From Great to Gone

Why FMCG Companies are Losing the Race for Customers

Peter Lorange, Jimmi Rembiszewski

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317132240
• Edition: 1
• Topic: Business
• Subtopic: Business Education
• Index: Business

The modern consumer is no longer attracted by single-minded, predictable and one-benefit-focused brand promises. The old-fashioned FMCG communication strategies based on television, radio and print with constant repetition have become outdated. From Great to Gone shows that what's needed are 'Lego' strategies, whereby the marketing and communication strategies are built up by many key facets (like building blocks) and delivered to the consumer through a mix of various touch points. Most importantly, you need to leave consumers to put all of that together themselves. There are major internal and external hurdles to transforming FMCGs successfully into FICGs - Fast Innovating Consumer Goods. It requires new brand strategies and flatter, more top-down than bottom-up, decision-making organisations and a 21st-century model for advertising agencies. Externally these companies need a new route to market through transformation of their old retail dependencies. Changes are also required in all communication delivery, reflecting modern consumers' connectivity and unlimited access to information. In the book the authors showcase what the winners of the 21st century have in common that has enabled them to become FICGs. New, unimagined models continue emerge, to which, with the authors' guidance producers and retailers may develop their own sustainable responses.

Chapter 1
The Dilemmas of FMCGs in the Twenty-first Century

This book is overdue. We are more than a decade into the third millennium and enough time has passed for us to be able to assess the consequences of a seismic shift in the behaviour and quality of twenty-first-century consumers and the impact they have had on the industries that sell to them every day. As we shall see, the modern consumer’s familiarity with multimedia communications technology has played a key role in bringing this change about.

Many of the current problems for FMCGs seem to us to be inextricably linked to a major theme in this book, which is that companies do not innovate; or if they do innovate, they do not do it in the right way. The old world, and the lumbering FMCG giants that have been used to ruling it, are slowly dying. The economic environment has taken a major blow and it is now a question of adapt or die. Too often, the only response of these classic premier league FMCG companies to the changing economic climate is to cut costs.

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‘The old world, and the lumbering FMCG giants that have been used to ruling it, are slowly dying.’

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The environment presents FMCGs with numerous dilemmas; for some we can provide guidance, others will be solved only through experience and learning and still others we can do little more than identify. For example, there is the dilemma of the effect of corporate governance on creativity. Corporate governance is in many ways poison to the creative and innovation processes within a company and it is easy to get to the point where the board is more preoccupied with risk management and covering its back than it is with building the top line. Another dilemma is how to find a sustainable way to give the people in middle and lower management opportunities to make strategic decisions – because without that opportunity they will never grow. Yet here we run into the problem of control. On the one hand there are a few companies, like Apple for example, which have strong direction from the top yet manage to allow innovation at all levels; while on the other hand most big companies also want to grow their people yet have stringent control mechanisms that suppress creativity. They find control and innovation difficult to reconcile.

There are no quick or easy answers to dilemmas like these. A winning company needs to have people at the top who have both the guts to lead and the ability to stimulate all the way down through the organisation. This is an art and it’s not obvious how it can be managed sustainably.

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‘There has been a fundamental change in consumers and consumer behaviour for which FMCGs have not calculated.’

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This has been driven by three main factors:

The first is the cyberworld, which has supplied new forms of communication, unlimited global accessibility, new sorts of data, instant feedback, boundless dialogue and enhanced transparency through easy access to information. The cyberworld has blown apart Maslow’s hierarchy of needs as it applies to human motivation in the modern consumer goods market. Today’s 18–20 year olds must have the means and ability to connect and communicate – in particular, access to the internet. This is now top of the hierarchy. The new consumers are experts at handling the new media, which are quantitative (giving us more, all the time, and faster) rather than qualitative (being very low on literature). But the crucial point is that consumer behaviour has changed because consumers themselves have changed.

There is a new consumer emerging, one who was born 20 years ago and who now represents the most important purchasing group in the world. These new consumers are typically relatively young multitaskers; they move seamlessly between swiping their iPad or iPhone, working on their laptop and watching a TV programme or film they are streaming, and occasionally talking to each other. What might seem a media and informational overload to their seniors – not to mention rude behaviour – seems perfectly natural to them. These are the people who are the true drivers for growth in FMCG companies and they are attracted to prestige (through branding), newness, speed and quality rather than lower prices.

These consumers decide everything and that poses huge marketing challenges. They use the media as a meeting place and are comfortable with an unprecedented intensity of interaction and dialogue. They are intelligent but many of them are disaffected because they are embarking on their working lives surrounded by the fallout from a global recession of unprecedented severity. Jobs are scarce and those who seem to have all the power and wealth – for example, bankers and politicians from a previous generation – are despised as greedy and corrupt. These young consumers are cynical before their time. They want change, they value innovation and they know they have a voice; they are almost impossible to reach through traditional marketing routes. There is a disconnect between older marketers and young consumers; it is very difficult for traditional marketers, who are used to putting consumers into categories, and creates a level of organisational stress.

