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Packaged Goods
The new model for
consumer goods
April 2018
Gregory Kelly
Udo Kopka
Jörn Küpper
Jessica Moulton
Why the industry’s historic value-creation model is faltering—and how to reinvent it.
The fast-moving-consumer-goods industry has a long became wealthier. This proved a tremendous
history of generating reliable growth through mass source of growth—generating 75 percent of
brands. But the model that fueled industry success revenue growth in the sector over the past decade.
now faces great pressure as consumer behaviors shift
and the channel landscape changes. To win in the Designed their operating models for
coming decades, FMCGs need to reduce their reli- consistent execution and cost reduction.
ance on mass brands and offline mass channels and Most have increased centralization in order to
embrace an agile operating model focused on brand continue pushing costs down. This synergy-
relevance rather than synergies. based model has kept general and administrative
expenses at 4 to 6 percent of revenue.
A winning model for creating value
For many decades, the FMCG industry has enjoyed Used M&A to consolidate markets and create
undeniable success. By 2010, the industry had a basis for organic growth post acquisition.
created 23 of the world’s top 100 brands and had After updating their portfolios with new brands
grown total return to shareholders (TRS) almost and categories, these companies applied their
15 percent a year for 45 years—performance second superior distribution and business practices to
only to the materials industry. grow those brands and categories.
This difference suggests that large companies face a Ten disruptive trends that the industry
serious growth penalty, which they are not making cannot ignore
up for through their minor expansion in earnings Why has this FMCG model of value creation stopped
before interest and taxes (Exhibit 1). generating growth? Because ten technology-driven
CPG 2018 trends have disrupted the marketplace so much
The growth
This new model forreally
challenge consumer
mattersgoods
because of that the model is out of touch. Most of these trends
Exhibit
the 1 of importance
particular 6 of organic growth in the are in their infancy but will have significant
consumer-goods industry. FMCG companies that impact on the model within the next five years
achieve above-market revenue growth and margin (Exhibit 2).
Exhibit 1 Organic fast-moving-consumer-goods (FMCG) industry growth has been weak, with
large companies growing at only 55 percent of GDP.
All FMCGs
6.0 2.5 0.6
(n = 290)
Medium, $2 billion
6.3 2.6 0.1
to $8 billion (n = 102)
55% of GDP
Exhibit 2 Ten trends are disrupting the historic value-creation model in the fast-moving-
consumer-goods (FMCG) industry.
4 Operating model that drives • ~4–6% general and • Pressure for profit from activist 2 4
consistent execution and administrative investors
achieves cost reduction
Disruption of mass-market product innovation And while millennials are obsessed with research,
and brand building they resist brand-owned marketing and look instead
Four of the ten trends threaten the most important to learn about brands from each other. They also
element of the current model—mass-market product tend to believe that newer brands are better or more
innovation and brand building. innovative, and they prefer not to shop in mass
channels. Further, they are much more open to
The millennial effect sharing personal information, allowing born-
Consumers under 35 differ fundamentally from digital challenger brands to target them with more
older generations in ways that make mass brands tailored propositions and with greater marketing-
and channels ill suited to them. They tend to prefer spend efficiency.
new brands, especially in food products. According
to recent McKinsey research, millennials are almost Millennials are generally willing to pay for special
four times more likely than baby boomers to avoid things, including daily food. For everything else,
buying products from “the big food companies.” they seek value. Millennials in the United States are
Exhibit 3 The venture-capital industry is fueling the explosion of small brands, providing
$7.2 billion in investment in the past four years alone.
1,994
1,578
1,287
647
452 506
336 346 317
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Example companies
Bai Caulipower Hello Beverages Koia Spindrift
Banu Daily Harvest Impossible Foods KRAVE Jerky Sugarfina
Beyond Meat FEED Projects Just Memphis Meats Unreal Brands
Brad’s Raw Foods Green Park Snacks Kensington and Sons
Brandless Health-ade Kite Hill
Exhibit 4 Small companies are generating two to three times their fair share of growth in
developed markets.
Retailer
private label 17 20 32
39
Small1 19
53
Medium1 33 33 59
12
Large1 31 25
16 15
2
–6
1 “Large” refers to top 16 companies, “medium” to next 400 companies, and "small" to remaining companies.
price, promote, and merchandise their products, of about 1,000 fast-moving SKUs 20 percent below
not just in these marketplaces but elsewhere. This mass grocers while still generating healthy returns.
disruption is in early days in markets other than
China and will accelerate as the e-commerce giants Mass-merchant squeeze
increase their geographic reach and move in to brick- The rise of the e-commerce giants and the discounters
and-mortar locations. Amazon’s push on private is squeezing grocers and other omnichannel mass
labels is a further game changer. To see the future, merchants. Together, the seven largest mass players
we can look to how China FMCG retailing has been saw flat revenue from 2012 to 2017. This pressure is
revolutionized by Alibaba Group and JD.com and forcing mass merchants to become tougher trading
the profound impact Amazon has had on its early partners. They are pursuing more aggressive
categories like electronics, books, and toys. procurement strategies, including participating in
buying alliances, getting tighter on SKU proliferation,
Discounters and decreasing inventory levels. They are also seeking
ALDI and LIDL have grown at 5.5 percent from 2012 to out small brands and strengthening their private
2017, and they are looking to the US market for growth. labels in their quest for differentiation and traffic.
