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Tough choices for consumer-goods companies - part 2

2014-01-13 11:36:14

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Increasingly empowered consumers, rising yet volatile input prices, and tricky emerging markets mean global consumer-packaged-goods companies must rethink how they do business. Here’s a guide.

 

Exhibit 2

Digital technology is shaping all markets and categories.

 

 

To benefit from the mobile Internet, companies will need to make careful choices about where to place their bets and how big those bets will be. Which of their products should they sell online? How, if at all, should they engage with Amazon? (Some CPG players are putting their best people on Amazon-dedicated account teams. CPG companies will, of course, need to weigh the risks and trade-offs of partnering with Amazon, including the potential for channel conflict and the loss of control over the “virtual shelf.”) How much of their marketing budget should they shift to mobile media? Digital marketing, including mobile, now accounts for 22 percent of global ad spending and could grow to 27 percent by 2017, according to eMarketer.

 

The mobile Internet is already prevalent; the Internet of Things—the embedding of networked sensors in physical objects—is just beginning to make waves. It’s not a stretch to imagine that in a few years CPG companies will be using sensors to track consumers’ use of products (for example, sensors that can be ingested to measure caloric intake), customize marketing messages (as in shelf displays that change depending on who is standing in front of them), or revolutionize their manufacturing and logistics processes.

 

3-D printing, or additive manufacturing, is already in use in the CPG sector, with 3-D-printed jewelry and toys being sold in online marketplaces. Other CPG categories—apparel, furniture, sporting goods—may soon follow. In the near term, product designers can use 3-D printing to reduce prototyping time from weeks to minutes; in the longer term, it will open up mass-customization opportunities.

 

Taking full advantage of these transformative technologies will require companies to invest in building the relevant capabilities, including digital-content creation, mobile marketing, and advanced data analytics. CPG manufacturers should closely follow the evolution of these technologies and foster a test-and-learn mind-set within their organization, building an experimentation “engine” that can quickly scale up successful pilots.

 
Merger mania—with a global twist

 

A new M&A wave seems to be gathering strength—and this time it’s global. As we said earlier, emerging-market companies are expanding aggressively and becoming global winners. Our analysis shows that since 2007, Brazilian companies have made 13 CPG deals valued at more than $500 million each; Chinese companies have completed 7 such deals, and Mexican companies another 7. Most of these deals were in categories in which global or regional scale is an advantage, such as snacks, nonperishable beverages, paper products, personal care, and tobacco. (US-based companies completed 51 deals of comparable size over the same period.) The combined 27 major CPG deals originating in Brazil, China, and Mexico represent a huge jump from the 5 deals those three countries completed in the 2000–06 time frame (3 for Brazil, 2 for Mexico, and none for China).

 

Even after recent mergers, many CPG categories remain fragmented both within and across countries. Companies will need to make choices about how best to capture synergies in both developed and emerging markets. How will they position themselves to be the acquirer rather than the acquired? How will they avoid paying too much for acquisitions—a mistake many companies made during the M&A wave in 2000–07? How—and how aggressively—will US manufacturers lower their cost base to compete with emerging-market players?

 

We see three potential growth archetypes: global giants, from both developed and emerging markets, will consolidate categories that benefit from economies of scale (such as those previously mentioned as well as apparel and footwear); regional leaders will concentrate on value segments in categories where scale is less of an advantage (such as food, paper products, and dairy); and small, agile innovators will introduce new business models and capture premium niches.

 

In any case, CPG companies would do well to build their M&A capabilities. They should identify and carefully assess potential targets or partners in emerging markets. And they should be financially prepared to pounce on an M&A opportunity when it arises—specifically, by reducing their debt and loading up on cash.

 
Regulatory risk and the expanding role of government

 

Government’s influence on the consumer sector is increasing rapidly and will only continue to do so, given the ubiquity of CPG products and the role they play in people’s daily lives. The financial impact of regulation on the industry won’t be trivial: extended producer responsibility regulation, for example, which has been implemented in Europe, could cost the US CPG industry upwards of $7 billion per year according to prior McKinsey research.

 

Some industry leaders are taking action before government—or the public—demands it. Wrigley, a division of Mars, took its Alert Energy caffeinated chewing gum off the market in order to give the Food and Drug Administration time to pass regulations on caffeine-enhanced food and drinks. Coca-Cola is partnering with groups in Mexico to invest in an effort to increase recycling of materials for sustainable packaging. CPG companies and industry associations have formed coalitions to tackle issues such as front-of-package labeling, tax policy, and waste management.

 

CPG companies must decide what stance to take toward government. Will they take a leading role on one or more topics, or will they instead take a wait-and-see position and be prepared to act quickly when regulations change? Our prediction is that more companies will choose to be proactive and collaborative, following the example set by Unilever, whose Sustainable Living Plan outlines a set of ambitious social and environmental goals for the company.

 

Regardless of its regulatory strategy, each company must earn the “social license” to be in business. It must become aware of the issues and the potential impact of regulation on its business and on the overall industry, particularly in three areas: economic, environmental, and health-related. Best-practice companies regularly review emerging regulatory issues and plan for plausible scenarios, give regulatory issues a place on the agenda at both the top-management level and the board level, and ensure that exposure to government affairs is part of leadership development and job rotation for high-potential managers.

 

The CPG industry will look very different in just a few years. It will be a bigger industry, with much larger global players and more competition from up-and-coming companies in emerging markets. Resource constraints and scale will lead to very different value-chain structures. New technologies will play an increasingly central role in business, as will regulation and government affairs. Already, these changes are compelling CPG companies to rethink how they do business and pursue growth. Companies that fail to adapt to these changes—or that make suboptimal choices—will be left behind by more thoughtful, action-oriented competitors.

 

Source: mckinsey