The second factor driving change is the speed of innovation. Technological progress has accelerated to a degree that consumers now expect new, better products hitting the shelves every six months – and for minimal extra cost. Because many FMCGs are not capable of this rate of innovation, expectations have adjusted and now all FMCGs must strive to deliver.

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‘Technological progress has accelerated to a degree that consumers now expect new, better products hitting the shelves every six months.’

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Nestlé has developed a six-point programme to train young executives to develop and keep a competitive advantage as the leading nutrition, health and wellness provider in the world. The aim is to develop edge through relevant innovations, including:

• Making choices. This implies saying no to some projects and pursuing only relevant innovations.

• Grasping opportunities and pursuing them aggressively.

• Valuing what consumers value. This means understanding the key preferences of the modern consumer and coming up with innovations that they will appreciate and understand.

• Engaging with the community and stakeholders.

• Communicating through the right media. Innovations need to be communicated effectively and digital means are the way today rather than traditional advertising.

• Having the best people. This is an essential condition for achieving this innovation-centred agenda.

The third factor is the cost of servicing this fast-developing communications technology. Mobile telephony, social networking and instant communications have had a massive effect on the amount of money available for traditional consumer goods, many of which have lost some of their allure and come under enormous spending pressure, driving prices down. A telephone was originally seen as an investment product – you’d expect to buy one, maybe two, in a lifetime. But mobile phones have shown themselves to be consumer products. The speed at which communications technology has been taken over our lives is unprecedented in the history of mankind – as witnessed in the developed world where a significant percentage of disposable income now goes on products and services that didn’t exist 20 years ago. Even Nokia, initially one of the leaders in mobile telephony, underestimated its effect, predicting ten years ago that it would have tens of millions of customers; in fact it has billions.

Even more surprising than the extent to which mobile telephony has revolutionised consumer spending in the developed world is the way in which it has managed to take root in the world’s poorest continent: Africa. In most of sub-Saharan Africa (as well as eastern Europe and south-east Asia) electronic technology is expensive, often unreliable and invariably the preserve only of the wealthiest in society. Mobile phones are the exception. In less than 15 years they have become ubiquitous – in Uganda alone, it is estimated that about a third of the population owns a mobile phone and the number is growing. This is true throughout Africa: in 1998 there were fewer than four million mobile phones in the continent; today it’s more like half a billion.

Nor is it just the number of phones in circulation that is remarkable. It is also the way in which the technology has been harnessed to serve the peculiar requirements of developing countries. In a continent renowned for its death-trap roads, sparse rail networks and intermittent power grids, mobile phones are one way of overcoming the region’s enormous communications problems. Mobile telephony has helped big businesses operate more efficiently, but more importantly it has opened up huge opportunities for the hundreds of thousands of small businesses on which African economies all depend. Not only can farmers and fishermen now check market prices quickly and get a decent price for their produce, but anybody can now use a mobile phone to make and receive payments – an application that has largely been ignored by the rest of the world.

Mobile telephony is also revolutionising the way companies reach their customers. For example, in Asian markets mobile devices are increasingly becoming the first and often the only way for people to access banking services. While mobile access is a helpful optional add-on for western customers, it has become a critical success factor for banks wanting to establish themselves in countries where potential customers would otherwise have to walk miles to reach a branch. In these markets, banks have leap-frogged the classic evolutionary pathway to attracting customers: ‘They don’t have the legacy systems and practices to overcome. They can skip the branch build-out and capture customers straight on to the state-of-the-art platforms.’¹

More generally, social scientists now have access to huge amounts of data derived from mobile phone records and social networking sites that can enable them to pinpoint and predict people’s behaviour with extraordinary accuracy: ‘Song Chaoming … a reasearcher at Northeastern University in Boston … has devised an alogorithm which can look at someone’s mobile phone records and predict with an average of 93 per cent accuracy where that person is at any given moment of the day … [H]is accuracy was never lower than 80 per cent for any of the 50,000 people he looked at.’² It is not difficult to see how companies applying the same methods could gain unparalleled access to information about their customers’ purchasing intentions.

So the phenomenal rise of mobile phone technology, with its ability to connect huge and complex social networks, instantly, across the entire globe, has changed the consumer. How have the marketers responded?

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‘The FMCG sector has failed to realise that its lunch has been eaten.’

