Consumer goods companies expecting to maintain their 2% to 4% annual revenue growth in the U.S. are waking up to a cold reality. Turbulent retailing trends mean that unless they drastically rethink their strategies, brands could be hard pressed to capture even one-third of that growth, while up to 30% of their margins could be at risk, according to Bain & Company analysis.
At the heart of the matter: Shopper behaviors have put big brands at a crossroads. Americans are increasingly going online to purchase their groceries. They’re deﬁning value in new ways by embracing private labels, demanding low prices and, in rising numbers, migrating away from larger, known brands in favor of small brands that appeal to their individual health choices, an interest in local origin and other preferences. It’s to the point that small brands now have the edge when it comes to revenue growth. Our research found that 23% of small brands — many benefiting from lower barriers to entry — outpaced their category growth every year from 2010 to 2014, compared with only 14% of larger brands.
These trends are signiﬁcantly changing the U.S. grocery landscape. Drug, dollar, discount and online players have boosted their food offerings. In discount, ALDI continues its U.S. expansion as Lidl prepares to aggressively grow in the market, both with heavy emphasis on private labels. At the premium end, specialty retailers such as Sprouts will continue to outperform the industry’s growth by offering healthier and fresh alternatives. At the same time, online grocery sales are growing by nearly 15% each year in the U.S.
With the world around them shifting, traditional grocery channels — supermarkets and convenience stores that once were the source of reliable growth for brands — will continue to see their share positions erode. To defend their share, they’re devoting more store space to fresh food, prepared food and smaller brands, while expanding private label offerings. They’re lowering shelf prices, while investing to expand into e-commerce and improved service models. To pay for these moves, they’re aggressively cutting costs by carrying less inventory, squeezing savings out of their supply chains and trimming labor costs. Meanwhile, consolidation trends will continue as retailers seek additional ways to improve costs through scale.
What does this mean for large, established consumer goods companies? If brands do nothing, our analysis suggests many will struggle to see growth rates that reach 1%.
In once-dependable traditional grocery channels, the vast majority of growth for big brands will need to come from stealing share from their competitors in center-store categories such as canned grocery, frozen foods and pasta. And most companies will ﬁnd themselves under-penetrated in key growth channels. Many lack the capabilities and service models to win in dollar and discount, and particularly in e-commerce.
The bottom line: Up to 30% of margins could be at risk. Consumer goods companies will face tougher trade negotiations and more price pressures as their key customers ﬁnd themselves in trouble. They will be asked for more responsive supply chains with improved delivery speed, frequency and ﬂexibility. They’ll be expected to provide shelf-ready casings and pack sizes tailored to store formats. And the demands will mount as retailers further consolidate to gain strength through scale.
To position themselves for this emerging future, brands must attack these challenges on two fronts: Reignite growth with the winners among traditional grocers but do so without overinvesting. At the same time, shift resources to win in new channels of growth. We’ve identiﬁed ﬁve imperatives to help large consumer products companies survive and thrive in this evolving retail landscape.
First, determine how much risk — or upside — you’ll have from channel shifts. Before setting a plan to respond, it’s best to invest in understanding your company’s future channel exposure. How much of your retail shelf space could you lose? How much incremental consumer spending can you realistically expect to capture, and what do you need to achieve in share gains to hit your targets? This requires a brutally honest assessment of the business and a thorough understanding of your category dynamics.
Next, decide where you should strategically focus to win. In traditional channels, identify retailers that know how to defend themselves—those that will emerge as leaders — and dramatically reduce your costs to serve them. When it comes to new channels, carefully weigh the opportunities and risks. For example, should you play in channels like deep discount, which could affect your brand image and your ability to maintain pricing and margins across the board?
Redesign commercial and operational capabilities to win in both battlegrounds. Traditional grocers’ demands will change, and new channels will have different supply chain and sales requirements. As a result, winning share with leaders in traditional grocery will require greater collaboration, including tighter joint business planning aimed at ensuring perfect sales execution. Tougher data-driven negotiations will place even greater importance on revenue management and pricing capabilities. Supply chains set up to deliver long batches and full pallets to large distribution centers will be ill-equipped for high-growth channels demanding multi-brand, multi-product pallets. Similarly, sales organizations can no longer be designed just for large accounts. They’ll need the ﬂexibility to serve the varying needs of different channels.
Build stronger and simpler product portfolios tailored to your channels. You’ll need to assess how your product portfolio serves your channel mix. In traditional channels, where shelf space for branded goods is hotly competitive, focus on your most productive, top-selling products, or “hero” SKUs. This will protect you from losing shelf space while increasing sales through broader distribution of high-performing SKUs. Another question: Are you able to compete with small brands? If not, can you successfully innovate and launch your own alternative brands or selectively acquire and grow emerging small players alongside your portfolio of larger brands? Can you do it without overpaying or destroying the magic?
Finally, get ahead of the mounting cost demands. You’ll need to pare more costs in order to free up resources to invest in growth. Based on our experience, winning companies take a private equity approach to zero-base their entire cost structure. They align their costs with areas of growth while freeing up costs in assets, spending and organizations geared to serving traditional grocers.
The channel shifts and consumer trends that are upending U.S. grocers could have dire consequences for brands that are left unprepared. The best consumer goods companies will control their own destiny. They’ll sustain their performance by choosing the right mix of traditional and new channels and then thoughtfully reallocate their resources to build the capabilities and portfolios required to win. That’s how they’ll ﬁnd solid ground amid the shaky grocery landscape.