Three years ago David Howlett, OTM’s then Marketing Director, put the spotlight on the Fast Moving Consumer Goods (FMCG) sector. In his article Fast Moving Consumer Goods Get Faster and Faster, he explained how the FMCG sector has to increase its focus on operating model design as the pace of change in the sector increased. There has certainly been no let-up in that pace of change since then. As the developed world becomes more environmentally aware, consumers are not only demanding the reduction in waste that David referred to, but are also demanding reduced food miles, plastic-free packaging, lower sugar, and plant-based products. In fact, the voice of the consumer has become even stronger in FMCG markets. We now demand greater transparency around every element of a product’s journey – through the supply chain, from source to shelf, and beyond.
In this article we have updated David’s original thinking, bringing to life OTM’s recent experience of helping FMCG organisations. Typically the FMCG org is very product-centric. It incorporates Omnichannel and Big Data to bring the voice of the consumer into an operating model that can innovate quickly in response to changing markets, whilst not losing sight of the need to deliver operational excellence in the core production processes.
Fast Moving Consumer Goods and Consumer Packaged Goods (CPG) are the two names for the sector that so many of us interact with every day. Over the past thirty years, the sector that covers food, beverages, personal care, and much else sold by large retailers, has grown massively. This is in large part due to the increasing disposable income in developed countries and the rapidly expanding and aspirational middle classes of the developing world. Today, global powerhouses like Nestlé, P&G, Unilever, Mondelez, General Mills, Coca-Cola, and Pepsi dominate the sector. These companies are the visible and high-profile manifestation of our free-market economies. They have grown on the back of massive global marketing efforts to generate demand for low margin, incrementally improved products, delivered through operationally efficient supply chains.
However, behind this apparently strong business model, change is afoot. Fast markets are a magnet for competition. Competition squeezes profit as the market becomes saturated with options for consumers – whether from the large companies or from the entrepreneurial start-ups. The start-ups utilize digitally enabled business visions delivered through agile operating models creating and leveraging market opportunities unseen by the large, but slow, moving global corporations. The developed market’s year-on-year growth in demand (exceeding growth in population) is stalling. The market has been purchasing about 30% more than it needs through overconsumption. This has contributed to the current but only slowly dawning realization that a market correction is needed to avoid further waste.
The growth formula of the last thirty years will not be extended any longer. How can a business sell 30% less volume and yet deliver continued financial growth to its shareholders? Anticipating these changes, the major companies have been busy switching investment into economies with growth potential and harvesting developed markets for profit to invest elsewhere. However, these growing markets are, in many cases, changing even more rapidly than their developed country cousins. Countries like China and India are learning the lessons even before they themselves have gone through the period of excess that characterized much of what we have seen in the “developed” world.
GfK’s annual Futurebuy Survey stated that over a third of shoppers worldwide are blending online and in-store shopping. This statistic will continue to rise, and the upward trend shows us that Millennials ‘mobile’ mindset is going to change the way we all look at shopping forever. Were any of us really surprised by three of the recent moves by Amazon? First, their move into brick and mortar. Second, their move into online grocery shopping with the purchase of Whole Foods. Third, the development of their own delivery channels. Five years ago OTM highlighted the challenge that designing an Omnichannel operating model placed on an organisation. Amazon is now leading the way through purposeful innovation and integration of strategic acquisitions that deliver an omnichannel experience in the FMCG market.
Meanwhile, the growth in awareness of the carbon footprint of the goods we consume led consumers to make choices based on reducing food miles, plastic avoidance, reducing meat & dairy/increasing plant products, and reducing sugars.
The UK’s major supermarkets typically have 30,000+ Stock Keeping Units (SKUs) based on a strategy of offering consumers “choice.” Ironically, the average UK consumer has a repertoire of only 300 SKUs per year and 50% of each consumers’ purchases stay the same each week (Kantar WorldPanel). The “choice” strategy of UK supermarkets and FMCG manufacturers has in itself created a demand for a much simpler offering. This is demonstrated by the success of new entrants (E.g. Aldi and Lidl) in the UK who offer less choice at a competitive price by decluttering an operationally efficient supply chain. Consumers are switching to this less complicated shopping experience because they only have a simple and short shopping list. Online shopping with its memory of our favourites has worked to reinforce this tight repertoire, a surprising consequence in a digital age, but proof again that we are creatures of habit. Looking at numbers from earlier this year we see that in a flat market the big supermarket chains lost market share, while the less complicated new entrants (Aldi +6.2%, Lidl +7.7%), and agile online-only players grew (Ocado +12.6%). This is all at the expense of the big players. There is no denying a market shift is happening across the developing world.
Consumers are now bombarded with messages encouraging them/us to consume less, use less plastic, and reduce our carbon footprint. How can global food manufacturers respond when their main markets are heading towards a volume correction in per capita consumption that will translate to circa 30% less food sales by volume? The knee-jerk reaction is for marketing strategy to switch to niche approaches, innovation, premiumization, higher price per unit, etc. However, we see evidence in the UK, the US, and many other developed markets that people don’t value the proliferation of choice; we become immune to the standard marketing tactics as a defence mechanism in our busy lives. People instead trade up by eating out; they tend to value “experiences” more than the brands they consume in home. In the US, the value being spent on food in retail has been overtaken by the value of food consumed out of home.
Every situation, no matter how severe, gives rise to opportunities, and invariably, the entrepreneurs show us the way. In the food market, we witness the rapid growth of portion controlled and healthy food delivery services that minimize waste, and provide a convenient, healthy alternative to our standard ways of shopping, cooking, and eating. Hello Fresh (UK) and Green Chef (USA) are two prominent examples.
Larger companies struggle to be quite so innovative from within their operating models. The responses of the large global players in the FMCG market sees them seeking marginal gains or trying to prevent significant losses in market share, rather than innovating their business model in response to a new strategic direction. Responding this way might means a relatively modest payback for what could be a significant financial or time investment. This may explain the slow growth of online channels in the US compared to the rest of the developed world. Other signals include the very limited shift away from plastic in packaging, the reluctance to change the ingredient mix, and the variations in experience depending on the channel a consumer uses.
From an organisation design perspective it’s easy to see why it is difficult to innovate or even make significant changes to the customer experience from within an operating model that has successfully dominated a market for decades. These operating models tend to be risk averse, intolerant of failure, and directed through many layers of management by top-down cost-driven planning and decision making processes. At OTM we have been vocal about the difficulties of trying to introduce agility into just one part of an organisation. The problems of ambidexterity, when one hand is far bigger than the other, also become an issue when there is an initiative that the leadership team are not aligned around.
The answer lies in understanding why pockets of ‘agility’ or ‘ambidexterity’ fail. The decision to do something different (being truly innovative around the customer experience) in a large global organisation must come from the top. It must be a strategic decision that the leadership both fully understand the consequences of, and are fully aligned around.
The ‘parent’ organisation, the cash-cow, must remain both operationally efficient and effective to compete, but this is not an environment in which innovation thrives. The business leadership must understand that in order to develop innovative solutions for their customers/consumers they must completely ring-fence the work and develop a new work boundaries. An operating model that is agile and freed from the constraints of its ‘parents’’ vertical planning, budgeting and decision-making mechanisms is required.