GoodThings Come in Small Packages

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As small consumer packaged goods companies continue to eat away at the market shares of larger players, how should incumbents respond? The authors lay out several strategies.

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GoodThings Come in Small Packages

  1. 1. ONLINE JUNE 10, 2013strategy+businessGood Things Comein Small PackagesHow large consumer packaged goods companies can leverage thewinning strategies of small players.BY STEFFEN LAUSTER, J. NEELY, ANDELISABETH HARTLEY
  2. 2. www.strategy-business.com1Over the last several years, small consumer pack-aged goods (CPG) companies in the U.S. havesteadily gained market share at the expense oflarger competitors. This has been true across a broadrange of CPG companies and categories. What’s more,upstarts often price their products at a premium. Booz& Company recently completed an analysis of the top25 food and beverage categories and found that smallplayers (those with sales of less than US$1 billion) areoutperforming the competition in 18 of the top 25 cat-egories, including the largest ones.Several broad forces, most of them peculiar to ourtimes, are combining to create advantageous conditionsfor small companies. For starters, consumers aredemanding broader selection. “Selectionists,” who com-prise 30 percent of the consumer market, seek greatervariety and new tastes—and sometimes care deeplyabout other factors such as the origins of the food andhow far it has been shipped. Selectionists have a strongerinterest in local, boutique foods and beverages. Sometraditional supermarkets are catering to this trend as away to differentiate themselves from Walmart and otherbig price clubs. It’s difficult for traditional supermarketsto compete on price, but they can compete by offeringa wider assortment of products, which, in turn, createsfurther opportunities for niche manufacturers.Several other important factors in the rise of smallCPG players are linked to technology. The fragmenta-tion of media and the generally lower cost of digitalplatforms give small players new outlets to reach cus-tomers in more targeted, cost-efficient ways. But whatshould concern large players the most is how technol-ogy is eroding their scale-driven advantages. Small play-ers are increasingly able to outsource invoicing, HRsystems, and logistics, as well as other back-officeSG&A functions.Retail consolidation is further chipping away atscale advantage. The preference among bigger retailers isto work with a broad range of manufacturers—bothlarge and small—to keep large CPG companies fromgaining too much leverage.How do large CPG players respond to thesechanges and the serious threats they contain? Com-panies begin by developing a better understanding ofthe strategies that upstart competitors are employing tograb market share. Next, they look at the capabilitiesunderpinning those strategies and consider how theymight access these capabilities for their own advantage.Market Share Growth, Pricing PowerFrom 2009 to 2012, small food and beverage manufac-turers grew revenue about three times faster than therate of the overall category. In the packaged food cate-gory specifically, small players experienced a three-yearGood Things Come inSmall PackagesHow large consumer packaged goods companies can leverage the winningstrategies of small players.by Steffen Lauster, J. Neely, and Elisabeth Hartley
  3. 3. compound annual growth rate (CAGR) of 6.2 percent,and gained 1.7 percent of market share. Meanwhile,large players increased sales by just 1.6 percent CAGRand saw market share decline 0.7 percent. In the bever-age category, the results were similar. Small companiessaw a three-year CAGR of 4.4 percent, compared to just0.1 percent among large companies. Small companiessaw their market share rise 0.8 percent while large com-panies’ market share dropped 2.5 percent. This outper-formance occurred even in some of the largest, mostconsolidated categories, such as bakery, dairy, snacks,and ready meals (see Exhibit 1).Along with market share gains, small playersenjoyed price premiums in many categories. A survey ofin-store pricing found that Godiva chocolate cost 138percent more than the Hershey’s product of comparablesize and flavor, Cape Cod potato chips cost 24 percentmore than Lay’s, and Amy’s Kitchen soups cost 58 per-cent more than Campbell’s. Small players also showedpricing strength over private-label manufacturers. From2011 to 2012, the price premium for small players overprivate labels jumped 5 percent for butter, olive oil, andpackaged/industrial bread.Capabilities Underpin DifferentiationSmall players don’t have a single or consistent approachacross all categories to account for their success. Theyare using a variety of strategies that incorporate brandpositioning, pricing, market entry, innovation, route tomarket, and in-store marketing and merchandising.Within these categories, each carves out distinct posi-tions depending on the product and competitive envi-ronment. The overall effect is a patchwork of bespokestrategies. That means one needs to look harder for thelessons—but they are there.Consider pricing. Although small players generallyenjoy premium