NEW YORK — Over the past decade, a confluence of factors has dynamically transformed the U.S. consumer packaged goods industry. A shift in shopping behaviors, the fragmentation of retail and the rise in digital technology have forged a challenging new marketplace where traditional growth strategies no longer work.
“The natural growth drivers of the past, which were basically population growth, are slowing down, and the industry hasn’t found good ways to get a bigger share of the consumer’s wallet, which has probably gone to spending on some other categories,” said Steffen Lauster, partner and leader of the North American consumer and retail practice at Strategy&, a New York-based consulting firm.
Adding complexity is an increasing bifurcation of consumer spending habits.
“We use the terms ‘selectionist’ and ‘survivalist,’ and it’s important to note they are not that much income-related; they are much more attitudinal,” Mr. Lauster said. “We have a larger part of the population, at least for the typical grocery categories, who are rather value-oriented and cost-oriented and don’t splurge that much. On other hand, you have some categories like coffee, where more people show appreciation for product differentiation by spending more. But in general the desire to spend for premiumization and differentiation is only shown by a smaller part of the population.”
Meanwhile, the retail landscape has become increasingly fragmented, with grocery channel share of packaged foods sales forecast to fall from 45% today to 37% in 2025, according to Strategy&.
“We are changing from a world where, in the past, grocery has been very dominant and Wal-Mart has driven a lot of growth,” Mr. Lauster said. “It’s very different today because the channels driving growth are club or Whole Foods or the dollar store. They require a different approach.”
No longer competing in a one-size-fits-all market, companies may need to tailor packaging and propositions to win in different channels.
“Today, it’s not enough just to follow the old model of offering the same products with a more efficient supply chain,” Mr. Lauster said. “It very often requires different price points, different product propositions, different packaging, which adds much more complexity, and that is very hard for most large manufacturers.”
In the past, dominant players could leverage scale to broaden distribution and purchase television advertising at lower rates. As leading retailers increasingly embrace smaller food suppliers, size may be more of a barrier than a benefit.
Mr. Lauster, who co-authored the report “How U.S. C.P.G.s can get their groove back,” shared six solutions for how C.P.G. companies may grow beyond the grocery channel.
Reevaluate the portfolio
To reach the rising number of price-sensitive consumers, companies with a focus on premium positioning may need to adopt a more value-oriented approach while eliminating superfluous products or brands.
“This question of ‘Do I have the right portfolio, and do I align in a way that can I be competitive across my portfolio?’ is a big question,” Mr. Lauster said. “For the Kraft/Mondelēz split, I think it was a realization of saying, ‘We probably have two different ways to compete in the market here.’ One is the center of store, which is now Kraft, and then a much more direct store delivery-oriented portfolio with cookies and chocolate and other categories like Mondelēz.”
The instinct to realign portfolios with core capabilities has been seen in recent moves by Unilever and Nestle S.A., both of which over the past two years have strategically divested nonessential businesses.
“Just being big and being under one roof doesn’t provide an advantage anymore,” Mr. Lauster said. “It certainly makes it more difficult because you have to be out competing across all of your different categories, and it might require very different success factors. … Some of these categories, like cookies and chocolates, which are impulse categories, require a different way of marketing than mac and cheese.”
Manufacturers must be nimble with product offerings by tweaking brands to fit in different formats. For example, landing shelf space in Whole Foods may mean reformulating products with non-bioengineered ingredients. And gaining distribution in the club channel requires packaging and sizes not available in other retailers.
“In the Wal-Mart economy, you could rationalize your portfolio and reduce complexity and be very efficient with your main s.k.u.s,” Mr. Lauster said. “We just think today that is a fool’s errand. You have to be ready to have more complexity to win in these different channels and to offer something unique because the value propositions are so different from what shoppers are looking for in different channels.”
Win in different channels
To maintain distribution in traditional grocery stores while growing a footprint in the fast-growing club, dollar and on-line channels, companies may need to develop a new strategy for allocating trade spending with the flexibility to innovate for specific formats and partners.
“You have to think very smartly about which will be your future winners or not,” Mr. Lauster said. “In trade spend, that’s a big challenge because you have very historic spending patterns and very historic relationships.”
Innovate in merchandizing
Line extensions, the traditional approach to innovation, are failing to catch the consumer’s eye like before as more shoppers migrate away from the center of the store. Packaged food companies may need to be more creative in product development and promotion by marketing an item to an occasion, such as Halloween or even breakfast.
“Think about new ways of catching the shopper’s attention,” Mr. Lauster said. “Not just with an end-aisle display, but much more occasion-based merchandising, ideally combined with the periphery of the store where the stores generally invest because that’s where the margins are higher.”
Develop a digital strategy
Many food companies have embraced social media and on-line interaction as a way to engage with consumers. But the rise in digital technology also means more shoppers are buying on-line, and not all products fit the format.
“If we talk about e-commerce, Wal-Mart and Amazon are leading the investment and are making great strides and good progress,” Mr. Lauster said. “The question, in the long run, is how do you want to align with those versus others? What can you do to make your product more shippable, to really hit the price points they are aiming for and avoid price competition between different channels and between on-line and in the store?”
Rethink price-pack architecture
In the past, companies learned to price products in a way that prevented cannibalization across channels while maximizing overall market share. But a higher number of s.k.u.s and no proportionate increase in consumption have forced companies to reconsider their approach to price-pack architecture.
“In the same way you need more s.k.u. complexity to cater to different shopping propositions, you need a better capability to really be smart in your product price-pack architecture so that it’s a rational progression from a small item bought on impulse, which a consumer is ready to pay more for, all the way to the club, where someone may go and buy 20 or 30 packs and look for a value-oriented pricing proposition. It sounds easier than it is if you think about all the complexities you have to deal with and the different product/package combinations you offer today.”
Frito-Lay, a business unit of PepsiCo, and The Hershey Co. have demonstrated adeptness in the changing marketplace.
“They are very good at occasion-based marketing, very good at product placement in different channels,” Mr. Lauster said. “If you look at Hershey, it ranges all the way from attractive club packs to convenience impulse-oriented offerings. So they play in many ways very smartly and have been successful dealing with some of these channel complexities.”