Things are looking bleak in the brand powerhouses of major food manufactures. As NPD innovation grounds to a halt and consumer brand loyalty drops, the retailers are destined to continue to squeeze margins. just-food.com’s David Robertson asks is there anything that the CPG giants can do?
Giants of the food industry like Anglo-Dutch conglomerate Unilever and US branded food giant Kraft are in danger of blundering into a future where they are unable to grow their brands while retailers cut their margins, warns a new report by PriceWaterhouseCoopers’s consumer packaged goods (CPG) consulting practice. The PwC Consulting study paints a bleak picture for the companies behind some of the food industry’s leading brands.
The main fear is that a lack of innovation, a decline in consumer interest in brands and the growing power of retailers will squeeze the manufacturers to create a situation where “growth is dead and retailers win”.
“What we are saying is that if the CPGs don’t start changing their attitude now they are going to be in trouble,” Bill Gilmour, global leader of the PwC team, told just-food.com.
Less interest in brands
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By GlobalDataAccording to PwC, consumers are growing less interested in, and losing loyalty to, the big brands. Consumer goods account for just 12% of household spending, down from 17% in 1980, and it is forecast to fall even further to just 11% later in this decade. A substantial part of this is due to the rise in own-label products, particularly in the UK. Another aspect is the weakening of brands by adding spin-offs (although some are successful, like Diet Coke, the study believes many cannibalise the core brand). Finally, consumers have become immune to the marketing barrage that accompanies big brand products – we are no longer as naive as we were in the 1950s.
“We see 700 commercial images every day,” says Gilmour. “It is not possible to take all that many in. There is so much noise out there they are not going into your consciousness.”
Lack of innovation
Innovation has also become a problem as CPGs rely more and more on trusty brands – KitKat, for example, has been the number one confectionary brand in the UK for 16 years. In the washing powder market meanwhile very little has advanced chemically, added Gilmour, apart from the addition of new names like Ultra. Instead, innovation has come in the delivery of tablets and capsules.
“A lack of innovation leads to a downward spiral,” warns Gilmour. In the US, the number of new product introductions doubled between 1991 and 2001 to reach 32,000, but just 7% of those launches were considered innovative by an organisation called Productscan. Research also shows that of all the new brands introduced in the last five years, only 1% have generated sales of over US$100m in their first year. About 80% sold less than US$10m, a fact that PwC believes shows that companies are not succeeding in bringing “must have” products to market.
Bigger role for retailers
This combination of a lack of consumer interest and a lack of products that might generate a lot of interest has made it considerably easier for the retailers to play a bigger role in the shopping habits of consumers.
“Retailers are fighting, and winning, the battle to control ownership of consumers,” says the PwC report. As retailers get bigger and more dominant, they are also in a better position to squeeze margins from suppliers. And with consumers less supportive of individual brands, CPGs are being led into the “growth is dead and retailers win” scenario.
Fighting back?
But Gilmour believes that companies do have an opportunity to fight back. Unilever, Kraft and US biscuits giant Nabisco have all started by ditching surplus brands to concentrate on their core products, thereby giving themselves more leverage with the retailers.
PwC is urging the manufacturers to take control again and presents a number of ways of doing so. The first is to use an absolute winner of a product and strengthen it. Gilmour cites the example of Heinz tomato ketchup, which no supermarket would want to live without. Heinz has added new colours to attract more children to the product and instantly increased its attractiveness to consumers and to retailers.
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Another means of developing winning brands is to make them so attractive to consumers that retailers are unable to resist stocking them at attractive margins – even if volumes are not huge. Gilmour points out that the Smirnoff Ice alcopop drink was able to do this after becoming very popular in bars and the L’Oreal skin care product Dark and Lovely achieved the same effect in South Africa after being sold initially in salons.
The radical brand cutting by the major consumer packaged good companies is a clear indication that all is not well on the manufacturing side. But while the PwC recommendations are obviously very sensible, it is hard to see how even the mightiest food companies will be able to rein in the supermarkets in the near future.
By David Robertson, just-food.com correspondent
