IDEA IN BRIEF
The Consumer-Packaged Goods (CPG) industry now faces numerous challenges as it emerges from the Pandemic; harsh trading relationships, strained success formulas, the inability to recover costs through price increases, a challenging social-economic landscape, and regulatory constraints on growth. To reignite growth and motivate marketers and salespeople, it is imperative you: (1) foster a new growth mindset, (2) re-evaluate your understanding of consumers, (3) sell for availability, (4) negotiate with a merchant banker mindset, and (5) pursue breakthrough business models at a much faster pace.
In short, it’s time to strengthen the Demand Muscle.
After spending 20 years in CPG across various growth and leadership roles, I left this highly consolidated customer terrain for consulting. The year was 2011, and I felt the industry was nearing a breaking point in relations between manufacturers and retailers. Although it got close with the government’s investigation into claimed predatory practices by retailers, this breaking point never really transpired, and the industry began working on a long overdue Code of Conduct. These headwinds continued until the really big storm that hit in March 2020. With the advent of the global pandemic, a seismic shift occurred, reshaping the landscape, and rewriting the rules overnight, thrusting us into uncharted waters where unprecedented challenges awaited.
Prior to Covid, the prosperity of consumer businesses long depended on their ability to ignite demand and deliver products and services that met a consumer need. However, the past three years upended everything we knew about running a CPG business. Early panic-stoked demand cleared out everyone’s inventories, and the half-life of this run-on product strained the supply chains for years, relegating brand equity to the back seat and leaving a barren store where the best supply chains won for their brands.
In speaking with Michael Graydon, CEO of Food, Health & Consumer Products of Canada, and a few Presidents of the major CPGs, it seems clear that 2023 has marked the beginning of the post-Covid cycle, with manufacturers having largely recovered from the pandemic-party hangover. After three arduous years of demand muscle atrophy, the Presidents I spoke with are asking critical questions about their capabilities: “Do our marketers possess the acumen to engage the evolved consumer?” and “Can our sales force effectively unleash the levers that stimulate demand?” Survival in this new era necessitates radical introspection and an unwavering commitment to rebuilding these essential Demand Capabilities.
HARDSHIPS & HEADWINDS
A Strained Success Formula
Once, the formula for triumph in consumer product companies was as straightforward as Demand + Supply = Growth. Yet, from April 2020 to 2023, this equation was profoundly disrupted. The capacity to supply became an excruciating struggle, reducing growth to a mere survival game for companies capable of fulfilling the insatiable demand. Many of our CPG clients found recovery even more strained by their extended supply chain, with either ingredient, packaging or even finished products coming from outside of North America. In this environment, the strategic discourse shifted from aspiring growth to the grim task of resource allocation. Marketers found themselves crippled, unable to employ their craft while demand creation activity was suspended, and salespeople engaged in relentless negotiations revolving around allotments, fill rates, fines, and the inevitable consequence of scarce supply—price increases.
The Futility of Price Increases
With supply chains buckling under the strain, costs skyrocketed, and price hikes became inevitable. However, we now stand at the precipice of a bleak reality where the limits of price increases appear to have been mercilessly exhausted. No longer can escalating prices salvage profitability or offset costs. Instead, achieving sustainable growth necessitates an unwavering commitment to absolute consumption expansion to absorb costs and propel profit margins forward.
Navigating the Harsh Social-Economic Landscape
In today’s financially trying world, consumers find their wallets emptier, their discretionary spending diminished, and their caloric intake unchanged. With population growth fueled predominantly by immigration, driving demand now requires skillfully seizing market share from competing options and adeptly speaking the language of new Canadian consumer segments—an art few brands have yet to fully master.
Regulation’s Chokehold on Growth
As if the challenges weren’t already insurmountable, governments have proven themselves oblivious to the intricacies of supply chains. As Michael Graydon concluded, the relentless growth of regulations in our country has compounded the struggle, making it increasingly arduous to attract investment for local manufacturing capacity. This, coupled with an unbalanced retail landscape and retailers’ incessant demands for trade spend, has driven manufacturing away from Canada, further eroding our ability to flex the demand muscle.
FUSING THE ARRAY OF OPTIONS TOGETHER INTO A COMPREHENSIVE APPROACH – no silver bullet, no quick-fix
Hardships and headwinds such as these can create uncertainty about the future, which reminds me of a Peter Drucker quote I once read, “The best way to predict the future is to create it.” So, in homage to Mr. Drucker, here are 5 interconnected thought-starters for you to consider:
Get your sales team excited and motivated to Grow!
In the challenging realm of sales, where negotiations are fierce, and the trading environment is harsh, it’s crucial to create a growth mindset among salespeople to reignite their motivation and drive.
