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Business Model Innovation

Business Model Innovation for Consumer Goods Companies in the New-Age

Consumer goods companies are dictated by the unpredictable, cyclical nature of consumer demand, including food and beverage, health and beauty, footwear and apparel, and homecare.

Today’s business should change frequently and in more fundamental ways because companies face a confluence of rapidly evolving technologies, consumer demographic shifts, changing consumer preferences, and economic uncertainty.

Left unaddressed, these trends could undermine historical sources or profitable growth and render traditional business models obsolete. The global consumer goods industry has built many top brands.

Five-Point Value Creation Model

The success is owed to the five-part model pioneered after World War 2. There were only little changes since then and fuelled the growth of leading brands.

  • Mass-market brand-building and product innovation to generate stable growth and gross margins of 25% above non-branded competitors.
  • Partnering with grocers and other mass channels to gain broad distribution as grocers grow.
  • Building brands and distribution in developing markets as consumers grow their purchasing power. It capitalized on the rising individual wealth and accounted for 70% of revenue growth in the consumer goods sector over the past two decades.
  • Driving cost out of the operating model, often through increased centralization of marketing and other functions.
  • M&As to consolidate markets and enable organic growth post-acquisition.

The Struggle for Growth

The five-point model created strong brand equity, and broad distribution generated higher margins that allowed for more brand equity investment, and the scale provided a critical competitive advantage.

However, the last decade saw the faltering of performance in terms of stock market performance and fundamentals. While profit grew by 10.4% per year from 2000 to 2009, it dropped to 3.2% from 2010 to 2019.

Similarly, stock market performance outperformed the S&P 500 by 7.2% points per year from 2000 to 2009 to underperforming from 2010 to 2019 by 2.9% points. The struggle to create unit growth is the central issue for large brands.

The New Model for Growth and Performance

Companies must adopt a new model that uses digital to move towards targeted commercial execution. The new five-part model looks like this –

Innovation, marketing, and brand building based on relevance

The consumer targeting using all consumer touchpoints must include personalized point-of-sale marketing. The data generated by all consumers must be used to innovate, maximizing the brand’s relevance to micro-segments and micro-occasions while focusing on the efficient core.

Association with growing channels and digital sales adoption

While grocers remain important and strategic partners, companies must achieve pervasive distribution of their evergreen brands, requiring association with multiple channels, including e-marketplaces. To achieve this, companies must strengthen four digital-driven commercial capabilities.

Precision revenue growth management (RGM) – Pricing, assortment, and trade investment, which are the core levers of RGM, must be linked to the company’s expansion and activation strategy. Advanced analytics tools powers precision RGM, automating key analyses at a very granular level and enabling simulation and foresight.

E-marketplace management – Companies must create a team of developers that produce the necessary assets to drive technical execution. These teams must integrate with the business and be prioritized as a critical capability required to maximize growth.

Building omnichannel and D2C businesses – Companies must excel at omnichannel category management, setting the goal of overtrading versus each retailer’s brick-and-mortar business, given the expected 2-3% point share gain that online enjoys in most markets post-COVID.

Direct-to-consumer (D2C) businesses are commercially viable only for those with an average basket and purchase frequency high enough to justify customer acquisition costs and make-per-order economics viable.

Managing data for proprietary insights – Consumer goods manufacturers must demonstrate expertise in big data analytics, insight generation, and RoI tracking of investments, particularly for e-marketplaces since these retailers do not value traditional category management.

Brand building and distribution in booming markets

Companies must rebuild entrepreneurial and dedicated local organizations that can execute impactful and locally relevant global marketing campaigns. They must evolve their routes to market with trade changes.

In emerging economies, e-marketplace/online-to-offline giants will continue to lead. Early adopters of digital-led route-to-market models will have a clear advantage, both in shaping point-of-sale service level expectations and in leveraging the power of analytics.

Operating model evolution to fit the local demands

Companies must invest in local talent in priority growth markets and use them to understand consumers and channels in the region. The local growth market must own the game to win in the market.

Companies implementing this more unbundled operating model have abandoned traditional paradigms of how to organize for innovation. Instead of driving innovation from global R&D centers, they identify innovation needs by the local market.

They form a cross-functional team, fast-track funding, and, with the help of global R&D capabilities pulled into the process, develop a marketable product in weeks rather than years.

This operating model uses technology and digitizes wherever possible, from automating standardized tasks in HR, finance, and IT to supporting the decision-making of signature roles, such as equipping brand managers with KPI and consumer insights dashboards. It also must unlock the next wave of productivity.

Next-gen design and procurement – Product design must get closer to what consumers value and reduce other costs by modularizing, tearing down, and benchmarking every element in new designs.

Even leading companies still lag behind other industries in embracing design-to-value. Indirect procurement offers substantial savings opportunities, achieving savings of 3-7% points on their addressable direct and indirect procurement base.

Intelligent supply chain – The aspiration of an intelligent supply chain, where an integrated planning process takes relevant data from the demand side and turns it into reality on the supply side, is possible.

When you harness digital data throughout the value chain and use it in an integrated, automated corporate planning process, companies can move from monthly to frequent S&OP cycles that maximize sales while reducing working capital.

Technology overhaul – The new post-COVID-19 supply chain model will operate in real-time to enable cost reduction, resilience, flexibility, and traceability. Companies must take a zero-based approach and move into a cloud focusing on customer-driven processes built for machines talking to each other.

Back-office automation – A process overhaul must be built using intelligent automation, IoT, big data, and artificial intelligence to modernize the back office, creating a service-oriented, low-touch/low-code environment to democratize automation, analytics, and artificial intelligence.

Agile budgeting and resource allocation – As per research, top performers reallocate 2-3% of resources per year, removing unproductive costs and channeling funds to priority initiatives. The zero-based budgeting processes that many companies implement make this goal achievable than before.

Programmatic M&A&D

Companies have been using M&A&D to pivot their portfolios toward growth and add capabilities rapidly. Leading companies turned over their portfolios at 2X the rate of other listed large firms in the last decade.

The strongest players will continue to learn the skills of serial acquirers with expertise in acquiring large and small assets and at using M&A&D to achieve visionary and strategic goals – redefining categories, building platforms, and ecosystems, scaling quickly, and accessing technology and data through partnerships.

Successful players employ a programmatic M&A approach by acquiring small players rather than market consolidation. They complement their M&A&D with incubators or accelerators for small players that leave time to understand the success drivers of the brand and help the organization scale without burdening it with inflexible operations.

To conclude, business model shifts like these along with a robust sales enablement program will help industry leaders unlock brand growth. It is ready to scale when you have found ways to create strategic capabilities that are distinctive, well-realized, sophisticated, and backed by a deep organizational commitment.

Draup is a sales intelligence platform that can help your sales team build hyper-targeted prospect lists that can segment accounts and stakeholders through comprehensive and real-time metrics. Its real-time insights can help service providers develop actionable plans for digital retail.