consumer preferences would protect its local markets. These assumptions have proved false. Due to lower labour costs, offshore manufacturers are delivering products to the local market at a lower price than domestic or even local manufacturers can achieve. Of course, globalisation is a two-way street. Products can enter your market but your products can now enter other markets, a phenomenon once seen as impractical. 
Globalisation clearly provides the opportunity to sell to new markets.
To benefit from globalisation or to meet its threat, a mid-size manufacturer must, above all, be ready. To sell into new markets, it needs to be a better partner and collaborate with customers who have different needs than its traditional customers. The mid-size manufacturer has to be able to deal with the increased complexity of a global supply chain. Product development must look at non-local issues such as banned ingredients and local-label statements. To benefit from and defend against globalisation, costing systems become even more important. We find that most mid-size CPG manufacturers fail to have competitive cost tools. Without the right costing tools, pricing and cost-reduction programmes are less than effective.