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How retail brands get staying power
FOLLOWING decades of solid and dependable growth, the future for many global brands started getting hazy in 2012. That is when, despite steadily rising global demand, a series of events began taking a toll on large consumer products companies' revenues and profits.
Growth slowed in developing markets. The industry endured severe currency fluctuations, divestitures and the huge disruption caused by small insurgent brands in many product categories. In the US, less than 5 per cent of the growth in consumer goods between 2011 and 2015 came from the 25 biggest companies.
All of these forces caused large consumer products firms to watch their average annual organic growth descend steadily from a healthy 5.5 per cent rate in 2011 to 2 per cent in 2016. In fact, when we analysed the 2012 to 2016 performance of 34 of the world's top 50 consumer goods companies, we made the unsettling discovery that 85 per cent of them had seen a decline in either revenues, profits or both.
Given these trends and tensions, many companies now are dealing with nothing short of an existential crisis. Recent valuations reflect an expectation that consumer goods companies will return to 4 per cent to 5 per cent organic growth. However, for some, the reality will probably be much harsher unless they do something truly different. For all, the turbulence will offer great opportunities to reinvent their future.
As retailing morphs with the growth of digital, convenience and value channels, brands will need to consolidate, simplify and cut costs to survive; they also will need to make way for harder retailer negotiations and invest in a digital future with new rules for selling and marketing to consumers. Brands must prepare for the coming rebound in emerging markets while acknowledging that the next set - which includes Pakistan, Nigeria, Myanmar and others - will be more challenging to pursue. And they will need to invest to address rapidly shifting consumer preferences by creating new niche and indulgence categories that battle retailers' private labels and competitors' insurgent brands.
Large consumer goods companies have faced dark clouds and uncertainty before, but the playbooks that they have used to weather previous storms will not help much this time around. The very advantages they had as big companies have turned into disadvantages. For example, until now, large companies could instal the lowest-cost capacity, afford top research and development (R&D) capabilities, spread advertising broadly and efficiently, deploy large salesforces into a single channel, or access the cheapest capital. Today, evolving technology, an expanding network of specialised third-party solutions and other market conditions appear to favour asset-light companies that rely on third-party infrastructure or external R&D networks. Additionally, companies must contend with geopolitical shifts, sustained market pressure on short-term productivity improvements and an intensifying battle for talent.
Such rapid change and growing unpredictability make it more critical, but also harder, to design enduring responses. We suggest attacking the mounting challenges from two different angles simultaneously - "today forward" and "future back".
Taking a "today forward" approach means focusing on the challenges that you are facing to reignite profitable top-line growth over the next three to five years. Global brands will need to continue investing disproportionately in developing markets while being careful about their country footprint choices to minimise dependence and overall volatility. It also means expanding category definitions and elevating categories to premium status when possible, both to boost penetration and capture share from insurgent brands. Instead of fighting insurgent brands, major brands need to consider starting or buying them.
As the retail landscape evolves, brands can up their game in managing key accounts, establishing pricing and trade terms, and moving resources more quickly across customers and channels. In Europe, brands will need to do all of this at both country and cross-country levels. In addition, cost bases need to be fundamentally reset, not just squeezed. Too many companies still have inflated growth expectations that permit higher-than-acceptable costs. Removing complexity, bureaucracy, and low-value-added processes and activities is a good starting point. Finally, instead of relying on history, future winners will master the art of constantly reallocating scarce resources more quickly and more regularly to get money to the parts of the business that really fuel growth.
In addition to working today forward, companies will need to take a "future back" approach to strategy. Future back means redefining the vision for your industry and your company, often inspired by a fundamentally underserved consumer need or breakthrough technological solution. It means reinventing your own destiny and progressing towards it.
The future back approach starts by re-embracing a nobler mission. That means rearticulating a meaningful, sustainable consumer-led purpose that will reset the company's sense of urgency. Done right, it will guide innovation and sustainability strategies, and genuinely inspire the front line. In addition, winning companies will revive their sense of entrepreneurism. One proven step in this direction: adopting Agile ways of working. It is substantially better than traditional project management and changes the way companies work and innovate - it is fast, meritocratic, flat, fun, self-learning, and delivers what consumers, customers and talented employees want, on time.
To retain a share of the profit pool, many companies will also engage more directly with consumers and shoppers, creating a network of stores, launching direct online or mobile commerce operations, setting up subscription-based models, or partnering with third parties to operate a new channel or format. One of the most critical benefits will be the direct access to consumption and shopping data.
Another important move: rediscovering the benefits of scale. Big companies are still well placed to access scarce commodities as well as Big Data that will generate better business insights. They also have an advantage when it comes to accessing external networks and establishing stronger partnerships with third parties that will favour scaled relationships.
Finally, working future back can mean radically changing a business model - for instance, stretching a brand beyond products into services or using the latest digital technology to move quickly and build a cost and data advantage.
It has been a tough few years, and the road ahead is far from stable. But winning brands will be those that do the best job of meeting today's short-term challenges while reinventing themselves to capture the opportunities that lie further down the road.
- Matthew Meacham is a partner based in London, and Mike Booker and Paolo Misurale are partners based in Singapore. All are leading members of Bain's Consumer Products practice.