A convergence of trends has disrupted CPG companies’ traditional path to consumers. What was once a relatively stable process has become a holistic effort forcing companies to rethink everything from launch strategies, to channel strategies, to pricing models. The changes have significant implications on revenue and margin growth. This article will explain the trends that are revolutionizing the Food & Beverage (F&B) industry and how F&B executives can achieve margin growth without mortgaging their top-line.
8 Trends That Revolutionized the F&B Industry
Drawing on Clarkston research working with leading consumer product companies, we have identified the major trends that inform the new reality in the F&B industry.
- Transformation of Marketing Tactics. While pressures from retailers will continue to challenge manufacturers to increase their investment of promotional dollars, the overall mix is evolving, with traditional tactics like advertising being replaced by shopper and digital promotions. Looking ahead, F&B companies will need to better understand the ROI associated with these new areas of investment and work to ensure that they are maximizing the effectiveness of the spend across their entire portfolio.
- Brand loyalty has significantly declined. A recent study found that nearly every major CPG category saw yearly sales increases, but that the top 100 CPG brands declined in volume. The bulk of the decline was attributed to brand shifting within categories and increasing fragmentation of consumer preference for brands.
- eCommerce growth is outpacing traditional retail. According to the NRF, online growth will be up to three times higher than the overall retail industry. The industry group predicts online sales to increase 8-12%, compared to just 2.7% for brick-and-mortar stores.
- New entrants look to reshape the industry. The $13.7 billion Amazon purchase of Whole Foods will create significant changes in the retail landscape as traditional grocers react to the new competitive threat. According to Morgan Stanley, 64% of institutional investors believe Amazon poses the greatest risk to Food Retail companies.
- Years of commodity deflation looks to be over. The U.S. Government’s Food CPI index has been deflationary since late 2014. After nearly four years of reduced COGS, prices increased late this year, with 2018 projected to be inflationary.
- Data and analytics are reshaping the industry. Spearheaded by Amazon, who used a treasure trove of customer data to optimize its online store, the CPG industry is poised to embrace analytics. However, experiments and a/b testing won’t be relegated to purely digital channels. Many believe Amazon executives will quickly begin price experimentations in their 456 newly acquired Whole Foods.
- Barriers to entry are crumbling. F&B companies are no longer beholden to brick-and-mortar stores for product listings. Harry’s, BirchBox, and Bright Cellars have all found traditional CPG success, by offering unique value propositions and subverting the traditional avenues. Meanwhile, brands like Skinny Pop and Yasso are building new categories before established players know they exist.
- Reduction in R&D spend, less product differentiation. As companies look to become more cost competitive, they often choose the wrong levers at their long-term peril. This has never been more acute than when organizations reduce R&D investments thus limiting their ability to create differentiation and shopper preference versus the burgeoning array of private label and start-ups.
Achieving Profit Margin Growth without Leveraging your Top-Line
We’ve described a new hyper-competitive era led by Amazon/Walmart and defined by price matching and new entrants that will spiral across the retail landscape. Retailers will squeeze manufacturers with private label, pressure for higher trade spend, and shrink the center of the store. The picture is becoming clearer and it’s not a pretty one for manufacturers not willing to evolve their commercial practices.
F&B executives looking to position their companies for success and achieve margin growth should:
- Focus on sound pricing fundamentals. As we’ve covered in previous pieces, F&B companies can break away from their peers by adopting a strategic pricing framework that fits its products or services. Once a base price is determined, managers can support the effort and drive organizational discipline by instituting cross-functional oversight.
- Focus on product portfolio optimization. Experiment and incorporate the newest analytical tools to gain insights into growing and profitable trends. Use those insights to invest in high potential products and de-invest in underperforming categories. Acquire and divest assets using a similar process.
- Invest in brand building and R&D to ensure brand relevancy and product differentiation. Brands must be customer-centric and comprehensive in how they address their touchpoints in the consumer journey.
- Invest in innovation and speed to market. A Clarkston analysis revealed that redesigning the new product launch process can realize 15% gains over a period of five years.
- Develop an eCommerce strategy now, not later. CPG has traditionally lagged other items in eCommerce sales—but that is quickly changing. eCommerce is leading sales growth across nearly all categories. Today, eCommerce accounts for approximately 2 percent of total food sales. With Amazon’s acquisition of Whole Foods and Walmart purchasing Jet.com the acceleration is almost certain. Like all technology, the adoption curve will be closer to exponential than linear.
- Explore creative solutions for cost reduction. Reduce overhead and cost of goods sold by combining nonproprietary business practices to create economy of scale with “frenemies.” For example, what if two companies combined their packaging film spend together or their route to market where it makes sense. The point is to think in an unconstrained fashion.
- Understand the difference between analytics and data analysis. As previously outlined in detail, turn the mass of data your company has created into actionable insights. If you’re not sure where to start, we’d suggest reading about the different analytics capabilities within CPG companies. Once you’ve mastered that, move on towards its impact on wholesale distribution.
Delivering profit margin growth without mortgaging the top line is a substantial challenge. The eight identified trends have made it harder by seemingly upending a system overnight that was built over decades. But all is not lost. The transformation is creating a once in a lifetime opportunity for F&B executives who understand the shifts and have the foresight to proactively capitalize on them have the opportunity for margin growth is this evolving and complex environment.
Co-author and contributions by Eric Gardner.
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