The problem lies in the demoralizing effects of a tough market, where sales targets may seem unattainable, and rejection becomes a daily occurrence. This is significantly harder than managing limited product allocation where demand exceeds supply. Many sales teams struggle to stay motivated and find it difficult to navigate through the obstacles. However, by fostering a growth mindset culture, organizations can reignite the growth muscle within their salespeople.
To tackle the problem head-on, sales executives must move beyond merely leading the delivery of results and begin leading the behaviours that deliver results. Setbacks need to be viewed as learning opportunities and efforts recognized and rewarded so that sales teams can regain their drive and resilience. Clear and challenging goals must be paired with clear areas of freedom within which to maneuver and coupled with skill coaching to enable salespeople to enhance their capabilities and adapt to the growth mandate. Collaboration and knowledge sharing among team members can further boost motivation and foster a supportive environment within which people feel safe to take risks. With this in place, you can then provide salespeople with authority and autonomy to maximize the benefits of accountability. From my experience, this creates an exhilarating environment and is the gas of a growth mindset!
Re-assess what you think you know about your consumers and get into the heads of lapsed and non-users.
New products are important, expensive, and typically fail in the first year. Introducing innovation because you can ‘make it’ is increasingly ill-advised. If you sell what you can make as opposed to making what you can sell, then the post-pandemic world may require you to rethink your approach to innovation. One of my long-term clients made this shift before the pandemic by deploying Job Theory, popularized by Clayton Christensen, into their innovation strategy. They benefitted from a significant improvement in their success and have been ascending from Tier 2 to Tier 1 status ever since. This approach emphasizes the importance of understanding the underlying poorly served jobs that consumers use products to complete, from the simple (help me pass time) to the more complex (help me feed my children quickly and nutritiously so they can participate in Salah between 3rd prayer Asr and 4th prayer Maghrib … if you don’t know what I am referring to, that is exactly the point).
Brands can gain insights into the specific jobs their products can fulfill by (1) identifying job hypothesis for exploration (what are the fundamental problems consumers need to solve when they hire a product or service?), (2) define the desired outcome (clarify why they would hire the product), (3) segment consumers by job and outcome (remember to consider the changing make up of our populations), (4) conduct observational research in addition to consumer interviews and focus groups, and finally (5) design your solutions. This may increase the likelihood of introducing successful innovation with staying power beyond year 1.
Byron Sharpe’s “How Brands Grow” complements Job Theory by highlighting the need to focus on broad reach and penetration to drive growth against your portfolio. Specifically, Sharpe validated through his research that an exponentially larger addressable market resides outside of a brand’s current users. By understanding the motivations, needs and barriers to purchase of lapsed and non-users, brands can tap into this substantial market opportunity and drive further expansion. From personal experience at both Campbells and Mars, we tried to grow the Chunky brand and M&M’s respectfully by encouraging our heaviest users to just eat One More Bowl / One More Bag. Neither attempt worked to grow consumption through a heavy-user focus. However, when we deployed Sharpe’s strategies to grow M&M’s penetration and recruit new consumers, we unlocked sustained double digital growth on one of the largest confectionery brands.
Sell for availability and relentlessly manage Leading KPIs:
Drawing from Byron Sharpe’s work, growing mental and physical availability provides a path to demand growth. Mental availability refers to a brand’s presence in consumers’ minds, while physical availability refers to its accessibility when the shopper is ready to buy.
All healthy brands have distinct assets which can be used to grow mental and physical availability. Distinct Assets refer to a unique attribute, characteristic, or element that sets your brand apart from competitors. It represents a brand’s key strength that makes it memorable and recognizable. Distinct assets can include a brand’s logo, tagline, physical design and colour schemes, voice, packaging, product features, customer experience, and even intangible factors like brand reputation or associations. These assets help consumers identify and differentiate the brand from others, connect them to jobs, include them in their repertoire of options, and ultimately influence their purchase decisions.
Here’s the rub, to be distinct, these assets need to score high for both Recognition and Ownership; one without the other will not help. When we conducted research on the M&M’s brand to find its distinct assets, we identified a short list of potentials that were highly recognizable as a candy for the snacking occasions. We then checked them for ownability. We were surprised to find out that the ‘colourful bowl of lentil candy’ we had been using was not only recognizable for purpose, but half the time, it was related to SMARTIES instead of M&Ms … oops. Consequently, we shifted back to the M&M’s Characters (Red was my personal favourite), which were both recognizable and ownable to the brand. From that point on, the Characters showed up in our ads and in-store to fuel our double-digit growth.
Once you have identified them, you should treat your distinct assets as untouchable. You don’t need to look far for cautionary tails of the damage done when marketers are permitted to ‘contemporize’ what they believe to be tired-looking brands; Tropicana’s straw image and orange-shaped cap and Bud Light’s affinity to some male ethos are just a few examples.
