• If you are trying to get a toehold in a developing market, you may choose to make moves that, strictly speaking, are not coherent. For instance, you might acquire an indigenous CPG manufacturer or retailer, accepting some ill-fitting products or services because they come along with the essential capabilities you need in areas like distribution. You can also plan for eventual coherence by structuring your acquisitions up front as two-part deals: Think simultaneously about finding and acquiring the target company, and about divesting unneeded brands, assets, and personnel. (See “M&A in the New CPG Strategy,” by J. Neely, Paul Leinwand, and Amit Misra.)
Finally, look ahead to determine which capabilities will be needed in the future in this market. For example, if you are a small CPG company looking to expand in China or India, how rapidly do you expect the retail and distribution infrastructure to improve there? Will you get the scale you need in these countries by climbing on the backs of major retailers like Walmart?
• If you are a local company trying to expand your geographic footprint, the nature of your category can determine the capabilities you will need. For instance, food companies often have difficulty gaining an advantage in new regions, no matter how big they are. People’s food preferences vary too much by locale, and different areas may require different development and marketing capabilities. KFC’s successful launch in China, for example, required shifting most of the food on its menu, and many of its processes, to forms more palatable to its Chinese consumers. Beauty companies, however, have an easier time operating globally because in general tastes in personal care products travel more easily across diverse geographies than do preferences in food.
• If you are pursuing organic growth (without M&A), seek “scale at the shelf,” not across categories. In other words, establish multiple brands at diverse price points, each with its own proposition. Smaller CPG companies, especially in niche product areas, have proven more adept at this tactic than larger ones. They can use their cluster of brands to gain the retail chain buyer’s attention and develop deep, relevant insights into shopper and consumer behavior, making it more likely that the retail chain will provide concessions, promotions, and advantageous positioning.
Church & Dwight excels at this approach. It has generated total returns far exceeding those of bigger CPG companies — including some from which it has bought assets — by developing deep expertise in brand extension and by concentrating on narrow product segments. The company’s biggest asset is Arm & Hammer, which in 2010 became its first $1 billion brand. This achievement was possible only because of Church & Dwight’s capabilities in brand cross-pollination and extension. Arm & Hammer and its distinctive logo long ago ceased to be associated simply with baking soda. In recent years, the Arm & Hammer brand has also helped Church & Dwight, now a $2.5 billion company, increase its market share in such areas as liquid detergent, cat litter, and oral care.
Church & Dwight’s scale at the shelf allows it to get a lot for its marketing dollar. To advertise the Arm & Hammer brand is to advertise the company’s shower scrubs, clothing stain removers, and battery-powered toothbrushes. Its narrow product portfolio also enables Church & Dwight to wring manufacturing and cost efficiencies out of many parts of its operations. Indeed, the company takes a relentless approach to improving its P&L, using a level of financial discipline more common at private equity firms. This in itself is a strong capability, and one that has made Church & Dwight’s stock a top performer in the CPG universe during the last 10 years.