This article originally appeared on Forbes.com.
It was only a decade ago when many industry analysts looked at two looming trends—the rise of retail consolidation and proliferation of private labels—and issued dire warnings about the power of consumer packaged goods brands. However, their predictions turned out to be premature. Brands aggressively managed overhead costs, pursued dynamic growth in developing markets and gained scale, efficiency and entry to new markets through mergers and acquisitions (M&A). As a result, brands now report 10-year high operating margins.
Of course, not all companies fared equally well. Nearly half of the highest-valued consumer goods companies in 1999 no longer rank in the top 20 by market capitalization in 2015. Also, between 2004 and 2014, the top three brands in major categories maintained top-three status in only 30% of U.S. categories we studied. Among the top three fresh bread brands in 2004, for example, only Pepperidge Farm remains. Even when top brands keep their status, they aren’t always maintaining share. We found that across categories, more than 50% of top three brands lost category share during the years 2004 to 2014.
So operating margins have reached their 10-year high. There’s a lot of jostling among top companies and shifting category share. What lies ahead? Will operating margins growth continue on its trajectory, or will slowing market growth and intensifying investor pressures to reduce costs mark an end to the party? Future headwinds may not differ drastically from past challenges. But the scale and complexity of today’s consumer goods companies heightens the importance of discerning what has worked in the past—and what will continue to work—while understanding the future trends that will inform new and critical choices.
We see five ways companies can keep their brands thriving in the new era of profits.
Ignite the topline. As developed markets remain somewhat stagnant and growth in developing markets slows, revenue growth may feel elusive. We see some companies boosting their toplines by rethinking pricing strategies. In beverage categories, price increases accounted for more than 50% of household spending increases globally and 98% within North America and 107% in Western Europe.
Despite pricing gains, volume growth remains hard to achieve. Winners will focus on three areas: building brand memorability, innovating with a focus on expanding consideration and penetration of hero brands (those with the highest potential to win with shoppers), and determining ways to convert shoppers where and when they make purchase choices. The importance of hero products can’t be over-emphasized. A wine company made the radical decision to focus the majority of its resources on the 20 most promising SKUs among the 400 in its portfolio in a particular European market. The results were dramatic: a 36% increase in volume while the overall market saw a 5% volume drop.
Plan to take out—and keep out—another 10% to 30% of costs. Consumer goods companies have been successful in cutting costs over the past decade. But too often cost savings creep back into their businesses within a few years. The inability to make savings stick and the increasing presence and power of activist investors suggest that the best consumer goods companies will follow a different approach. As they continuously improve their cost positions year after year, they’ll look at both the total amount spent and at the effectiveness of what they spend. By analyzing total spend and spend effectiveness, one global brand discovered that over half of its above-the-line marketing budget went to subscale and ineffective campaigns that ballooned nonworking media expenses. By concentrating on fewer, more quality promotional campaigns, the company was able to reduce its below-the-line spending and fund higher-reach media spend.
Reinvent your supply chain. There are two fundamental questions any consumer goods company should consider: Does the existing supply chain provide a demonstrable (and measurable) competitive advantage? Are all growth platforms, brands and technologies on advantaged assets in optimal locations? If the answer to either question is no (or unclear), it’s likely time to reinvent the supply chain. The best companies will strive to have supply chains that are more aligned with their future commercial strategy. Instead of investing to maintain old manufacturing facilities, they’ll focus on building the capabilities that will serve their future market needs.
Future-proof your capabilities. Technological innovations and shopping trends are transforming where and how consumer goods companies operate and build scale. Companies are aggressively discovering novel ways to use data to improve existing products and processes across the full value chain. Brands now rely on digital insights tools that reduce both development cost and time, inform how and where to confront shoppers, and enable efficiencies in everything from truck routing to shelf availability and inventory management. For example, a beverage company has incorporated real-time, image-based technology to improve planogram compliance and minimize out-of-stock items.
Build agile teams. To grow in rapidly shifting markets, executives know they need to adapt their operating model for new strategies. Many are turning to an approach to product development that provides them with rapid feedback from internal and external customers to complement their traditional waterfall approach to longer-term projects. They’re speeding time to market and lowering delivery costs by reducing dependence on business analysis and project management roles and by making better use of people and time. In this so-called “scrum” approach, small, cross-functional teams collaborate with customers and consumers in an iterative process, relying on continuous, real-time testing and integration instead of waiting until after development is final. Brands improve their chances of quickly delivering products that customers want.
Winning in the next era of profits means getting five things right. The best companies will fuel top-line growth with proven approaches such as strategic pricing, more selective innovation and a dedication to win where shoppers make decisions. It will be critical to continue to take out costs and implement programs to keep them from creeping back in.
Leaders will adapt their supply chains for future needs. They’ll build the capabilities required to win in the future, including advanced analytics to fuel insights and boost efficiencies. And the winners will hone their operating models to deliver strategies for new and changing markets. That’s how brands will continue to beat the odds.
Written by Vijay Vishwanath, a partner in Bain & Company’s Boston office, and Suzanne Tager, a New York-based practice area senior director in Bain’s Consumer Products practice.