The CPG industry is mature and witnessing transformative change. In the past decade, the industry has realized limited growth, with the exception of a few innovative categories, and is now witnessing an all-out assault on everyday price and margins with the introduction of LIDL, Aldi (900 store expansion) and Amazon aggressively increasing their current footprint in the space with the acquisition of Whole Foods.
The question that arises from this disruption is what should a CPG company do when external disruption threatens sales performance? Without careful reflection on the appropriate strategy to react to the disruption, we will unfortunately probably see more acquisitions in the incredibly shrinking world of CPG participants.
As noted in Wall Street Journal article, “So Long, Hamburger Helper: America's Venerable Food Brands Are Struggling,” “The plight of the packaged-goods companies is a classic business tale. An industry creates winning products, carves out strong market positions and enjoys reliable, sustained revenue -- only to be too slow to adapt to changes that threaten those cash cows.”
"What should a CPG company do when external disruption threatens sales performance?"
Unfortunately, the first response to this barrage of competitive pressure was to announce price reductions by the already margin compressed retailers. This knee jerk reaction plays right into the hands of these newer players in the CPG sector, that have a lower cost of distribution with equal leverage in buying power with their manufacturer vendors.
3 Optimization Capabilities to support joint business planning in the face of disruption
Collaborative review of
Defining and sharing retailer and
Optimizing using retailer and manufacturer constraints for mutual benefit
Their strategy is to get the conventional grocery retailers to chase the low price and ignore their key strength - the periphery of the store where fresh produce, bakery, meats, seafood and in many instances a selection of fine wines exist today. Unfortunately, focusing on this customer advantage without focus on getting the center store SKU distribution optimized, will not solve margin erosion.
While manufacturers strategize how to respond to the blanket cost cutting of retail partners and maintain the growth mindset that their organizations need, many foundational CPG companies remain on the hunt for a solution to prevent further financial loss. Instead of getting caught in the cycle of looking to the past for an existing solution to a new problem, it is truly in the best interest of the CPG manufacturer and the retailer to sit down in a non-confrontational setting to conduct true collaborative distribution and merchandising planning, utilizing the power of optimization databases that exist today.
However, it’s going to take more than desire for CPG companies and retailers to achieve the results that they want. Companies facing these issues need the help of analytics to measure and predict current and future outcomes. By providing a database that provides a real-time version of the truth regarding category performance on an SKU basis and providing an optimized mutual category merchandising plan collectively they can begin to shore up and increase the profitability of the center store. Although this initial necessary exercise will be painful to both sides, the end result will be a distribution base that is more efficient to produce, minimize costly out of stocks and mutually maximize the profitability of the categories, brands and individual SKU’s.
"It is truly in the best interest of the CPG manufacturer and the retailer to sit down in a non-confrontational setting
to conduct true collaborative distribution and merchandising planning, utilizing the power
of optimization databases that exist today."
The takeaway from this predicament is that in order to stay competitive and financially stable, CPG companies need to find new ways to innovate. Adopting a truly collaborative approach can be driven by the power of optimization modeling to arrive at a mutually beneficial long-term result. Together CPG companies and retailer can set guardrails and map strategy for trade investments focused on achievement rather than savings. With these abilities unlocked, it is up to informed businesses to bring their businesses back to life.