Finally, the use of your distinct assets should be an integral part of your sales tool kit and included in your leading indicators; a display / promotion / ad without distinct assets is simply not as good as one that prominently leverages them. To sustain a growth focus, brands should prioritize leading indicators that influence availability, such as distribution (get outside of what syndicated data providers can measure and be everywhere consumers shop), visibility (display & promotion leveraging your distinct assets), and shelf presence (pricing, position, and in-stock %). Doing this increases the likelihood of achieving your lagging KPIs (Net Sales, OP, etc..).
Prepare to negotiate with a merchant banker mindset:
In the context of negotiation, many CPGs have invested in the GAP Partnership’s negotiating training. “Getting to Yes” by Roger Fisher and William Ury also provides valuable guidance to master principled negotiation techniques that aim for mutually beneficial outcomes. Or you could adopt the frameworks and tactics to negotiate favourable deals and forge productive partnerships described in the “Negotiation Genius” by Deepak Malhotra and Max Bazerman.
Regardless of the best practice you choose, the message here is that you will need a process for negotiating the customer demands to come. Whether you subscribe to Michael Graydon’s belief that trade negotiation is set to become harsher as price inflation stalls and retailers return aggressively to sourcing earnings growth through buying products over selling; or that ‘customer asks’ are simply ‘par for the course,’ they will need to be planned, structured, and conducted with business discipline.
As resources to invest in demand-generation are finite, and the trade’s demands are infinite by comparison, my recommendation is to approach product, program, and price negotiation with a merchant banker mindset. The merchant banker mindset is anchored in the principle that every dollar invested must go to the highest Demand-ROI available.
The inputs required to achieve this include: (1) customer P&Ls that minimally identify gross margin after activity-based, cost-to-serve, (2) a method/tool to model trade spend ROI and access to the required data, and (3) a master customer schedule for annual program ‘asks’ overlaid to your annual demand activity plan. With this information, you can plan your negotiations based on the predicted timing and magnitude of customer ‘ask’ versus required ROI and sequence the negotiations to leave the most challenging retailers to the end. This process of minimizing uncertainty will give you greater leverage to stick to your ‘walk-away’ KPI thresholds for net sales, gross margin, and cost to serve, and maximize your returns during the negotiations to come. This was the secret of my best year when I was a VP Sales.
Pursue (with greater speed) Breakthrough Business Models that Increase Demand:
The rapidly evolving digital ecosystem has opened new opportunities for CPG companies to pursue breakthrough business models. Incubating online stores, direct-to-consumer (D2C) channels and integrated commerce approaches create the ability to connect to shoppers and complete a transaction without an intermediary (i.e. retailer).
In my opinion, digital transformation for a CPG is most rapidly and cost-effectively built and maintained through a leveraged infrastructure. Consider these 3 areas of leverage in your design:
- Leverage digital ecosystems for established centers of excellence to create platform development velocity (i.e. SaaS, payments, POS, Delivery, etc.). You don’t need to build it from scratch.
- Leverage your brands that possess the highest household penetration to establish reach and equity that builds distinction, credibility, and campaign scale.
- Leverage Marketplaces for established, well-trafficked digital forums to increase consumer acquisition; and go beyond retailer-owner platforms like Amazon, Walmart.ca, etc. Expand to Social like FB Marketplace and Editorial like Reddit. Go to adjacent places where your consumers already frequent.
Most digital commerce companies have not been built with large and costly studies or consultant recommendations. The winners start small and deploy iterative, test-and-learn releases and continually improve until they reach the tipping point of consumer demand. This requires a fast pace and agile program of development.
Consumer purchase behaviour changed over the pandemic as the mainstream adapted to digital commerce and engagement. CPG needs to catch up and explore innovative ways to reach and engage consumers. By doing so, they can unlock new revenue streams, reduce the control of established retail channels, and stay competitive in the evolving shopper purchase environment.
THE ESSENTIAL CONCLUSION:
The CPG industry has gone through major disruptions, and it’s crucial now to focus on practical strategies for revitalizing your demand muscles. Nurturing the growth mindset and re-understanding and adapting to consumer needs is paramount. Negotiations with the trade will require a solid, data-driven approach that ensures the most effective use of resources. Ensure your products are readily available to consumers, both mentally and physically, by optimizing distribution and employing effective penetration marketing. Innovate, but do it based on actual consumer needs and ensure that new products serve a job. And finally, it’s vital to embrace digital transformation and incubate alternative business models.
In an industry that’s evolving rapidly, action and adaptability are key. I wish you good fortune as you take decisive actions to build resilient, forward-looking CPG businesses sustained by powerful Demand Muscles.