strategy+business is published by PwC Strategy& Inc.
or, sign in with:
strategy and business
Published: June 6, 2011


Consumer Packaged Goods: Escaping the Consolidation Mentality

Holding fast to the two myths that have long dominated strategy in consumer-oriented industries — that bigger companies win, and that one or two players control every product category — can get a firm into trouble. A capabilities-driven strategy can provide a better path to profit.

Some strategic concepts, if they’re regarded as sacrosanct, may lead an entire industry in the wrong direction. Something of that sort has happened during the past two decades in the consumer packaged goods (CPG) industry. Two of the most influential strategy ideas are so widely held, so intuitively appealing, and so seemingly pragmatic that they are very hard to give up. Yet they can also be very dangerous to follow.

Both of these misleading ideas have to do with consolidation: the premise that, when it comes to business strategy, bigger is better. Since the 1980s, the conventional wisdom has held that shareholder returns accrue most to companies with huge brands and the scale to compete in emerging markets. Many CPG leaders have assumed that their chances of winning, in every region and every product segment, were enhanced by size. More salespeople, a bigger distribution footprint, a bigger advertising budget — these were the ingredients of success.

This perception gave rise to the second misleading idea: Consolidation is inevitable. For years, experts predicted that most consumer packaged goods segments would end up like carbonated beverages, razor blades, and diapers — with just two or three big rivals, a handful of niche players battling over the scraps, and a few private-label brands for value consumers.

Together, these two myths add up to a consolidation mentality that has dominated business strategy in this industry. CPG leaders have assumed that their job was either to make their company as large as possible or to position it for eventual sale to a giant conglomerate. They bet their company’s future, in short, on untrammeled growth — whether or not they had the capabilities to manage it. In this way, many previously solid CPG companies began to lose their way on the path to profit.

To be sure, some players, such as Procter & Gamble, use their size and scale to great advantage, particularly in emerging markets or new growth areas. But in reality, the industry is much more diverse and dynamic than the conventional wisdom would suggest. Most CPG categories — including staples such as food, personal care products, and cleaning supplies — are in a constant state of evolution. They move from consolidation to fragmentation, and some can cycle back, time and time again.

In such an environment, there are many ways to prosper, with each successful company finding its own path: some end up large, some small, some global, some regional. But none of the paths taken involve growth for the sake of scale alone. Instead, they require the kind of growth that leads to profitability. This in turn requires coherence.

Coherence in Consumer Packaged Goods

Coherence is a company’s ability to concentrate its resources and collective intelligence, and marshal all of them in the service of a well-aligned group of products and services with a focused strategic direction. Highly coherent companies have three to six major distinctive capabilities, all of which are integrated into a single system that is used throughout the company. This type of strategy and management execution allows companies to be efficient in their activities, disciplined about their portfolios, and differentiated in the eyes of customers.

Because of the consolidation mentality, many executives of CPG companies have overlooked the value of coherence. They have focused on sheer size and scale instead. But size and scale are no longer as critical as they once were — at least not in the mature markets of industrialized nations.

We recently compared the financial performance of three dozen consumer packaged goods companies in North America and Europe, over a 10-year period starting in 2000. The most consistent CPG successes were all coherent firms. These included some relatively small firms, such as Alberto-Culver Company (a US$1.4 billion company with a consistent track record of beating the market in shareholder returns, and that is being acquired by Unilever in 2011) and Church & Dwight Company (the $2.5 billion producer of Arm & Hammer products; the company has generated total returns far exceeding those of most other CPG companies). The value of coherence was demonstrated by other consumer products companies as well — including niche companies such as Ketel One, upstart competitors such as Starbucks, and such large, well-known companies as Coca-Cola, PepsiCo, and P&G.

Page 1 2 3 4 5 6 7 8 9  | All | Next Last>
Sign up to receive s+b newsletters and get a FREE Strategy eBook

You will initially receive up to two newsletters/week. You can unsubscribe from any newsletter by using the link found in each newsletter.