The Great Escape
In the next five years, a situation will arise in which retailers will increasingly prescribe how their suppliers are to act. In which consumer packaged goods (CPG) companies no longer have any powerful brands. In which retailers are controlling the supply chain. Is this situationunimaginable or realistic? Can suppliers escape the "Growth is Dead, Retailers Win" scenario?
Elsevier Food International, Vol. 5, Number 4, November 2002
Edward Giesen and Hendrik Stegenga
There are developments afoor within the CPG industry that could indeed lead to the above scenario. It begins with the self-perception of CPG companies that appears to contradict reality.
Traditionally CPG companies have looked upon themselves as creative enterprises that appear to know everything about the consumers. Various studies, however, demonstrate that this image is seriously flawed. In the U.S., for instance, the number of newly introduced products has increased considerably during the last few years. However, in 2001 only seven per cent were rated as being innovative, compared to almost 20 per cent in 1986. Most new product activity has fallen into the realm of line extensions and minor innovations. Another analysis has shown that more than half of new products introduced in 20 categories failed within two years of introduction.
A second misconception of CPG companies is the idea that their products occupy a special place among consumers. However, as standards of living have increased, the share of CPG products in consumer spending has come under pressure. In the last 20 years consumers have increasingly spent relatively more on services (up from 50 to 60 per cent of their disposable income). This growth has gone directly at the expense of CPG products and is an added blow coming at a time when the expected economic growth- has had to be adjusted downwards.
Last but not least, CPG companies see themselves as highly important players in advertising and the media. However, the share of total media expenditure of CPG companies fell from 45 per cent in the eighties to 19 per cent in 1999. CPG products and brands have therefore lost the attention and attraction value with consumers. This is clearly reflected in brand value and brand awareness. Many factors determine the brand value and CPG companies are continually emphasising that various emotional issues playa very important role in the strength and value of their particular brand. Coca-Cola, for instance, is considered to be an exceptionally strong brand with an estimated brand value of US$ 69 billion in 2001. Yet, it is the only CPG brand listed in the global top 10 brands. Moreover, only eight CPG brands rank in the top SO brands globally.
Generally speaking, the image of CPG companies is under considerable pressure. It appears from recent studies among top executives that only five CPG companies rated in the top 50 of the world's most respected companies. Of these five, only two increased in rank compared to the previous year.
Retailers are gaining the upper hand
The predominant channel of distribution for CPG products is through retailers. As a last link in the CPG chain towards the consumer, they control the actual transaction with the consumer.
Retailers are continuously consolidating and do this at a much faster rate than their manufacturing counterparts thereby tilting the balance of power to their advantage. The retailers therefore place increasingly high demands in their relations with CPG companies. In 1996, the top 10 of retailers had a market share of 28 per cent in the global retail top 100 sales. In 2000, this had already increased to 33 per cent. Ahold, for example, continued to grow considerably owing to acquisitions and now realises the majority of its turnover in the U.S. In a few large European markets, such as France, Germany and Britain, the top 3 retailers already have a combined market 
share of over 40 per cent.
Private labels continue to gain importance, to the detriment of CPG brands. Only less than a quarter of consumers indicates to be prepared to pay extra for a CPG brand as compared to that of a private label. Retailers indeed continue to need CPG brands in order to be able to offer the consumer a wide choice. However, with higher margins on private label products, retailers could be placing a much stronger emphasis on private labels. Moreover, the marketing costs per unit of their own brands are much lower than those of CPG companies. Practice shows that retailers are successfully introducing private labels in an increasing number of categories. In the diapers segment, Wal-Mart for instance already generates more turnover with its private label than P&G's Pampers and Luvs combined. In this way retailers also build an extensive knowledge and experience in consumer branding, to date, a domain that was only controlled by CPG companies. Consequently, price and quality are increasingly less distinguishing characteristics between CPG brands and private labels.
The Transformation Blueprint
CPG companies need to change course radically in order to effectively handle the stranglehold of stagnating growth on the one hand and the increasingly powerful retailers on the other hand. In many cases this will mean a transformation in both thought and action.
PwC Consulting has developed a model that represents the level of influence that CPG companies have on consumers and retailers. With this model, CPG companies can map their current position, in which direction they can best head and which strategy they should follow to achieve this goal.
