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Of Note: The Winds at Your Back

Of Note: The Winds at Your Back

Navigating in uncertainty is tricky, but leading companies always make the most of the winds at their back.

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Article

Of Note: The Winds at Your Back
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Matthew Meacham Matthew Meacham
Leader, Global Consumer Products practice

In their universal quest for sustainable top- and bottom-line growth, executives at consumer goods companies encounter more than their fair share of headwinds. Exchange rate volatility, continued weak consumer demand and long-term shifts in shopping patterns all conspire to make planning difficult. It’s hard to allocate resources properly, let alone establish proper investor expectations.

But there is good news too. Emerging tailwinds may provide a significant structural boost to packaged goods companies for years to come. Interest rates are low, and Bain’s Macro Trends Group believes they are likely to stay low for an extended period. The decline in oil prices has both primary and secondary benefits to the industry. The primary benefits: lower transportation costs, lower manufacturing costs and lower inputs of oil-based packaging products. The secondary benefits include dropping prices for protein and many plant-based agricultural inputs.

It’s tough to predict the net impact of all of these changes. For example, as many companies discovered, the low price for grain in Brazil or oil in Russia won’t necessarily offset the weaker consumer demand in those markets. In this world of volatility, it’s tempting to focus attention on the downside pressures. However, we recommend that firms try to balance managing those headwinds by really leaning in to take advantage of tailwinds. Navigating these challenges starts with separating out the variables that have a reasonably narrow set of potential outcomes (the “cold hard truths”) from the truly volatile. For example, the shift to modern trade in developing markets like China is reasonably predictable and quantifiable based on the impetus of massive demographic and economic forces. Other variables, such as currency fluctuations or shifts in demand, are genuinely volatile, presenting a wide range of possible economic outcomes.

One thing is for sure: The old-school method of strategic planning used by many consumer goods companies is insufficient for the task at hand. Old style, to be uncharitable, largely relied on taking last year’s three-year plan, adding one more year to it and moving ahead linearly. Companies now need a more adaptive form of planning—one that senses volatility, understands its effects and spurs resource and behavioral changes on far shorter time cycles.

Consumer goods companies can apply disciplines learned long ago in other industries—proven risk mitigation techniques ranging from changes in financial structure to pass-through pricing mechanisms. Again, it is equally important to seize the opportunities provided by the tailwinds while making these maneuvers.

In the US, for example, one consequence of lower oil prices is consumers are eating out more often in fast-casual restaurants as they save money filling up their gas tanks and feel more confident about the economy. This is great news for companies in that end of the restaurant business. However, it also gives impetus to the long-term decline in home cooking from scratch, suggesting continued opportunities to help grocery partners be more competitive (through meal solutions, for example) while creating opportunities to develop new channel outlets.

Already, lower gas prices in the US have benefitted convenience stores, the fastest-growing retail channel. Consumers who are saving a few dollars filling up at convenience store gas pumps are more likely to feel they can splurge on snacks. Winning consumer goods companies are reevaluating their convenience store strategy to take better advantage of the new opportunities in this channel.

Finally, with so many companies now sitting on so much cash, there are huge possibilities in the world of mergers and acquisitions (M&A). Consumer goods companies have maintained shareholder returns in recent years from unprecedented amounts of cost-cutting and share buybacks. These may help in the short term, but for longer-term prospects, winning companies need to consider serious M&A investments. As we explain in this issue of Consumer Products Insights, our research shows that mergers and acquisitions deliver better results for consumer goods companies than for other industries. The best companies use M&A as a critical element of their growth strategy. They create great leadership positions and sustainable competitive advantage by building and continually honing a repeatable model for M&A.

Navigating in uncertainty is tricky, but leading companies always make the most of the winds at their back.

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