All FMCG companies can bring these same emerging strategies to bear, just as the top performers in the industry are doing, by heeding five calls to action.
Focus the portfolio. Our research shows that FMCG companies with more concentrated product portfolios performed better than companies with more fragmented portfolios. The top product category for the ten top-performing FMCGs accounted for 56 percent of sales on average, compared with only 35 percent for the bottom 15 companies. Such a focused approach enables FMCGs to better understand how consumers and customer needs are evolving—and to make more effective use of their resources for competitive advantage.
Danone serves as a great example of how a highly focused company can drive advantage and achieve strong growth in a growing category by quickly responding to trends and investing in promising areas with overwhelming force. Although Danone didn’t start the Greek yogurt trend, the company quickly reacted by drawing on its understanding of the consumer and category, gaining a leadership position. By breaking the compromise between “better tasting” and “better for you,” the Greek yogurt trend ultimately enabled Danone to convince many consumers to trade up to a product that is twice the price on average as regular yogurt.
Certainly, companies don’t have to be as concentrated as Danone to achieve a high degree of focus. Large, diversified FMCGs can increase their focus in a number of ways, such as by aggressively reorienting their portfolio around specific points of competitive advantage or consumer occasions (such as breakfast), segments (such as moms of school-aged children), or megatrends (such as an emphasis on health and wellness).
Partner with winning retailers. As the retail sector continues to consolidate and new channels begin to take off, FMCG companies that direct the bulk of their attention and resources toward the most successful retailers stand to gain the most.
This approach is not about allocating more money to retailers to promote sales. Rather, it’s about gaining a better understanding of a retailer’s consumers, developing products and marketing activities that meet those unique needs, assigning dedicated people to work with a retailer’s specific buying structure and planning processes, and collaborating to create a truly demand-driven supply chain that connects seamlessly to the retailer’s operations.
To this end, FMCG companies would do well to communicate more openly about product planning, production schedules, and any ideas related to innovation and cost-saving. The goal is to develop greater trust and a true working partnership. This is often achieved by establishing global teams that are dedicated to working alongside specific retailers.
In this area, Procter & Gamble set the bar during the early 2000s, becoming the supplier of choice to the largest retailers through joint value-creation initiatives around category management, product innovation, and collaborative planning. As a result, P&G sharply increased its market share and gross margin—all while spending less on advertising.
Innovate to grow the category. Our research shows that private labels commanded a lower market share, on average, in categories marked by a relatively higher rate of innovation. We have also observed that large companies can stay on top of consumer trends and reinvent seemingly mature categories both organically and through acquisitions.
An example of success in organic R&D is Reckitt Benckiser, maker of household products such as Lysol and health and well-being products such as Mucinex. It has a proven innovation process fueled by employee ideas, recognition, and promotion. With rapid decision making and minimal bureaucracy, the company brings new products to market quickly. Consequently, even though Reckitt Benckiser spends less on R&D than its competitors do, its new products account for roughly a third of sales—making it a consistent leader in the FMCG industry.
An example of success achieved through acquisitions is Church & Dwight, long known for its household products and Arm & Hammer brand. It has used acquisitions to strengthen its portfolio and reinvent mature categories such as laundry care. The company is highly disciplined, investing a significant portion of the accretive gross margin of the acquired company back into its brands to spur additional growth. This acquisition strategy has contributed to total shareholder returns that lead the industry.
Sharpen your marketing. The marketing budget is often the first place many companies cut when times get tough. However, our research showed that, over the five-year research period, the top-performing FMCG companies grew their measured marketing expenditures by 9 percent, on average, while the bottom 15 FMCGs grew them at just 2 percent. But the top performers didn’t just spend more. They repositioned their brands to cater to the cost-conscious postrecession consumer, self-funded campaigns by reducing trade spending, and were much more targeted in their use of mass media such as television. A great example of the last point is Old Milwaukee’s Will Ferrell ad during the 2012 Super Bowl. Instead of paying for a national spot, the beer maker aired the commercial only in North Platte, Nebraska, a hotbed of loyal consumers. These loyalists spread the news virally, and the ad garnered higher digital ratings in terms of tweets, YouTube views, and similar measurements than some national Super Bowl ads did.
The majority of the FMCGs we researched increased the proportion of their marketing dollars spent online from 2006 to 2011, and we expect that trend to continue. Digital media, online marketplaces, and mobile devices are changing how people interact with brands and shop—and are providing a flood of data that allows FMCG companies to better segment and target potential buyers according to their demographics, interests, past purchases, and buying behaviors. These developments will likely be the catalyst that causes “shopper marketing”—a discipline that influences the consumer’s path to purchase—to finally take off. They are also likely to continue leveling the playing field so that niche brands and private labels can better compete against brands with bigger marketing budgets.
Master the art of pricing. On average, the ten top-performing FMCG companies increased prices faster coming out of the recession than the bottom 15 FMCGs did. Of course, not all of these high-performing companies had breakout innovations that could command price premiums.
Few FMCG companies fully understand how to price their products to maximize profits—or have the in-house capabilities to do so. To achieve higher margins, companies need to rethink their pricing strategies based on a range of factors—such as regional differences, product segments, ingredient mix/quality, seasonality, competitive dynamics, packaging options, retail outlets, and consumers’ willingness to pay—instead of using a one-size-fits-all approach. Best-in-class players are creating centers of excellence for managing and adjusting prices on an ongoing basis instead of treating pricing like a one-time event.
Within the pricing realm, FMCG companies also need to ensure that trade spending expenditures—essentially price discounts to retailers—are truly “pay for performance,” promoting the right retailer behavior (such as improving shelf placement or offering point-of-purchase displays). Too often, companies allocate too many budget dollars to the most unprofitable retailers or to fund a range of unprofitable promotion events. These mistakes could be easily avoided by using basic measurement tools, such as return on trade spending.