Manufacturing Growth: Top 5 Trends for CPGs in 2016
Amazon and new online players like jet.com continue to threaten conventional retailers, and these retailers are responding by increasing investments in their online shopping experience and bolstering click-and-collect capabilities. This trend, in turn, has led CPGs to increase their omnichannel investments and experiment with new ideas. Companies with exposure to impulse categories face a unique challenge, and many are confronting it with online innovation. For example, Mondelez launched a new Oreo website to allow consumers to design custom packages, Mars has expanded the options for customizing and buying M&M’s online, and Frito-Lay’s “Do us a Flavor” campaign engaged consumers by crowdsourcing chip varieties. Hershey is also exploring new initiatives, such as upgraded kiosks at curbside pickups and dispensers at self-checkout machines, to address the changing nature of impulse transactions.
Omnichannel’s share of sales will continue to grow in 2016, but most CPGs are still in the early stages of establishing their omnichannel strategies. When developing these plans, CPGs should consider the convergence of e-commerce and brick-and-mortar (e.g., home delivery, click-and-collect) and view them holistically rather than as distinct channels. Some CPGs, like SC Johnson, are already embracing this development by forming partnerships with Instacart, a grocery delivery service, to promote products.
Reallocation of marketing spend
2015 saw continued disruption in the advertising space, as numerous CPGs put their media accounts up for review. This movement was largely driven by the growing importance of digital marketing, causing CPGs to shift media spend dramatically to this evolving channel. Clorox, for example, expects digital marketing to comprise 40% of its global media budget in fiscal year 2016, up from 30% the prior year.
One of the boldest moves in 2015 was Coty’s purchase of Beamly, a digital marketing platform. While not every CPG will fulfill the need for improved digital marketing capabilities through acquisition, it is critical that CPGs figure out how to effectively allocate budget to this channel. CPGs are using two key methods to accomplish this critical goal. First, the most sophisticated organizations are leveraging a feedback loop to refine their media mix decisions. Recognizing that consumer preferences are difficult to pinpoint and constantly changing, CPGs that test new marketing ideas in select markets can use learnings to inform future decisions. Optimizing a finite media budget is an iterative process, and using feedback loops is becoming even more vital as the pace of the marketing cycle continues to accelerate.
Second, organizations are getting smarter about improving ad targeting and promotion granularity. For instance, Coca-Cola and P&G have begun tailoring advertising content on Snapchat to understand which types of messages and content work best for different consumer types.
Greater consumer focus through data insights
Though CPGs historically have had less access to consumer-level data than retailers have, they are continually finding new ways to capture and derive value from methods that go beyond the focus groups and panels. For example, CPGs can find deeper consumer insights from both established and new vendors that collect and sell consumer-level data.
Companies can maximize the value of this data by targeting high potential consumer segments and tailoring promotions accordingly. For instance, a CPG may offer a 20-percent-off coupon which drives truly incremental profit for certain consumer segments (e.g., millennials, urban consumers). Offering the same coupon, however, might subsidize existing purchase behavior from other consumers (e.g., high income consumers), who would have purchased regardless, costing the CPG significant profit. Testing each promotional offer with a small subset of consumers prior to broad rollout allows CPGs to understand the real incremental impact of each offer. In turn, this strategy enables companies to maximize returns and minimize risk for each new program.
The growing influence of private equity
As private equity firms increasingly take large stakes in consumer goods companies, executives are taking notice and putting a relentless focus on cost-cutting. One predominant response has been adopting a zero-based budgeting framework which emphasizes rebuilding each year’s budget from the ground-up rather than simply building off the prior year’s budget. CPGs, like Kraft-Heinz, are embracing this technique to increase profitability.
A novel approach to optimizing this budgeting process is incorporating empirical evidence as part of the planning process. This means building budgets based on experiments that clearly demonstrate the ROI for previous investments. For example, some companies are experimenting with variations of retail coverage in different stores to understand the true incremental value of each version (e.g., increasing retail servicing cadence). Companies can then optimize where resources are deployed, which servicing activities are most valuable and how time should be allocated at each store. Additionally, companies can optimize trade spend by understanding the precise impact of each idea, such as in-store displays, promotions, and assortment rationalization, by determining where cuts can be made without impacting sales. These insights help CPGs justify each budget line and improve returns by investing more in profitable ideas and reallocating spend from ideas that do not generate sufficient returns.
Healthier, more convenient products
Responding to consumer preferences is at the heart of the industry, and, as General Mills CMO notes, “Today, consumers seek real food and wellness more than science-driven health.” CPGs are responding by creating more transparent food and beverage items tailored to these needs.
Many food and beverage CPGs are removing preservatives, creating healthier alternatives, and introducing more ready-to-eat options catered to convenience-minded consumers. For instance,Nestle is repositioning its Lean Cuisine product line, and numerous CPGs, including ConAgra, J.M. Smucker, and Tyson Foods, Inc., have committed to using GMA’s new SmartLabel to increase product transparency.
There are many costs associated with creating and distributing new products, and product launches fail more often than not. In one example, Campbell Soup Company reduced the salt content of its soups to accommodate consumer demand for less sodium, but they were forced to reverse this change when it was net negative due to taste impact. CPGs can avoid this type of mistake by gathering more data-informed insights before broadly rolling out new products.
CPGs are responding to these trends by incorporating data analytics and learnings into their everyday business management. Leading organizations are leveraging in-market testing to better inform these decisions. Specifically, testing allows companies to:
· Identify the true incremental impact of each initiative
· Refine ideas for maximum benefit given consumer response
· Evaluate initiatives based on data-driven results rather than routinely repeating historical plans
· Target ideas on a more granular basis, allowing CPGs to move closer to the goal of providing the “right product, for the right consumer, in the right place, at the right time”
The use of big data is no longer a trendy buzz word used to impress at industry conferences. It is now a core capability that leading CPGs need to make more effective strategic decisions in a rapidly evolving industry.
Greg Ulrich, Senior Vice President at APT, has over 15 years of experience advising many of the world’s most successful organizations. Mr. Ulrich focuses on helping organizations leverage data to develop innovative but practical solutions to challenging problems, maximizing shareholder value.
Mr. Ulrich currently leads engagements in the US and Australia in a variety of industries, including big box retail, apparel retail, consumer package goods, casual dining, financial services and education. Mr. Ulrich also leads APT’s San Francisco office.
Prior to joining APT, Mr. Ulrich was a management consultant. He spent eight years at Marakon Associates and then focused in the social sector immediately before joining APT. Mr. Ulrich currently sits on the Board of Directors of Clear Care, a software company focused on the home-care market and remains very active with local nonprofits and foundations.
Mr. Ulrich holds an MBA from the Wharton School, University of Pennsylvania, where he was a Palmer Scholar, and a BS in Economics from Duke University, where he graduated Summa Cum Laude.
Aaron Fidler, Senior Vice President at APT, leads APT’s office in Northwest Arkansas and oversees relationships with Walmart and many leading consumer goods companies. He has helped clients create significant value across a wide variety of business issues, such as space optimization, capital investments, pricing strategy, new product launches and marketing optimization.
Prior to joining APT, Mr. Fidler worked at Capital One and Total Wine and More in a variety of analytic and strategy roles. He holds a BS in Economics from The Wharton School at the University of Pennsylvania, where he graduated magna cum laude.