This article first appeared on Forbes.com.
Consumer goods executives who look at Western Europe may feel like holding up their hands in resignation.
While some developed markets like the US stimulate their way to growth and most emerging markets continue to thrive, Western Europe’s well-documented challenges drag on. Gross domestic product (GDP) growth is low or virtually nonexistent, consumer confidence sags and shoppers’ loyalty to their preferred brands is low. Shelf space for branded goods is dwindling as retailers turn to smaller store formats and private labels steal share. Top talent is either rapidly being deployed to faster-growth markets or discouraged by their inability to make a difference, let alone advance their careers, in this environment. Consider: growth for personal care was more than seven times greater in Asia than in Western Europe from 2001 to 2011.
It’s no surprise, then, that consumer goods players are tempted to de-prioritize Western Europe in their corporate agendas in favor of more dynamic regions.
But there are a host of reasons why Western Europe remains important for multinational companies. It’s still home to a significant portion of the world’s wealth. And unlike consumers in fast-growth countries, almost every shopper can afford mainstream consumer goods, making it possible for companies to achieve high rates of penetration. While GDP per capita growth rates may be higher in developing economies, absolute growth is greater in Western Europe. As a result, the region still represents a significant portion of sales for a majority of global consumer goods companies, and remains highly profitable for many of them. For example, last year L’Oréal achieved profit margins of 21% in Western Europe.
In this environment, the key for any player is to boost penetration—getting more shoppers to choose to spend on its products. To meet that goal, winning companies have adopted focused-growth strategies. Instead of spreading resources too thin, they focus on a few select products, investing disproportionately where and how it matters most. By streamlining and honing their product portfolios, these companies rejuvenate growth while simplifying operations.
Take Orangina Schweppes. The company reversed a 10-year market- share and volume decline in France, outperforming the market from 2006 to 2009, by reprioritizing its fruit beverages portfolio and substantially reinvesting in its priority brands. Similarly, Red Bull rose above the pack because of its focused-portfolio approach and single-brand platform. It grew by an annual 8% in Western Europe during the slow growth years of 2009 to 2012. Such outperformance is not unusual. Bain & Company research has shown that focused-portfolio companies—those with the lowest levels of product complexity—grow at faster rates in periods of stable or slow growth. High-complexity companies begin to shrink in a recession.
A focused portfolio offers multiple benefits. Not only does it align resources in priority areas, allowing a company to invest enough to have a material impact, but it also keeps senior management focused and helps brands win in the store. Dedicating shelf space, promotion slots and other critical store assets to priority products increases influence with retailers and reduces shopper-choice paralysis. It lowers supply-chain and back-office costs. It also allows companies to build scale across markets for targeted products.
But once a company has identified key focus areas within its portfolio, it must fully redirect resources to achieve full-potential penetration – selling only the right few products to as many shoppers as possible.
Winning companies target their media spending to support their priority brands, ensuring sufficient, continuous and consistent messaging for those brands. Likewise they reserve their promotion investments for a few chosen brands. Various Bain studies have shown the greater benefit of promoting the so-called hero brands over smaller brands. Finally, the same single-minded focus on selected products needs to extend to in-store sales execution. By investing disproportionately in priority areas, companies can increase their ability to win at the moment shoppers make their decision by having a highly targeted offering that is perfectly executed on the shelf with sufficient availability and visibility—at the right price.
While companies pump up their investment in selected areas, they also need to be mindful of how they manage the rest of their portfolio. Winning companies establish strict guidelines for non-core areas. For example, a company may specifically limit advertising for a “B” brand to only a four- to eight-week period.
Costs for managing non-core brands should also be rigorously controlled. And opportunities should be identified to build scale for these brands across markets or regions with similar needs. If the cost of maintaining them is too high, the best option is to divest or delist.
There’s another benefit to focusing only on those few products with high growth potential: It gives companies the opportunity to simplify operations and redesign a more agile and flexible organization.
More focused companies can also more easily create clear, repeatable routines for critical activities while eliminating activities that create complexity. To achieve these benefits, companies must identify the few capability areas where they want to truly excel. For some, this will be sales execution; for others, it will be marketing. For all, a simpler portfolio will make it easier to excel in those areas. Finally, winning players in Western Europe also reorganize themselves to use pan-regional scale where it makes economic sense while still maintaining local capabilities where it matters. This typically involves regionalizing some brand management, commercial, supply, procurement and support functions, while keeping most sales activities local to ensure the appropriate activation is implemented at the local stores.
Companies now enjoying success in Western Europe have learned an invaluable lesson: A focused company is always a winning company. But results don’t happen overnight. The lesson from winners is to place big bets, stay undistracted, and be committed.
Matthew Meacham is a Bain partner based in Madrid and the leader of the firm’s Consumer Products practice in the Europe, Middle East and Africa regions. Nicolas Bloch and Guy Brusselmans are Bain partners based in Brussels and are leading members of the Consumer Products practice for these regions.