Much has been written about the historic sluggishness of the Consumer Packaged Goods (CPG) industry. Since 2013, CPG sales growth has been below 2% and that growth is entirely driven by pricing. In response, we see companies merging, brands being sold and jobs being lost.
The pundits in our industry sit on the sideline and pontificate the cause of these weak sales trends. Some blame distrust by millennials of 'Big Food,' but that doesn’t explain why the industry lethargy extends to non-food, as well. Others talk about lost sales to c-commerce.
However, at less than 2% of industry sales, e-commerce is hardly a factor, particularly – despite the boosters that say otherwise – in CPG where e-commerce growth is very modest.
So what is the reason for the weak sales? Certainly one macro-economic factor at play is that consumers, primarily younger ones, are substituting purchases of food and apparel for electronics and other leisure activities. You think CPG is hurting? Look at the dumpster fire that is the apparel industry.
The larger issue, though, is that the CPG industry is guilty of self-inflicted wounds. We are holding ourselves back with flawed industry paradigms and self-defeating behaviors.
The proof in this claim is that the sluggish trends are confined to only the group of companies with one billion dollars or more in sales (called Tier 1 companies), as their annual growth rates in the past five years are only 0.5%, according to Nielsen. Companies under one billion, as a group, are doing just fine. Annual sales growth for these companies is about 4%.
Let’s take a quick look at 10 things that Tier 1 CPG companies have done to shoot themselves in the foot:
1 - Packaging changes: How can you tell that a new brand manager or marketer has taken over? The package changes. I’m talking changes on just aesthetics, no real functional enhancement. TABS Analytics has tracked the effects of dozens of these changes. Most have no effect on sales; a very high percentage of them (30-40%), however, hurt sales by at least 5%. The percentage of package changes that grow sales? Less than 5%. So with package changes, we have an exercise that is time consuming, expensive and likely to hurt sales significantly, yet Tier 1 companies continue with these changes unabated.
2 - Cynical line extensions: Want to guarantee failure in a new product? Stick it with the suffix 'Essentials.' We have never tracked an Essentials line extension that grew sales; almost all of them fail. In fact, it is common for Tier 1 companies to launch thousands of undifferentiated, non-innovative flavor variants, not as a way to grow sales, but to hold shelf space. The trade complains about this, but they are the worst enabler of the practice. Our analysis shows that the typical new health & beauty care item sells about 50-70% of what the current existing items produce. We have also found that less than 20% of new items grow brand, much less category, sales.
3 - Downsizing product: This is when manufacturers behave in an un-shopper centric way and reduce the product size yet hold the cost. They do this thinking that most shoppers aren’t doing the retail price math. And for what? The average downsize saves only 1 or 2 pennies per unit but usually reflects a fairly big reduction in size. It usually takes less than 1% of consumers to notice and stop buying to neutralize the minimal P&L benefit of the cost savings. Our analysis shows the loss is usually much more: in the 2-10% range of unit sales reduction due to downsizing.
4 - 'Trading up' the consumer: Under the 'ignorant consumer' theory of marketing we also have the flawed paradigm of 'trading up the consumer.' This is the practice of offering larger sizes with a better price per ounce. This strategy actually works if a smaller-size, lower price option is still available to offer the price-sensitive consumer a choice. Usually, though, retailers and manufacturers make a full swap for lower priced for higher priced products. The outcome is a significant flight of customers to Value Channels and lower sales, overall.
5 - Obsession with Millennials: In some categories such as cosmetics, millennials drive the category and the trends. In the vast majority of categories, particularly in food, sales are driven by households with kids, usually with females age 35-54. Millennials are less than 15% of sales potential for most Tier 1 brands, but often garner a much larger share of the marketing investment. This is a misallocation of resources that is growing worse over time.
6 - Over-emphasis on e-commerce: Similar to the Millennial obsession is the over-enthusiasm for e-commerce. For a food category, less than 2% of transactions are done online, and shopper loyalty to the outlet is poor at 12% compared to the Brick & Mortar norm of 70% (source: TABS 2015 Consumables study). E-commerce share of health & beauty care is a bit more, in the 2-5% range, but it is still a market that often receives much more focus than it is worth. Retailers are particularly guilty of this over-allocation of effort to e-commerce, and they are similarly guilty of another misstep which is….
7 - Ignoring value grocery: This is primarily relevant to food, but food is still about 70% of the CPG industry. Value grocery, primarily Aldi, makes up 6% of industry transactions, five times more than online share. Despite that, you almost never hear retailers or manufacturers talking about this growing channel. Aldi and Lidl inflicted some major pain on UK grocery, and value grocery is over 13% of the Canadian Market. US manufacturers of brands ignore this channel at their peril since value grocery is about 80% private label.
8 - Promotional frequency over depth: A common lament on CEO earnings calls is that their trade spending keeps going up and the impact keeps going down. This condition has been corroborated by both Nielsen and our own internal analysis. One of the big reasons is that manufacturers and retailers are pulling back on deep discounts and are opting for watered-down promotions at a much higher frequency. In reality, promotional depth always generates more incremental sales than higher frequency for Tier 1 brands.
9 - Loyalty cards and digital coupon programs: Another failed promotional trend is the massive expansion of low-impact loyalty card and digital coupon programs at the expense of old-school vehicles such as circulars and Sunday coupons. These old-school vehicles are still more popular to consumers and more impactful to sales, as the discounts are available to everyone. Further, they are much less expensive.
10 - Bureaucracy…still: You would think Tier 1 vendors would have a strategic imperative to shake things up and do things differently. Nope. Big companies continue to be slogged down with slow decision-making and a lack of flexibility. As an example, a smaller company can evaluate and implement a new trade promotional management system in less than three months. The big company will take 18 months just to decide on spending 10 times more for a system that will take another 18 months to implement.
This list is certainly not exhaustive, but it covers many of the big areas where large CPG manufacturers are their own worst enemy.
It is possible that a major shift of consumer preferences will return the industry back to growth and the Tier 1 manufacturer can avoid the need to make any structural changes to its business.
More likely, though, mergers such as Kraft-Heinz will become more common and mid-tier managers will find themselves out of work, and wondering what happened. What will have happened is that these managers failed to act and to change the practices that were holding their business back.
(A version of this article was first published in Chain Drug Review for its April 2016 NACDS Annual issue.)
Dr Kurt Jetta is founder and CEO of TABS Analytics, a technology-enabled sales and marketing analytics firm serving the consumer packaged goods industry. He was previously CEO of baby feeding supplier, Binky-Griptight and has held a variety of marketing and marketing trade posts at Playtex.
What promotional tactics are most effective?
Deal tactic tips from TABS Analytics founder Dr Kurt Jetta:
- % Off: Go big, or go home… If you're not prepared to offer at least a 20% discount, then don't bother making one at all.
- BOGO A powerful tool, but not nearly so as offering a percentage off.
- Net Price after FSI (free-standing inserts): You need to start small and follow its progress closely.
- $ Savings: Offering $1 off here, $2 off there is not nearly as effective as the above promotion types.
- Multiple purchase requirements: Forcing the consumer to buy 2, or 3, or more to receive any discount is … generally done to achieve a short-term increase in volume, but there's just not a lot in it for the consumer.
- Buy 2, Get 50% off: Not an effective promotion… it essentially amounts to a gimmick.