pricing, such pricing is not a universalstrategy. In areas where big players are least capable—such as in organic, artisanal, or regional brands—smallplayers are more likely to take a superpremium position.However, in other categories they may choose a middle2Steffen Laustersteffen.lauster@booz.comis a partner with Booz &Company based in Cleveland.He leads the firm’s consumerand retail practice in the U.S.J. Neelyj.neely@booz.comis a partner with Booz &Company based in Cleveland.He specializes in strategy,mergers, and restructurings inconsumer products and retailsectors, and works with pub-licly traded and privately heldcorporations.Elisabeth Hartleyelisabeth.hartley@booz.comis a principal with Booz &Company based in New York.She specializes in helpingconsumer-focused companiesachieve strategy- andcapabilities-basedtransformation.www.strategy-business.comExhibit 1: Small Players OutperformCategory Size, US$$50 billion and over$20 to $49.9 billion$10 to $19.9 billionUnder $10 billionPastaBottled waterSports and energy drinksCarbonatesBaby foodSpreadsConfectioneryFruit/vegetable juiceRiceBakeryFrozen processed poultryIce creamChilled processed meatSauces, dressings, and condimentsSweet and savory snacksOils and fatsMeal replacementReady mealsOther frozen processed foodSoupDairySnack barsCoffee–5% 0 5% 10% 15% 20% 25% 30%In most of the biggest food and beverage categories, small CPG firmsare increasing their market share.Three-Year Growth of Small Players Relative to CategoryNotes: Ready-to-drink tea and frozen processed vegetables are not shown becausethose categories have no small players. Packaged food categories show 2012 data,beverage categories show 2011 data.Source: Euromonitor, Booz & Company analysis
  4. 4. www.strategy-business.comtier to be the “attractively priced alternative” to high-endbrands. When the large players are perceived by themarket as expensive, small players may even take a“value” price position.Their strategies are diverse and tailored to the cate-gory and competitive factors, but several successful smallplayers appear to have an important similarity: Theypossess a coherent system of capabilities that allowsthem to focus on a few critical areas where they canmost effectively exploit the weaknesses of less-nimble,less-focused large players. A capabilities system is madeup of three to six distinctive capabilities, and each capa-bility is ensured through the right combination ofprocesses, tools, knowledge, skills, and organization.This coherence gives its owner the necessary focus todifferentiate itself.Take Cabot cheese, which plays against the corpo-rate stereotype of rivals by highlighting its own cooper-ative business model and connection to the Vermontdairy farmer. In the same vein, Cabot uses its onlinepresence (Facebook, Twitter, Pinterest, Instagram) topromote community involvement. The company hasdeveloped the capabilities to roll out new flavors andspecialty aged cheeses that appeal to consumers’ desirefor variety and homespun creativity: HorseradishCheddar, Hot Habanero Cheddar, and Tomato BasilCheddar, to name a few. These specialty cheeses haveallowed Cabot to expand its presence in stores to the delicase (with other artisanal cheeses), thus gaining shelfspace in a more “premium” section of the store.Utz Quality Foods is a family-founded potato chipbrand in the northeastern U.S. that creates a direct rela-tionship with consumers by offering products onlineand delivering directly to homes. It also appeals tohealth-conscious consumers with wheat-free and gluten-free Rice Crisps, non-fried light potato chips, and or-ganic tortilla chips and pretzels. This capability to createhealthy innovations is a powerful differentiator for asnack often labeled a junk food.The Large Player ResponseThe success of small players and the conditions thathave arisen to make them more competitive raise somecritical issues for large players about both their organicand their inorganic growth strategies. Large players needto think carefully about how to access the capabilitiesthat small players are using to such advantage. Generallyspeaking, large players need to tailor product offeringsacross formats and shopping occasions, drive differenti-ation through innovation, and reinforce the brand expe-rience through in-store marketing and merchandising.But at what point should the company respond toa small player’s inroads? Should the response be to buildor buy? In either case, what new capabilities does thecompany need to succeed, and how can they be incor-porated into existing systems?Addressing these issues is a tall order, but severallarge companies are countering the incursion of smallplayers effectively and consistently. Some, such as Coca-Cola, have acquired a long list of high-growth smallbusinesses, capturing their continued growth for them-selves. Others, such as Frito-Lay, win by mimickingsmall players’ innovations and then using their scale andbrand leverage to compete and drive growth.Coca-Cola: The AcquirerCoca-Cola routinely expands its beverage portfolio.More recent acquisitions include Glaceau, an enhancedwater; Fuze, a vitamin-enriched beverage; and a handfulof other specialty drinks including Odwalla, HonestTea, Innocent, and Zico. Coca-Cola has learned fromexperience that acquisitions, rather than new products,are the best way to leverage its impressive and differen-tiating distribution capabilities. The company has care-fully designed six elements to manage acquired brandsand build value.