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How Consumer Companies Can Win Back the U.S. Market

The Game Has Changed
December 17, 2012 by Nicholas Keuper, Steven Matthesen, Jeff Gell, and Drake Watten
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In This Article
  • BCG and Nielsen evaluated the portfolio mix, go-to-market approach, and performance of the 25 largest public FMCG companies in the U.S. (ranked by sales) to determine what was and wasn’t working.
  • The top ten FMCG performers operate more like niche brand manufacturers, focusing on a great value proposition and how consumer behaviors are changing in the wake of the recession, a proliferation of retail channels, and innovations in technology.
  • The winning strategies are focus the portfolio, partner with winning retailers, innovate to grow the category, sharpen your marketing, and master the art of pricing.

The U.S. market has been tough on the biggest fast-moving-consumer-goods (FMCG) companies. Although big players have traditionally fared well, “size and scale” do not provide the same advantage they once did, and these companies have recently been outpaced by retailers and niche brands, The Boston Consulting Group and Nielsen have found in recent analysis. Fortunately, this same analysis and our work with clients also reveal that despite this trend, protecting—and growing—profits is very attainable for large FMCG companies that embrace the right strategies.

By analyzing the top performers, we have found that the consumer is at the crux of the winning strategies. To drive profitable growth in the U.S., FMCGs should return to a fundamental focus on the consumer that acknowledges and taps purchasing behaviors and mindsets as they have been transformed by the recession, the proliferation of retail channels, and innovations in technology.

Why the Profit Pool Has Shifted from Large Branded Manufacturers

From 2006 to 2011, our proprietary research shows, annual gross-profit dollars grew by 5 percent at retailers and niche brands, while they grew by only 2 percent, on average, among the 25 largest branded FMCGs. Had the top 25 FMCGs (ranked by sales) maintained the same growth rate of 5 percent, their annual gross-profit dollars on average would have been 15 percent higher in 2011. The stalled pace and missed revenue opportunities result from a few major factors:

  • Retailers claimed roughly 75 percent of the profits shifting away from large FMCGs. Among the factors driving this shift are the lingering recession—which makes private-label products more attractive to consumers—and the burden placed on manufacturers by rising commodity costs. The most powerful factor fueling the shift, however, is that retailers have more leverage than ever before: They have consolidated the market, gaining power, and they are becoming more sophisticated. Through data mining, their knowledge of the consumer now surpasses that held by many manufacturers, and this is informing all aspects of their business from innovation to person-specific pricing. Retailer consolidation has not only limited the ability of manufacturers to take a tough stance in negotiations with retailers but has also provided retailers with more transparency into manufacturers’ costs.

  • Manufacturers of niche brands accounted for the remaining proportion of the profit shift. Again, several trends are associated with this shift, such as the rise of health and wellness as a consumer focus and the role of digital marketing in enabling small brands to better reach customers. The most prominent driver, however, is the fact that consumers perceive niche brands as delivering a stronger value proposition than ever before. The enhanced quality and positioning of these brands have resulted in a loyal consumer base that is willing to trade up to premium prices.

In this environment, many large FMCGs have turned to counterproductive strategies such as reducing product quality, cutting back on marketing, and relying on price discounts to maintain or increase volume. They have been harvesting the market rather than investing to grow it. Although these moves may help meet short-term financial targets, they don’t communicate value to the consumer and will degrade the brand over time.