The result is that the discount and top-end companies are doing well and increasing their market share, while retailers in the middle — and the CPG companies that service them — are suffering. Many of these legacy mainstream retailers are saddled with excess physical store space that is bringing in less revenue than it once did and are desperately trying to adjust their operating models to remain competitive.
As retail channels have divided in response to these shifts in consumer behavior, CPG companies have increasingly had to support multiple retail formats. Long gone are the days when manufacturers were concerned mainly with winning grocery stores. In the U.S., the grocery channel share of all packaged-goods sales is forecast to drop from about 45 percent today to about 37 percent in 2025. Picking up the slack will be warehouse clubs such as Costco and Sam’s Club, dollar stores such as Dollar General, convenience stores, and online retailers, such as Amazon Fresh and Fresh Direct.
Although the U.S. and U.K. CPG environments are similar, the industry’s landscapes in Japan and China could not be more different; still, both Japan and China offer significant challenges to consumer goods companies. In Japan, domestic CPG companies have benefited from a highly fragmented, complex, and dense retail environment that has allowed them to control and flood distribution channels. Limited competition has meant these companies have not had to sharpen their skills in creating consumer value or in basic product marketing. But as Japan’s population ages, urbanization continues, retailers consolidate, and e-commerce becomes more popular, the old distribution mechanisms are creaking. CPG companies are struggling to field winning go-to-market strategies in the domestic market, which is forcing them to look outside the country for revenue growth — something that they are not equipped to do. This leaves the Japanese CPG market ripe for new entrants with the capabilities to break through the logjam of antiquated distribution structures and to market products to specific customers in multiple channels, including in-store and online.
In China, the CPG market is hyperdynamic and rapidly growing. The predicted boom in consumer products sales in lower-tier cities and western regions took shape very differently than predicted, in part because residents in those less-wealthy areas have not been interested in buying Shanghai’s “last year novelties,” as they call them, and because e-commerce volume has exploded, up to about 15 percent of total consumption in China now, from about 3 percent in 2010. The e-commerce developments are especially troubling for traditional, brick-and-mortar-oriented CPG companies, which in general lack agility in direct-to-consumer sales and face thin margins on popular Web shopping services like T-mall.com, JD.com, and Dangdang. Certainly, CPG companies have more opportunities in the affluent Chinese cities, but they are also hampered there, as young consumers — the predominant growth market —are trading up and shunning the brands and products used by their parents. The biggest losers in this setting are large CPGs (including many multinationals) that are stuck with musty legacy brand portfolios. Consequently, CPGs are in the midst of reevaluating their strategic thinking for China, shifting toward product and brand innovation investments, opening up new distribution channels, and finding their bearings in the e-commerce free-for-all.
Faced with these challenges in areas around the globe, many old-school CPG companies have taken comfort in the ramifications of the 2015 purchase of Kraft Foods for US$40 billion by Brazilian private equity firm 3G Capital and Berkshire Hathaway. The new owners almost immediately announced they would cut $1.5 billion in annual costs before 2018, increasing profit margins and boosting the stock price while slashing the number of employees, management levels, and brands.