Senior executives at consumer products companies are caught in a tight bind these days. Wall Street still has high expectations for growth, but many of the companies’ growth strategies – such as expanding into China and emerging markets to balance slower growth in developed markets – have not panned out.
Some have tried innovation strategies and brand extensions, only to find out they have added complexity and cost to their business without incremental growth. Others have tried to cut their way to greater profitability, only to find that their cost-cutting was a short-term fix, not a long-term solution.
The reality is that companies can grow, even in slow-growth markets, but they often lack the tools and capabilities to maximize their product portfolios effectively. We know of one large CPG firm where the bottom 50 percent of the SKUs accounted for less than one percent of sales, and where brand managers continue to fight with each other internally for share of growth as much as they do with competitors.
The good news is there are strategies and tactics that can tackle this problem. It will take patience and determination with investments in resources and analytical tools, but the results will pay in dividends.
Top companies are already using these types of tools to identify and capture areas of growth at a granular level, thereby leveraging product portfolio capabilities to eliminate the unknowns and make better decisions on which products to grow, maintain and exit.
- Consumer-centered innovation: This seems obvious, particularly for CPG companies, but the evidence would indicate otherwise. One study found that 66% of product launches at groceries stores are unsuccessful, with others showing the number in the 70% to 90% range. In a slower growth world, companies must be faster (e.g. fast fashion industry) and/or more targeted to meet fragmented consumer needs.
- Understand the marginal profitability of the portfolio: For many companies, the bottom 20% to 30% of their portfolios is utterly unprofitable. Smart CPG firms not only have financial systems in place to understand the marginal profitability, but also put the information in the hands of managers who have both the accountability and authority to act on the results they see.
- Actively manage the product portfolio: Senior executives should establish clear expectations as to where the brands should “play” and realistic goals to achieve growth within those boundaries. Product line leaders must leverage pricing and branding/marketing capabilities across multiple channels to reach their growth goals with analytics to increase their odds for success.
- Build “portfolio optimization” capabilities: Investment, maintenance and exit decisions for products, SKUs and brands are not simple. Many CPG decision-makers do not have access to the necessary information to make informed judgements on the right portfolio actions. Leading companies are leveraging advanced analytics to properly evaluate the multiple options that exist and maximize the profitability of their portfolios.
- Solve for the human equation: Aligning performance management goals and incentives across the organization is critical to ensuring the right portfolio management behaviors are reinforced. Product managers with new product goals but no measures around the portfolio profitability can lead to SKU proliferation. Common measures that apply across sales, marketing, product development, operations and other functions can do much to ensure a balanced approach and better portfolio decisions. A robust and profitable portfolio mix is attainable, but none of these strategies will work if the organization’s various functions are moving in opposing directions.
CPG firms can operate profitably in a world of greater complexity. Those that dig deep into the data for opportunities will uncover significant areas of sales and profit growth through better product portfolio management to achieve growth goals. Below is an example of how changing your mix can have a significant impact on your profitability. This is the first article in a four-part series. However, if you don’t want to wait for the next installment, click here to receive the all content in the series, and to discuss how we can help you optimize your product portfolio.
Jared Wiesel leads Revenue Analytics’ Consumer Products & Retail Practice and has deep experience delivering revenue growth and strategic transformation, with projects delivered across four continents. He is a known author and media presence on key revenue optimization trends affecting these industries.
Jim Armstrong is a Senior Director in the Strategy Group at Revenue Analytics. In this role, he serves as the leader on client engagements, bringing over 25 years of professional experience in developing growth strategies, pricing, and customer insights & plans. He delivers strategic insights and practical, actionable client solutions that drive organic revenue growth.