In some of my earlier OneSpace articles, you may have read that the CPG business landscape is changing fast. The problem is, many CPG companies are still married to growth strategies developed decades ago, which simply aren’t as effective in today’s rapidly evolving market.
When your business model hits a strategic inflection point, you need a sharply focused understanding of how customer values and needs are changing in your category. New digitally native brands are fragmenting the market and causing established CPG brands to obsess over this change. These legacy CPG brands are generally obsessed with one of the following three categories:
- Product: What it takes to design, develop and market their product line
- Business Model: Operating the business, identifying revenue sources and customer bases
- Technology: Offering upgrades and more features, but without a deep understanding of customer drivers
Regardless of a legacy CPG brand’s obsession, the first step in any strategic problem-solving initiative is to get the fundamentals right. Specifically, make sure you’re asking the right questions to internal and external stakeholders from the start. Asking the right questions determines the kinds of insight you receive and the value of that insight.
Trends That Matter
Fundamentally, legacy CPG brands are unique in the micro, but trends in the macro have become clearer by the day and show no signs of reversing in the next decade. For example:
- Offline to Online Migration: Purchases in more and more product categories are migrating from offline to online channels.
- Fragmentation of Market: With the migration of purchases online, many customers are getting acquainted with digitally native emerging brands that can market through targeting online.
- Private Label Growth: The last decade has seen an influx of retailer-owned private-label brands that are now represented across more and more product categories.
- Cost Reduction: Activist investors of legacy CPG brands are slashing costs and ushering in a new wave of consolidation.
- Regulatory Pressure: Governments are imposing stricter regulations on CPG manufacturers.
Considering these and other macro trends, CPG companies must reinvent themselves with new growth strategies if they are to survive and thrive.
Product-obsessed Growth Strategies
As the mass market shrinks, a range of small yet lucrative consumer segments are continuing to blossom. For example, more and more consumers are gravitating toward healthy food, environmentally-friendly products, personalization and convenience.
The disadvantage of niche markets and microsegments is that they often require some level of customization. The innovation process in large CPG firms isn’t set up for this new environment. It’s usually slow and risk-averse, with a relatively large “hurdle rate” (or minimum expected rate of return) favoring initiatives that don’t venture too far from the core business.
The problem with this old framework is that incremental improvements are usually too weak to change customer perceptions of legacy CPG brands. Brands that want to serve fragmented niches effectively need to be innovative and agile, as the traditional production, marketing and distribution processes of legacy CPG companies is too slow and cost-intensive to allow profitable growth in niche markets.
"Brands that want to serve fragmented niches effectively need to be innovative and agile."
Up until the current decade, legacy CPG brands had to attract new customers with big upfront commitments to traditional media. Today, these brands need to think like the emerging digitally native brands that they are competing against.
Social and digital media give you the ability to segment and target the market based on a set of variable creative assets. A benefit to legacy CPG brands over emerging brands is they have a greater number of available resources to test creative assets against different hypothesizes to attain feedback loops. Those feedback loops provide a framework to further the brand’s positioning and messaging to different sets of customers.
"Social and digital media give you the ability to segment and target the market based on a set of variable creative assets."
Business Model-obsessed Growth Strategies
One of the biggest trends in all categories of CPG is having a strong direct to consumer (D2C) commerce presence. In a recent OneSpace article, Anthony Riva wrote, “To remain competitive, many Big CPG companies that have traditionally only sold their products through retailers are beginning to experiment with their own D2C models. Last year, for example, Campbell Soup tested a D2C online soup delivery service, and Gillette launched Gillette On Demand, which allows customers to buy razor blades directly from the company via subscription or one-time purchase. And let’s not forget Unilever’s $1-billion purchase of D2C razor brand Dollar Shave Club in 2016.”
The benefits of legacy CPG brands having a customer-facing presence are access to more meaningful customer insights and the ability to quickly test new products.
Invest Through Incubators/Accelerators
Legacy CPG brands need to establish a well-defined acquisition and investment strategy. Grabbing inspiration from venture capital firms, legacy brands should be searching for emerging, authentic brands and forward-thinking entrepreneurs.
In recent years, many Big CPG brands have engaged with startups through internal corporate venture capital arms that invest directly in these types of companies through what they call incubators or accelerators. Nestle, Chobani and PepsiCo are examples of legacy CPG brands that are looking for “disruptive” food and beverage brands through this type of investment strategy.
Technology-obsessed Growth Strategies
Strategic Technology Partnerships
As the world gets more and more intertwined with technology, legacy CPG brands need to find innovative ways to provide value to the buying experience. While investing in close-knit relationships with startups is paying off for the some brands, only 28% provide extensive resources for startups, per an Accenture report. In January, L’Oréal will unveil a state-of-the-art innovation center in Paris, inviting startups to pitch their best ideas on everything from artificial intelligence to augmented reality for the chance to work with the conglomerate.
Logistics is one of the biggest areas of strategic technology partnerships. Anheuser-Busch, for example, was one of the first to pilot Uber’s self-driving trucks. Similarly, final-mile logistics solutions for e-commerce packages through drone companies like Flirtey, which is known for its high-profile partnerships with companies such as Domino’s Pizza, could be a major innovation for CPG brands.
"As the world gets more and more intertwined with technology, legacy CPG brands need to find innovative ways to provide value to the buying experience."
Algorithms might bring up fears of high school or college exams, but they are now influencing buyer behaviors in all CPG categories. As e-commerce continues to grow, legacy CPG brands need to ensure they are capturing and analyzing customer data to provide value to the buying experience. Though e-commerce only makes up about one-third of all CPG sales (less in the grocery category), digital sales accounted for 89% of growth for CPG products between 2016 and 2017, per Nielsen.
"Digital sales accounted for 89% of growth for CPG products between 2016 and 2017."
Similarly, digital searches for consumer products have steadily increased in recent years, with more customers activating with brands prior to the points of purchase through pull marketing strategies. This gives a legacy CPG brand the chance to use digital (combined with previous analog) customer data in a targeted manner to drive a higher percentage of conversions.
Joshua Schall, MBA has an 11-year background in the emerging and intersecting CPG/FMCG categories of functional food and beverage and nutritional products.
He currently is the owner of J. Schall Consulting, an Austin, TX-based boutique management consulting company that focuses on digital growth strategies for CPG/FMCG brands that range from pre-launch to portfolio companies with $500M in yearly revenue.
Joshua enjoys an active healthy lifestyle but still finds himself spending way too much time scanning social media and digital grocery aisles for new consumable brands.