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 / Spring 2014 / Issue 74(originally published by Booz & Company)


How to Achieve Growth in a Lean Europe

Lessons on winning in a slow market.

Executives of consumer products and retail companies in Europe responded to the recent global economic crisis the best way they knew how. As demand shrank, they cut costs across the board. And initially, these measures worked: Between 2009 and 2012, even as revenues fell, many companies posted increased earnings and relatively strong stock market performance. But today this strategy has run out of steam. There’s only so much excess to remove and overhead to reduce.

That’s left these executives facing a significant challenge. They need to find ways to grow in Europe, but the market is working against them. The social safety net that supported European consumers early on has been worn thin by continuing economic pressures and rising taxes. Since 2011, disposable income in Europe has been contracting in real terms. This decline in consumer spending power makes it hard to argue for increased investment in the region. At the same time, other regions are attracting more investment away from Europe. In countries such as Brazil, Russia, India, and China, even though disposable income growth has leveled off at around 6 percent per year from a high of 10 percent in 2007, the middle class is large and growing, and has cash to spend on products that had long been out of reach. Meanwhile, North America’s personal income growth rate has rebounded to about 2 percent per year, supporting reinvestment in the North American market.

It’s a forbidding picture of Europe: consumers with less cash to spend in a market that most companies aren’t eager to invest in. Fortunately, there is a way to grow even in today’s lean times. Executives confronting these pressures will need to look within—at the markets and customers their companies already have—and find new ways to reach them by using the capabilities and strengths that make their companies distinctive.

A New Approach

For many companies, growth opportunities hide in plain sight—and finding and seizing them doesn’t always require significant investment. Executives should look at the products in their current portfolio with fresh eyes, and determine whether consumers are using them in unintended ways. For example, Procter & Gamble learned that people were using its cold medicine NyQuil, which comes with a warning that it can cause drowsiness, as a sleep aid. In response, the company started marketing ZzzQuil, a product that uses the same active ingredient, but with a modified formulation—obviating the need for a major R&D effort. And P&G already had strong distribution and marketing networks in place. With minimal investment, it was able to create an entirely new growth segment.

Reckitt Benckiser (RB) has also had great success in developing product variants. The company starts by paying careful attention to consumer interests and gaps in consumer needs, closely connecting its R&D and consumer insight–gathering capabilities. RB realized that it could create versions of Nurofen, its popular pain relief medication, that were targeted to specific ailments such as migraines, muscle pain, and colds, among others. The basic ingredient—ibuprofen—remains the same. And like P&G, the company could leverage its superior distribution and marketing capabilities to sell each of the variants at a premium over regular Nurofen.

In rethinking their product portfolio, established consumer and retail companies can take a page from their upstart competitors. In early 2013, Booz & Company found that smaller companies—those with less than US$1 billion in sales—were prospering, growing their market share more rapidly than larger competitors in 18 of the top 25 food and beverage categories. Some recent market developments favor these smaller players. For one, “selectionist” consumers seek out brands that match their own needs and sense of differentiation, and often turn to products from local sources. And, with extensive outsourcing, smaller players can now offset scale disadvantages in administrative and support functions (see “The Big Bite of Small Brands,” by Elisabeth Hartley, Steffen Lauster, and J. Neely, s+b, Autumn 2013).

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