Does size matter? Rethinking the importance of scale in consumer goods companies

Published: September 16, 2010

Executive summary

Since the 1980s, managements and boards in the consumer packaged goods (CPG) industry have been on a quest to get bigger — the conventional wisdom being that the best shareholder returns would accrue to companies with huge brands and the scale to compete in developing markets. But this assumption has turned out to be misleading, certainly over the last decade.

Instead, the best performers from the perspective of total shareholder returns have been small CPG companies with relatively narrow product portfolios supported by three to six differentiated capabilities.

These small companies exhibit “coherence,” a state in which their capabilities, product portfolios, and market strategy (what we call a “way to play”) all fit together. Coherence allows these companies to be efficient in their activities, disciplined about their portfolios, and unmatched at the capabilities that matter most to customers.

The importance of coherence does not mean there is no value at all to scale. In fact, scale is still critical for CPG companies trying to expand into developing markets. There the near-term advantage is to the swift, and the scale of a Procter & Gamble, for example, does represent an advantage. In general, scale matters more in markets that don’t have well-developed retail infrastructures than in markets that do.

No CPG company is perfectly coherent across all of its businesses. Indeed, there is so much incoherence in certain sectors that a company can often gain an advantage simply by being less incoherent than its rivals. At a management level, the practical question is where to pursue coherence full bore and where to tolerate some level of incoherence. The answer will depend on the company’s international profile and product portfolio, and on its sense of how the sectors it competes in will evolve over time.

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Highlights

  • The traditional kind of scale has lost some power in the CPG industry in recent years, as a handful of smaller companies have produced the best returns for shareholders.
  • These small companies have what may be called “scale at the shelf” — meaning they offer multiple brands at various price points and with different propositions. This is a type of scale that does remain important and is enabled by capabilities.
  • The shift toward capabilities has been accelerated by media fragmentation, the availability of outsourcing, and a consolidated retail environment. Retail consolidation has leveled the playing field and given small CPG manufacturers a way of getting broad distribution.
  • Most emerging markets, by contrast, don’t have consolidated retail infrastructures. That is why the Procter & Gambles of the world — those with scale — are rushing to those markets and finding a degree of success there that is eluding them back home.
  • CPG companies need to decide what they have to offer — what their differentiated capabilities are — in order to determine their market strategy, their degree of internationalization, and the products they are going to sell.

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Does size matter? Rethinking the importance of scale in consumer goods companies