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 / Autumn 2013 / Issue 72(originally published by Booz & Company)


The Big Bite of Small Brands

Upstarts are gaining market share across consumer packaged goods categories. Here’s how incumbents can respond.

Small consumer packaged goods (CPG) companies in the U.S. are steadily gaining market share these days, often at the expense of larger competitors. Booz & Company recently analyzed the food and beverage industry and found that small players (those with sales of less than US$1 billion) are outperforming the competition in 18 of the top 25 categories, including the largest and most consolidated ones, such as bakery, dairy, snacks, and ready meals (see Exhibit). From 2009 to 2012 in packaged foods and from 2008 to 2011 in beverages, small players grew revenue about three times faster than the overall category. Specifically, in packaged foods, small players ex-perienced a three-year compound annual growth rate (CAGR) of 6.2 percent, and gained 1.7 percent of market share. Meanwhile, large players increased sales by just 1.6 percent CAGR and saw their market share decline 0.7 percent.

Along with market share gains, small players enjoyed price premiums in many categories. A survey of in-store pricing found that Godiva chocolate cost 138 percent more than the Hershey’s product of comparable size and flavor, and Amy’s Kitchen soups cost 58 percent more than Campbell’s. Small players also showed pricing strength over private-label manufacturers. From 2011 to 2012, the price premium for small players over private labels jumped 5 percent for butter, olive oil, and packaged/industrial bread.

Several broad forces, most of them peculiar to our times, are combining to create advantageous conditions for small companies. A market segment known as “selectionists,” who constitute 30 percent of consumers, are seeking greater variety and new tastes in the food and drinks they buy—and sometimes care deeply about factors such as the origins of a product and how far it has been shipped. Some traditional supermarkets are catering to this trend as a way to differentiate themselves from Walmart and big price clubs. The fragmentation of media and the generally lower cost of digital platforms are giving small players new outlets to reach customers in more targeted, cost-efficient ways. But what should most concern large players is how technology is eroding their scale-driven advantages. Small players are increasingly able to outsource invoicing, HR systems, and logistics, as well as other back-office SG&A functions. Retail consolidation is further chipping away at scale advantage. The preference among bigger retailers is to work with a broad range of manufacturers—both large and small—to keep large consumer packaged goods companies from gaining too much leverage.

How do the most successful large CPG players respond to these changes and the serious threats they contain? The leaders of these companies begin by developing a better understanding of the strategies that upstart competitors are employing to grab market share. Next, they look at the capabilities underpinning those strategies and consider how they might take advantage of these capabilities themselves.

Capabilities That Differentiate

Small players don’t have a single or consistent approach across all categories to account for their success. They are using a variety of strategies that incorporate brand positioning, pricing, market entry, innovation, route to market, and in-store marketing and merchandising. Within these categories, each carves out distinct positions depending on the product and competitive environment. The overall effect is a patchwork of bespoke strategies. That means one needs to look harder for the lessons—but they are there.

Successful small players appear to have one important similarity: They possess a coherent system of capabilities that allows them to focus on a few critical areas where they can most effectively exploit the weaknesses of less-nimble large players. This coherence gives its owner the means to differentiate itself.

Take the Cabot Creamery, a cooperative dairy enterprise based in the northeastern U.S., which plays against the corporate stereotype of rivals by highlighting its business model and connection to the Vermont dairy farmer. In the same vein, Cabot uses its online presence (Facebook, Twitter, Pinterest, Instagram) to promote community involvement. The company has developed the capabilities to roll out new flavors and specialty aged cheeses that appeal to consumers’ desire for variety and homespun creativity: Horseradish Cheddar, Hot Habanero Cheddar, and Tomato Basil Cheddar, to name a few. These specialty cheeses have allowed Cabot to expand its presence in stores to the deli case (with other artisanal cheeses), thus gaining shelf space in a more “premium” section of the store.

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