The fast-moving-consumer-goods industry has a long history of generating reliable growth through mass brands. But the model that fueled industry success now faces great pressure as consumer behaviors shift and the channel landscape changes. To win in the coming decades, FMCGs need to reduce their reliance on mass brands and offline mass channels and embrace an agile operating model focused on brand relevance rather than synergies.
A winning model for creating value
For many decades, the FMCG industry has enjoyed undeniable success. By 2010, the industry had created 23 of the world’s top 100 brands and had grown total return to shareholders (TRS) almost 15 percent a year for 45 years—performance second only to the materials industry.
The FMCG value-creation model
This success owed much to a widely used five-part model for creating value. Pioneered just after World War II, the model has seen little change since then. FMCG companies did the following:
Perfected mass-market brand building and product innovation. This capability achieved reliable growth and gross margins that are typically 25 percent above nonbranded players.
Built relationships with grocers and other mass retailers that provide advantaged access to consumers. By partnering on innovation and in-store execution and tightly aligning their supply chains, FMCG companies secured broad distribution as their partners grew. Small competitors lacked such access.
Entered developing markets early and actively cultivated their categories as consumers became wealthier. This proved a tremendous source of growth—generating 75 percent of revenue growth in the sector over the past decade.
Designed their operating models for consistent execution and cost reduction. Most have increased centralization in order to continue pushing costs down. This synergy-based model has kept general and administrative expenses at 4 to 6 percent of revenue.
Used M&A to consolidate markets and create a basis for organic growth post acquisition. After updating their portfolios with new brands and categories, these companies applied their superior distribution and business practices to grow those brands and categories.
A new model for creating value in a reshaped marketplace
To survive and thrive in the coming decades, FMCG companies will need a new model for value creation, which will start with a new, three-part portfolio strategy. Today, FMCGs focus most of their energy on large, mass brands. Tomorrow, they will also need to leapfrog in developing markets and hothouse premium niches.
This three-part portfolio strategy will require a new operating model that abandons the historic synergy focus for a truly agile approach that focuses relentlessly on consumer relevance, helps companies build new commercial capabilities, and unlocks the true potential of employee talent. M&A will remain a critical accelerator of growth, not only for access to new growth and scale, but also new skills (Exhibit 6).
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