• Brand positioning: To keep the new brand distinctand attractive to its established and sometimes devotedcustomer base, Coca-Cola does not affiliate the acquiredbrand directly with the Coca-Cola brand.• Pricing: Acquired brands are often positioned aspremium brands and priced higher than the competition.• Market entry: Coca-Cola chooses brands thathave an established market presence in their niche andthat have reached a certain multimillion-dollar revenuethreshold.• Innovation: Coca-Cola uses different governancemodels to oversee acquisitions, but the common priori-ty is to keep the company flexible and innovative.• Route to market: Coca-Cola continues to distrib-ute the acquired brand to specialty retailers, but it alsoleverages its extensive distribution network to reachmore consumers.• In-store marketing and merchandising: Coca-Colaleverages its reach and distribution to merchandise newproducts. For example, Vitamin Water is now availablein numerous convenience stores and kiosks with coor-dinated displays and in-store support.3
  5. 5. Frito-Lay: The Fast FollowerFrito-Lay’s strategy for capturing the high growth ofsmall players is much different from that of Coca-Cola.Consider kettle chips (potato chips cooked in smallbatches, rather than in the more common continuous-flow machines). Two small players have dominated thecategory: Cape Cod and Kettle Chips. But instead ofacquiring either small player, Frito-Lay leveraged itswell-honed capability to mimic market innovations andcreated Lay’s Kettle Cooked. As Coca-Cola does for itsacquisitions, Frito-Lay has carefully designed six strate-gic elements to manage and grow the brand.• Brand positioning: Lay’s Kettle Cooked brand ispositioned as a value brand in comparison to Kettle andCape Cod products. Frito-Lay also promotes thehealthy aspects of the chip (e.g., “40 percent less fat thanregular potato chips”).• Pricing: In keeping with its value brand position,Lay’s Kettle Cooked is priced below other kettle com-petitors. A canvassing of supermarkets in 2011 foundthat a $3.29, 8-ounce bag of Lay’s Kettle Cooked wasas much as 7 percent less expensive than small playeralternatives.• Market entry: Frito-Lay rolls out different flavorsof Kettle Cooked chips over time, instead of all at once,all the while pushing them as a healthier way to enjoyLay’s potato chips, which have a long-established brandfollowing.• Innovation: Frito-Lay has developed the ability torapidly replicate new flavors introduced by Kettle andCape Cod that it would not have considered offering inthe past (e.g., jalapeno and sun-dried tomato andparmesan).• Route to market: Frito-Lay sells primarily throughgrocery and supermarkets rather than restaurants andboutique markets. Lay’s Kettle Cooked leverages Frito-Lay’s extensive direct-store-delivery network to pene-trate key channels.• In-store marketing and merchandising: Lay’s “cate-gory captain” position in traditional flat potato chipsgives Frito-Lay the power to influence, if not set, cate-gory shelf plans. That sway over product placement is akey advantage.ConclusionLarge companies should view small players not simplyas a threat or nuisance, but as valuable working exam-ples of how they might recharge their own growth.Whether a large company decides to acquire small play-ers or to compete with them head on, it needs the rightcapabilities system. An acquirer must have the people,processes, and tools in place to leverage its scale andstrength without snuffing out the new brand’s innova-tive spirit and upstart image. A builder needs the peo-ple, processes, and tools in place to innovate quickly inresponse to small players and to reinforce the new brandthrough in-store marketing and merchandising.Careful attention to building or buying the rightcapabilities will allow large companies to leverage thewinning strategies of small players for their own growthambitions. +4www.strategy-business.comAdvice for theUpstartsEven as larger competitors takenotice and react to their successes,small companies should keep playingon the strengths that have carriedthem thus far. Using a variety ofstrategies that incorporate brandpositioning, pricing, market entry,innovation, route to market, and in-store marketing and merchandising,small players are eating into the mar-ket share of long-dominant brands.And there are plenty of gains yet to behad. The trick will be continuing tofocus on a few critical capabilitieswhere they can most effectivelyexploit the weaknesses of less-nim-ble, less-focused large players.
  6. 6. strategy+business magazineis published by Booz & Company Inc.To subscribe, visit strategy-business.comor call 1-855-869-4862.For more information about Booz & Company,visit booz.com• strategy-business.com• facebook.com/strategybusiness• http://twitter.com/stratandbiz101 Park Ave., 18th Floor, New York, NY 10178Looking for Booz Allen Hamilton? It can be found at at www.boozallen.com© 2013 Booz & Company Inc.

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