Fundamental market shifts benefit smaller firms over larger, analyst says

By Hank Schultz contact

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Fundamental market shifts benefit smaller firms over larger, analyst says

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The marketplace for consumer goods has fundamentally changed, and CPG companies looking for stable long term growth need to be able to solve this “frustrating puzzle,” according to a new report from market research firm Strategy&.

“The per capita spend on food in grocery stores when adjusted for inflation has been completely flat for fifty years,” ​Steffen Lauster, vice president of strategy told FoodNavigator-USA. “There are still categories that go up or down. Greek yogurt is hot while the other yogurts are going down.”

A number of factors have changed the US market into the fragmented picture of today, Lauster said. One key trend has been the ongoing maturation of the market, according the the new Strategy& (formerly known as Booz & Company) report titled “How US CPGs Can Get Their Groove Back.”​ As far as maturation is concerned, population growth has slowed in the US. Population growth has been one of the barely acknowledged underlying drivers of CPG demand in the country. According to the report, in 1965, the average U.S. household spent the inflation-adjusted equivalent of $2,041 per person on food at home. A forecast by Strategy& suggests that number will be $2,061 in 2015, meaning almost all of the growth for food companies in recent decades can attributing simply to more consumers in the market.

Fundamental market shifts

The market is ‘bifurcating’ too, Lauster said.  By this he means a significant change in the distribution of consumers who base decisions on a perception of premium quality, and those for whom value is the key driver. Before 2008, this was almost a 50-50 split, but those days are gone and they don’t seem to be coming back.

“You’ve still got what we call ‘selectives’ who are willing to spend more for a premium product. Think about coffee. But two thirds of the population are now behaving in a much more value-oriented way. And that isn’t just about socio-economic level; you could have a newly minted MBA who is just married and bought a house and is very concerned about value. It’s hard to see this trend changing. We will continue to see this situation in which CPG companies have to play to both segments,” ​Lauster said.

Going along with this change in the consumer base has been an ongoing change in the retail landscape, the report said. “The emergence ofsmaller competitors, and the proliferation of retail formats — the grocery channel has lost share to club, dollar, and convenience stores —have created a much more complex environment,” ​the report said.

“From the mid 1990s to the mid 2000s Walmart was a big growth driver,” ​Lauster said. “It used to be if you had an efficient supply chain you could make some good money with them. Walmart is still relevant, but now there are all these other players.”

Now, the growth is moving toward smaller, more nimble firms and the retail channels on both ends of the specturm that are willing to or are able to work with them, Lauster said.

“Now the growth is organic, premium brands.  Or its in dollar stores. Costco is an example of a retailer willing to work with a lot of small brands. These are different brands, different models, different approaches. You now have growth that from a channel perspective is much more complex,”​ he said.

Being big ain’t what it used to be

This dynamic will benefit smaller players and force big companies either to buy them at an accelerated rate or at least learn better how to think like them, Lauster said.  With niche markets and rapid product cycles, being big ain’t what it used to be. In addition, advertising formats are in ferment, a development that benefits the fringe players too, he said.

“The advantage of scale used to be very significant in the past in the CPG industry. It used to mean more efficient factories, economies of scale, and cheaper ad buys. With new ad formats this has really diminished. The scale of TV ad buying doesn’t matter that much any more,” ​Lauster said.

Lauster said metrics quoted in the report clearly show this trend. In the 2009-2012 period, small manufacturers (defined as annual sales of less than $1 billion) posted a 6.2% compound annual growth rate.  Private label manufacturers grew by 2.8%, medium size firms ($1 billion to $3 billion in annual sales) by 1.6% and the biggest firms retreated, posting a -3.7% CAGR for the period.  The smallest manufacturers gained 2 percentage points in market share during the period, while the medium and large firms each lost a point, the report said.

What is to be done?

The report laid out various strategies for coping with the puzzle presented by the present day marketplace. On one hand, brands need to be keenly aware of the value end of the market. A strategy built purely on a premium product positioning may be inherently limiting. Lauster offered P&G as an example of a larger player that has successfully managed this transition with some of its brands. Pampers is the company’s premium disposable diaper brand, but the company created Luvs to capture the value minded buyer, and now Luvs signifcantly outsells Pampers, Lauster said.

In addition companies should look at their channel strategies.  Building brands in one channel and trying to repackage them and sell them with different messaging in other channels isn’t a winning strategy in the modern marketplace. Companies also need to rethink advertising strategies to go with new media outlets and retool pricing and volume models to go with real-time transpency on comparison prices that new technology platforms afford. It’s a matter of adapt or expire in the wake of the market shift meteor, he said.

“You built a lot of these companies around an efficient supply chain. In the future you will certainly see the whole industry be more ready than in the past to adjust portfolios,”​ Lauster said.

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