CGN Edge Blog

A Perplexed CPG World

September 27, 2018 Posted by: Ayush Agarwal
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Consumer product companies cover a vast array of product categories and come in numerous shapes and sizes. Consumer packaged goods (CPG) are items used daily by the average consumer and need to be replaced frequently. Basic examples include: food, beverages, clothing, tobacco, and household products. Additionally, cosmetics and frozen dinners can be categorized under CPG.

There are two main characteristics of CPG. First, CPGs are meant to be consumed quickly and sold at a relatively low cost. Second, CPG companies are less likely to be affected by market fluctuations.  If the future economic condition is uncertain, people are less likely to spend large sums of money on ‘durable goods’, especially when they own older version of the product. However, people will still spend a fixed amount of money on CPGs.

CPG companies are worried because traditional growth models must be changed for adjusting the magnitude and pace of change in the US market. Some CPG companies are considering leveraging ‘digital’ to leapfrog. Having said that, in a CPG business, strategic decision-making is often perplexing due to the complexity of these businesses. They could have several brands, multiple target consumer groups, operate in multiple geographic regions, various channels of distribution, and so on, which makes evaluating these decisions difficult and complex.

Challenges faced by the CPG Industry

From brand perception to supply chain efficiency, not to mention pricing, product innovation and, of course, assessing customer needs and behaviors, consumer products companies face a long list of things they must get right to survive in the ever-changing CPG marketplace.

There are three main challenges facing the current CPG industry:

  1. Pervasive digitization of path-to-purchase. Large CPG companies want to leverage direct-to-consumer strategies to drive cross-channel sales, profits, and consumer loyalty within the digital word. There is an increasing use of digital tools for in-store purchases. Additionally, barriers to enter the market are being overcome. Under the influence of e-commerce, traditional market and channel economies of scale dissipate. Smaller and nimbler competitors are empowered to threaten the grocery’s goliaths – Kroger, Meijer, and Schnucks, to name a few.
  2. Health, wellness, and responsibility as the new basis of brand loyalty. Companies might experience greater pressure to promote sales volume with satisfying consumer interests and values toward health and wellness products.
  3. The value of mass-production – economies of scale are being undercut by new business models based on customization and the delivery of individual units. CPG companies are struggling to further gain/realize profits from economies of scale; while they make diverse products at the same time to meet costumers’ need.

Retailers are placing smaller orders more frequently and furthermore; those retailers are asking CPG companies to deliver goods on time which are otherwise penalized for a delayed delivery. 

Market Trend

Due to a confluence of evolving technologies, consumer demographic shifts, changing consumer preferences and economic uncertainty, stress is placed on traditional sources based on obtaining a competitive edge, such as scalability, brand loyalty, and retail relationship.

“The marketplace is facing channel disruption on a dramatic scale, growing e-commerce penetration and the continued strengthening of Amazon, new and disruptive business models, demographic shifts and renewed spending priorities, highly informed and empowered consumers, and rapidly evolving technologies.”

Also, there is a push to optimize shelf space to maximize profit, because of the more recent crunch from online markets. Additionally, large retailers are looking to hold less inventory and reduce order quantities, which in turn will lead to less frequent shipments. Therefore, inventory optimization is increasing in importance.

“The changing channel landscape is forcing many consumer brands to restructure their go-to-market strategies to drive more productivity from fewer points of distribution, and to build direct-to-consumer strategies that require capabilities and expertise that don’t typically reside in-house today.”

Many CPG firms have made the decision to upgrade packing designs to attract more buyers. More and more customers are willing to spend money on personalized products. It is the same for CPG industry even if the price is relatively low.

“Today, consumers are increasingly looking for “specialty” brands that deliver on precise needs, and thus grant brands less “permission” to expand beyond their core. The appeal of power brands has eroded, and the prevalence of private label and other value brand alternatives gives consumers many choices when they’re trading down, particularly in an hourglass economy”

CPG firms wanting to survive in an ever-changing marketplace need to adapt to better satisfy new customer interests and by offering customers personalized products, utilizing digital tools to enhance the customer experience, and by optimizing their inventory processes.