In this Play Big model, the vertical axis represents the Importance to Consumers, for example, in terms of importance of the product/brand in the life of consumers, consumer loyalty and perceived differentiation. The Degree of Leverage with Channels is represented on the horizontal axis. It represents the Degree of Leverage with Retailers, for example, in terms of the ability to resist price degradation and promotion, the retail profit contribution, and the CPG company's margin. The four quadrants in the model are:
* Growth Is Dead, Retailers Win: retailers dominate and control the distribution channel. Many CPG products have become commodities. CPG companies behave responsively and often produce for private labels.
* Brand Brilliance: growth for CPG companies comes primarily from non-retail channels. CPG companies support big brands.
* Service Leader: retailers and CPG companies collaborate heavily in the supply chain. CPG companies deliver world-class customer service. * Play Big: CPG companies grow categories collaboratively with retailers. CPG companies support big brands and there is a migration from products towards solutions.
Each position in the matrix requires a specific strategy and accompanying capabilities in order to maximise shareholder value. Each of the four quadrants may be a possible option for the desired positioning of a CPG company, as long as this choice is based upon a good assessment of the present capabilities. The transformation towards the future position should also be formulated consistently and realistically. Furthermore, the company will have to comply with the rules within the chosen quadrant.
A few examples of CPG companies and their chosen positioning are:
• McDonalds has become a dominant player in the Brand Brilliance quadrant, by having created a strong global brand in the non-retail/out-of-home channel.
• Heinz recently shifted its emphasis away from consumer marketing, whilst at the same time strengthening its focus on service. Thus, Heinz is heading towards becoming a Service Leader.
• Colgate Palmolive is an example of Playing Big. For instance, in Portugal Colgate Palmolive worked closely together with the retail group Sonae and the Portuguese dental association. No new products were developed in this process. They merely applied an innovative technique aimed at cooperating with retail, in order to create awareness of oral hygiene. The close cooperation that was aimed at consumers resulted in a considerable growth of the category.
The matrix in practice
If a manu-facturer wants to move from one quadrant to another, all activities should relate entirely 
to the newly chosen positioning.
Primarily it is of importance to optimise the use of fixed assets. When moving up in the matrix the CPG brand gains more and more strength among consumers. At this stage, many CPG companies hive off the non-core activities that in fact only absorb valuable capital and require scarce management time and attention.
Through a focused use of subcontractors (contract manufacturers) and shared service centres such a CPG company will need to spend less time on the management of production and secondary processes but instead focus more on managing the brand and strengthening relations with consumers and retail customers. Other CPG companies that are found predominantly at the bottom of the matrix, actually choose an opposite strategy by letting go of consumer marketing and focusing on low-cost production processes. In both cases the creation of a targeted choice is important.
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With its global Smirnoff Experience, Diageo wants to build a long term relationship with cunsumers. |
Furthermore, companies in the Brand Brilliance segment in particular are developing non-retail channels with accompanying multi-channel marketing. Breweries, for example, are traditionally strong in setting up a "branded drinking outlet network". The Internet is also to play an increasingly important role as an alternative sales channel. Thus Nike, for instance, set up Niketown.com.
The quest for continuous growth urges CPG companies to structure their product innovation processes. In this, one could think of creating a culture that encourages innovation and introducing a portfolio approach in order to effectively manage all product innovations together. Furthermore, many new techniques can be introduced such as Internet portals, which efficiently link all parties involved as well as all information that is needed for the innovation process.
In moving to the right in the matrix, the building of a structural relation with retailers plays a major role. Here, it is of major importance to so to speak step into the shoes of retailers, to understand where their problems lie and subsequently to respond with total commitment. An example of this is the development of self-service Internet portals in which retailers can examine all kinds of issues of their CPG supplier as and when it suits them. For example, in the field of tracking and tracing, payment of accounts, requests about specific products, and so forth. Key account management is also of vital importance to CPG companies. In order to understand and manage the retail customer effectively one could think of setting up a specific profit and loss account per customer, so that the account manager can act increasingly more as business manager. An accurate insight into, and effective management of, trade funds also plays an important role in this.
In moving to the right in the matrix, especially in the Service Leader quadrant, CPG companies must excel in managing the supply chain. One could, for example, think of introducing advanced CPFR systems with a continuous or online alignment between partners within the chain.
All above-mentioned initiatives should ultimately come together in a consistent business-operating model; CPG companies should translate their chosen position in the matrix as well as the accompanying initiatives into the elements as represented in the figure above. This encourages the planning of a well-founded transformation and facilitates monitoring during the execution .
Edward Giesen is director and Hendrik Stegenga is partner of PriceWaterhouseCoopers Consulting. An in-depth version of this article is included in EFI's publication Executive Outlook vol. 2 number 3 (October 2002).
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