Discounters typically grow to secure market share
of 20 percent or more in each grocery market they Disruption of developing-market category
enter. This presence proves the consumer appeal of the creation: The rise of local competitors
format, which enables discounters to price an offering Developing markets still have tremendous growth
Exhibit 5 The historic value-creation model for fast-moving consumer goods will be affected in
several ways.
2 Advantaged consumer access • The e-commerce giants will lead the trade
via mass-trade relationships • Discounters will grow to ~20% in most markets
• Mass merchants will feel the “squeeze” and fight back with greater use
of buying alliances, better use of owned data, and keenness for differentiation
• Factors will push down pricing, which will require consumer-packaged-goods
companies to live within a lower gross-margin structure
3 Developing-market category • Developing markets will remain a great source of value creation; local players
creation alongside rising incomes will fight for it
• Channel evolution will leapfrog developed markets, especially in mobile
4 Operating model that drives • Local relevance, consumer closeness, and speed will become more important
consistent execution and than consistent execution as a driver of competitive advantage
achieves cost reduction • Activist investors will continue to promote a cost agenda
5 M&A to consolidate markets and • Large assets will become scarce in some categories
enable organic growth post acquisition • Deep pockets of private equity will drive up valuations
data and tools like choice models, strengthening stimulating incremental innovation (now), efforts
demand forecasting, and using robotics to improve trained on breakthrough innovation (new), and true
shared services. game changers (next).
In addition to taking functional excellence to the Further, FMCGs will need to gather their histori-
next level, FMCGs will need to focus relentlessly on cally decentralized sales function, adopting a
innovation to meet the demands of their core mass channel-conflict-resistant approach to sales. They
and upper-mass markets. will need to treat e-commerce as part of their core
business, overcome channel conflict, and maximize
FMCGs will need to increase their pace of testing their success in omni and e-marketplaces. Players
and innovating and adopt a “now, new, next” like Koninklijke Philips that have weathered the
approach to ensure that they have a pipeline of sales- laborious process of harmonizing trade terms across
Exhibit 6 The new model for fast-moving consumer goods is a three-part portfolio strategy
enabled by an agile operating model, with continued use of M&A as an accelerator.
Relentless focus on innovation Bringing best technologies Innovation based on rapid test
that generates incrementality to market early and learn
Digital/IT capability Data and advanced Mass supply Niche supply Back-office
analytics capability system system functions
5 Continued use of M&A as an accelerator to drive market consolidation and fuel organic
growth, including programmatic M&A skills, post acquisition
markets are finding that they can grow profitably degree of automation and at greater speed than
on e-marketplaces. manual processes.
Finally, FMCGs will need to keep driving costs Third, advanced analytics and digital technologies
down. We are following three big ideas on cost. improve manufacturing performance by pulling
levers like better predictive maintenance, use of
First, zero-based budgeting achieves sustained cost augmented reality to enable remote troubleshooting
reduction by establishing deep transparency on by experts, and use of advance analytics for real-
every cost driver, enabling comparability and fair time optimization of process parameters to increase
benchmarking by separating price from quality, and throughput yield of good-quality product.
establishing strict cost governance through cost-
category owners who are responsible for managing Many of these changes will require strengthening
cost categories across business-unit profits and losses. technology—making it a core competency, not a
cost center.
Second, touchless supply-chain and sales-and-
operations planning replace frequent sales-and- Leapfrogging new category creation in
operations meetings with a technology-enabled developing markets
planning process that operates with a high FMCG companies must bring their newest and
Agile operating model The agile organization moves fast. Decision and
Originating in software engineering, the concept of learning cycles are rapid. Work proceeds in short
an agile operating model has extended successfully iterations rather than in the traditional, long
into many other industries, most significantly stage-gate process. Teams use testing and learning
banking. Agile promises to address many of the to minimize risk and generate constant product
challenges facing the traditional FMCG synergy- enhancements. The agile organization employs next-
focused model. generation technology to enable collaboration and
rapid iteration while reducing cost.
Building an agile operating model requires
abandoning the traditional command-and-control We also expect the FMCG operating model of the
structure, where direction cascades from leadership future to be more unbundled, relying on external
to middle management to the front line, in favor providers to handle various activities, while FMCGs
of viewing the organization as an organism. This perhaps provide their own services to others.