If you work for a consumer goods company there are tough times are ahead. A once highly-profitable industry has seen net profits decline rapidly over the last two decades. We’ve recently conducted a study based on the United Kingdom consumer goods market which suggests profits are likely to decline further over the next 5 years. Why? Because the UK market finds itself caught in a perfect storm of five key trends, all of which have massive implications for the profitability of consumer goods companies. And its not just the UK. The trends are global and while the specific triggers vary by country, no country is immune. In this post we’ll explore these key pressures, and understand what lessons that can be learned by consumer goods practitioners around the world.
Consumer goods companies pressured by retail restructuring
It’s impossible to deny that the UK retail market is in turmoil, and that there is similar turmoil elsewhere in the world. The collapse of a number of high profile retail brands reflects fundamental shifts in the retail environment. Those working with major consumer goods companies might imagine themselves to be insulated from this – after all the loss of House of Fraser or the closure of DIY stores may have little to do with the sales of baked beans and beer. However, the same structural changes that are taking sales from the high street are also having a significant impact on the core grocery sector, and the consumer goods companies that make those products.
Disruption here is more broad-based: the rise of discounters; category specialists; convenience retail; online grocers; recipe boxes and . All are rapidly eating into the core business of supermarkets and hypermarkets. Whilst these big players might currently make-up over 70% of a brand’s sales, over the coming years the growth of supermarkets and hypermarkets is set to stall and indeed probably decline.
Many consumer goods companies will pin their hopes on replacing this lost growth in emerging channels but for most brands this is likely to be tough. Discounters and convenience stores favor limited ranges so offer little respite for those brands not already distributed there. Online sales may well seem to be the panacea for many but successfully converting brand awareness in an online grocery store is proving to be much harder than many brand managers had imagined.
For our report, we worked with a number of consumer goods brand teams and modelled the impact of these channel shifts. On average, their brands are predicted to lose between 5 and 10 per cent of their market share if they do not make swift and significant adjustments to their strategies.
Consumer goods companies caught out by changing shopper behavior
It’s hard to tell if the restructuring of retail is driving a change in shopper behavior or vice versa. The reality, however, is that, as a new cohort of millennial shoppers enter the market en-masse and as existing shoppers begin to experiment with new ways of buying, our assumptions about how shoppers behave are being upended.
As shoppers spread their purchases across numerous retail platforms the role, purpose and therefore ultimate success of a consumer goods brand can change. For instance: When considering recipe boxes, how important is the brand within a curated meal solution? What about online grocery shopping? How important is the brand in driving category search? If shoppers visit physical stores with limited brand ranges how do you get them to trial a new product? And, if footfall declines in supermarkets, how does one encourage brand switching?
These are all significant problems that, if not aggressively addressed, could well lead to the further erosion of market share.
Consumer goods companies squeezed by retail consolidation
The first two macro trends that we have considered so far affect a brand’s top line growth. However, the trend towards further UK retail consolidation is likely to hammer the bottom line too. Assuming the Sainsbury / Asda merger is concluded, over 60% of the UK’s grocery sales will be concentrated in the hands of this new group and Tesco combined.
Most commercial finance teams in consumer goods companies are almost certainly currently poring over their trade terms sheets in an effort to project the probable exposure that this merger would raise. It is likely to be significant and painful. Our research suggests similar mergers in the past have seen a loss of up to 1.5%.
Increased financial pressure from retail
This potential decline in margin assumes that the only issue is around the Asda / Sainsbury price file. But if you were Tesco, Morrisons or Waitrose, wouldn’t you want to do your best to shore up market share now? If so, this is likely to lead to demands for more promotional funding from consumer goods suppliers to make the stores more attractive in the short term.
In the long term all supermarket retailers will feel the pinch of retail restructuring and use aggressive pricing to entice shoppers back into their stores. At the same time, price pressure from both discounted brands and from online retailers with lower operating costs will pile further pressure on retail prices.
At a time of currency devaluation along with the rise in input costs, grocery brands are likely to suffer a major constriction. But this is not the only issue arising from retail. Globally retailers are destocking and cutting the number of products they hold; as well as reducing inventory. These factors may well also lead to further decline in grocery sales. Consumer goods brands will additionally almost certainly feel further financial pressure as retailers also seek to pay slower.
All in all, these pressures from retailers could put consumer goods brands in considerable and escalating financial difficulty over the coming years.
Consumer goods companies starved of talent
Whilst the UK boasts low unemployment, there is a marked shortage of knowledge workers in general. In days gone by, consumer goods companies were attractive employers offering good working conditions, training and remuneration. However, as employers the CPG industry has been long-eclipsed by the financial sector and the tech sector, which has drained much of the new talent from the market.
Young managers in the industry are often impatient at the perceived slow rate of personal development in consumer goods and many leave in the hope of better prospects elsewhere. This puts pressure on the incumbent management merely to look after the day-to-day delivery of targets, let alone finding the time to consider the strategic development of a brand’s future. As a result, the overall capability of many consumer goods companies is in decline.
What does this all mean for managers at consumer goods companies?
This might feel like it is a sales issue and a distant one, to be dealt with later rather than now. But our research suggests that the impact of these factors will combine to have an immediate impact on everyone in the industry, across functions both now and over the coming years and that immediate cross-functional action is required:
Finance teams will see a net decline in cash flow as retailers destock and pay slower: making ready cash flow management harder; and forcing some tough decisions that are likely to be unpopular.
For marketers, if your brand shares decline, you will see budgets slashed or shifted to faster growing brands and markets. This is likely to lead to non-essential activities being cut and brand growth initiatives being curtailed. Furthermore, the pressure to justify expenditure as well as to account for ROI will intensify.
If you are in the sales front line, things will get even tougher: expect hard negotiations with customers; greater pressure on your performance in the short term; and lower bonuses in the future.
Finally, HR managers are likely to find it harder to secure investment in development programs which will make it harder to attract, retain and motivate both new and existing talent.
As a result, addressing the challenges to come from the considerable changes afoot is no longer the sole responsibility of one function. Rather, now is the time to pull together as a fully aligned customer-focused team.
Consumer goods industry leaders respond
The leading lights in the consumer goods industry are doing just this: rapidly taking proactive steps to mitigate risk and even prosper from the opportunities that this new environment presents. Many of the largest players are currently taking steps to better understand the fast-evolving UK retail landscape, to reassess retail channel priorities as well as to redefine and crystallize future sources of brand growth.
This is leading to a concerted multi-functional effort across consumer marketing, customer marketing and sales, as these combined teams collectively reconsider customer priorities, build more integrated brand and customer plans and determine a vision for the ‘store of the future’. Many of these leaders are taking the opportunity to assemble real and virtual customer focused teams across all relevant commercial, financial, operational as well human capital development functions, with the aim of blending the best resource to deliver against cross functional initiatives which will underpin future sustainable growth.
These businesses are well placed to weather the storm; however, they represent only a small minority of the UK’s branded manufacturers. Many of the others are struggling to identify where to start and how to engage cross-functionally to formulate a response.
Don’t panic – Accessible solutions at hand
The next few years will be tough for consumer goods companies operating in the UK. And this will also be the case in most markets around the world. We have partnered with a team of UK and Global industry experts to build a roadmap that describes the key actions that consumer goods companies should be planning for the future as well as helping to identify immediate opportunities to begin working together ever more closely as a team.
Both the roadmap and our findings are freely available to managers in the consumer goods sector. If you would like our experts to share these with you as well as taking the opportunity to discuss some of the specific issues that you face, then please don’t hesitate contact me now to arrange a time to discuss in more detail.