In the United States, one of the first major CPG categories to show real fragmentation was beer. Before 1978, there were just a handful of producers. Then new regulations allowed small-scale breweries to operate, and breweries proliferated. About 1,500 beer companies operate in North America today. The same dynamic spread from beer to other food and beverage categories. By 2004, the top two or three brands in any food category were just as likely to lose market share as to increase it over the subsequent four years.
In food, the categories that are fragmented are wide-ranging; they include hot drinks, balsamic vinegar (priced from $3 a bottle to more than $100 a bottle at some specialty stores), ready-to-eat meals, and vodka, which is available in a dozen or more brands at the average liquor store. Fragmentation is also common in many personal care and beauty segments. In shampoos and conditioners, the most successful brand as of April 2009 was Procter & Gamble’s Pantene. But it had only 16.4 percent of the market, a figure that had dropped three percentage points since April 2007, as Pantene lost share to newer products like Alberto-Culver’s Tresemmé and some budget-conscious consumers opted for private-label hair products. Hairstyling products are even more fragmented than shampoos, with the top three products barely accounting for a quarter of all revenues. Here, the smallest company’s entry (again Alberto-Culver’s Tresemmé brand) pushed past the entries of two far bigger companies (L’Oréal’s Garnier and Procter & Gamble’s Pantene) in 2008 and 2009.
In some fragmented categories, mass and price usually don’t matter as much as perceived quality. In the New York area, for instance, Rao’s marinara sauce (the same sauce available in the famous Harlem restaurant of the same name) is a popular brand in specialty supermarkets despite costing twice as much as other jarred sauces. Other categories, like paper goods, frozen vegetables, dairy, and some baked goods, are fragmented because consumers don’t believe the products are differentiated at all, so they care only about price. Private-label products often gain a foothold here. Adding to the complexity, the perception of brand value differs across geographies. In Germany, more than 60 percent of consumers resist buying branded toilet paper: They do not believe it is any better than the cheaper private-label variety.
There are, of course, categories that have consolidated in just the way the experts predicted. Carbonated beverages (Coke and Pepsi have more than 70 percent of the market between them), breakfast cereals (Kellogg and General Mills), shaving products (Gillette and Schick), and pens (Sharpie and Bic) all have only a couple of major brands, plus a few local or niche brands, and private labels. These are among the categories in which retailers — responding to consumers’ dislike of an overabundance of choices — are opting to simplify their inventory. These consolidated categories also offer unique scale advantages in product development, manufacturing, and distribution. But they do not represent the bulk, or even the majority, of consumer product categories. Moreover, as time goes by, some of these categories are also likely to fragment.
Coherence at Alberto-Culver
In the face of these realities, why do so many consumer products companies maintain the consolidation mind-set and pursue a strategy of incoherent growth? In part because it feels natural to executives who grew up in the business during the past 30 years. Most of the large companies in this category evolved through ad hoc mergers and acquisitions. A baked goods company might acquire two others, each with a small frozen foods sideline, and become a conglomerate with a frozen foods division. Ultimately it would end up with a diverse portfolio of relatively unrelated products.