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We believe that most of the traditional FMCG sector has been getting it wrong. It has failed to recognise that its lunch has been eaten and has not responded to these challenges, for two main reasons. The first is that it didn’t see this technology as a game changer. It viewed the change in consumer behaviour as a trend that would modify its communications and its use of media but it did not see the underlying structural problems. Consumers are spending their money elsewhere. Today, the key competition for P&G, Unilever, Nestlé and Colgate are technology companies like Apple and Facebook, which have a far more profound effect on young consumer spending than any product in their traditional categories and are now seen as fast-moving consumer products. Established companies are losing their share of new business and having to compete for the money in the consumer’s purse. Pricing pressure has forced the FMCG sector into a position where profit margins are getting progressively narrower while the consumer goods they sell are becoming increasingly difficult to differentiate on quality. We will argue in Chapter 3 that this is the real innovation gap that FMCGs face – the gap between the traditional innovation cycle of years and the new innovation cycle that customers now expect, a matter of months before new products are launched. When companies fall into this innovation gap, profit margins fall. The second reason that the FMCG sector got it so wrong is that it is hampered by internal and external barriers to innovation, as we will examine in detail in Chapters 4 and 5.

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‘Today, the key competition for P&G, Unilever and Colgate are technology companies like Apple and Facebook.’

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Further factors are changes in distribution and identifying where growth is going to come from. New ways of communicating and bonding with the consumer have led to a very different role for distribution. For example, the clothing company Burberry, based in Knightsbridge in London, uses Twitter-based communication with its customers to determine what they are interested in and the store is stocked accordingly.

In times of economic turbulence a more intense focus on one stakeholder group – the customers – seems to be warranted. This will stimulate further growth, either directly, by securing more top-line growth (sales), or indirectly, by creating a more realistic basis for sustainable bottom-line growth (profits). More than ever, the customer is king. We can no longer stick to a balanced scorecard approach, which would call for focusing more or less equally on several stakeholder groups, as prescribed by Kaplan and Norton.³ Instead, we have to make sure we get as close as possible to one key stakeholder group, the customers.

In a recent series of TV interviews on CNN (7 March 2013) several prominent CEOs (of Adidas, Daimler and Bayer) emphasised the critical importance of top-line growth in markets in the US, China and Russia, rather than in the European markets with which they are more familiar. All three stressed the importance of being aligned with the geographic markets that have the best propensity for top-line growth. But this implies, of course, that companies need to understand their customers in each of these specific markets, and that innovations relevant to each are implemented and communicated.

This might sound obvious to the point of being glib but we have very recently seen how even the most successful companies can get this badly wrong. On 17 April 2013, the UK-based retail giant Tesco announced that it was pulling out of the US, following the company’s first fall in annual profits in 20 years.

Six years earlier, Tesco had launched its chain of budget grocery stores, Fresh & Easy, in the US. The venture had struggled from the start in the market, where it pitched itself against Trader Joe’s, an established chain also owned by a major European retail group, Aldi. Both stores stock limited lines of own-brand items and both aim to provide good-quality, wholesome food at lower prices. Yet Trader Joe’s has thrived, while Tesco is withdrawing from Fresh & Easy at an estimated loss of £1.2 billion. Why?

Tesco chief executive Philip Clarke pointed to the part played by technology and changes in shopping habits: ‘The world is so different now from 2004–5 when the research was originally undertaken – who was shopping on a smart phone back then? In fact, who owned a smart phone back then?’⁴

However, Emma Vickers, writing in The Guardian,⁵ identifies other reasons, not least Tesco’s failure to understand customers’ needs and preferences: ‘The key difference between the two lies in Trader Joe’s focus on customer experience – the cheery staff wear Hawaiian shirts, morning shoppers get free coffee and kids get rolls of stickers. Over at Fresh & Easy, customers fend for themselves at self-service checkouts.’

Tesco in the US fell into a yawning innovation gap: despite its extensive research, it managed to enter the most competitive market in the US without an edge; it brought nothing new to the US; it went in on a totally wrong premise (that the US would readily adopt the UK’s self-service, budget goods model); and it failed to leverage one of its most valuable assets – its name.

Stories like this underline the importance of understanding key customers and we should be asking ourselves some basic questions: Who are they? Are new groups of key customers emerging? How do they prefer to be served? There the answer seems to be relevant – and rapid – innovations. And how do we communicate these innovations to the target customers? If we can handle these three steps successfully – identifying and understanding today’s key customers, coming up with effective innovations to meet their needs and communicating these innovations effectively – we might be able to see more top-line growth at higher prices (that is, bottom-line growth, higher margins).

As a consequence of these factors, we believe that the classic FMCG leviathans have to change radically, not only in terms of their communication and media strategies, but also in their marketing and brand strategies, innovation set-up and innovation cycles. They are hampered by their sheer size and they need to develop a new route to market. Otherwise the innovation gap will mean that they face permanent pricing pressure coupled with decline which will lead to lower margins and unsustainably low profit growth. This cycle will bring these modern dinosaurs to extinction if they don’t change their ways.

Unfortunately, at the moment the old received wisdom still holds sway in the world of marketing. FMCGs are still seen as the gold standard when it comes to getting close to the consumer and they are still seen as the quintessential training ground for each new generation of marketers. This should no longer be the case – as a closer look at the mobile phone industry reveals. Far from being a history of technological innovations pushed at the consumer in the traditional way, the history of the mobile phone has so far been a chr...