How Consumer Products Companies Work
Consumer products companies design, manufacture, and sell food, clothing, electronics, furniture, toys, supplies, and everything in between to customers around the world. This industry is extremely competitive, with market leaders often changing position based on how well their products map to evolving customer preferences.
Within the consumer products industry are companies who make products in categories that people have to buy, and companies who make products in categories that people can decide to buy or not. For example, if you make beds or cheese, you are selling to people who are going to buy a bed or some cheese from time to time, and you try to convince them to buy these products from you. Alternatively, if you make an automatic back-scratching device, your goal is to convince people that they want (or need) such a device. This division is helpful to understand when evaluating companies, as it drives the framework for how they position and compete.
There are a number of different ways to compete in each segment, such as price, features, scarcity, aspiration, etc. The way companies compete is to some extent a function of what they sell. More important, however, is corporate strategy, which encompasses not only what products are sold but how they are built, marketed, and sold. The degree of freedom to decide how to compete is unique to consumer products companies. Energy, aerospace, and logistics companies, for example, are much more constrained.
This makes consumer products a fascinating industry. I am constantly amazed by the innovation, creativity, and execution of companies in this industry. Items that should be low-cost commodities are presented (and received) as aspirational luxury items. Accessories are presented (and received) as life-altering status symbols. Food companies charge more for what is broadly known as essentially the same products as their competitors simply because of funny mascots or other hooks.
It is also important to understand two broad sub-segments within the consumer products industry, product and retail, as they each have different ways of evaluating and approaching markets. Product companies research, develop, and market products.). Retail companies sell products that other companies make in stores or online. E-commerce, which has enabled product companies to sell directly to consumers, has brought these two markets closer together, but the division is still important to understand, as companies in each sub-segment are structurally different.
Aggregate Market Size
The total market size is an important consideration for consumer products companies. As with all markets, they can compete with their peers for market share or create new categories within existing markets. What is interesting and somewhat unique is that consumer products companies have the opportunity in many cases to grow the total aggregate market by expanding into new international markets. All companies can, of course, pursue this strategy, but consumer products companies have unique advantages. Many of their products are inexpensive and do not depend on external gateways that inhibit purchase (e.g., buyers must have a smartphone).
The push of companies — ranging from cereal to shoes — into developing markets has fueled aggregate market growth in past decades, to the financial benefit of those companies. Total market growth would theoretically slow at some point as all developing markets elevated their purchasing power and access to consumer goods, but we are nowhere near this point. The Organisation for Economic Cooperation and Development (OECD) and similar organizations present optimistic projections that 1-1.5 billion people will be added to the global middle class during each of the decades ending in 2020 and 2030. Even if these projections prove to be wildly optimistic, total addressable markets for consumer products companies are going to continue to grow.
Top 50 Global Fast Moving Consumer Goods Companies by 2015 Sales
|Company||2015 Net Sales (in millions USD)|
|Procter & Gamble||75,813|
|The Coca-Cola Company||44,294|
|Philip Morris International||26,794|
|Archer Daniels Midland||25,217|
|British American Tobacco||20,031|
|Johnson & Johnson||13,507|
|Nippon Meat Packers||10,021|
|Royal Friesland Campina||10,018|
Source: OC&C, LZ
Changing Buying Patterns
Customer preferences are extremely sensitive to people’s age, social and economic status, urban vs. rural living environment, and a multitude of factors that change over time. This creates an imperative for consumer products executives to understand how environmental patterns are changing, so they can adjust their product mix and strategies accordingly. A primary focus at Grayline is forecasting demographic and living trends, as they form the structural underpinning of consumer products and most other markets.
Where and how people live determines what they need — and what they buy. People who live in cities have different requirements for consumer goods than those who live in rural or suburban communities: furniture (big vs. small), food (bulk vs. on demand), technology (centralized vs. distributed), appliances (size, type, and power), clothes (functional vs. stylized), etc. Individuals who live in megacities have different requirements than those who live in small- to medium-sized cities. Style changes more frequently and is generally more important to individuals who live in closer proximity to more people. This shift towards more people living in larger cities is driving consumption trends that consumer products companies need to understand.
Similarly, age also shapes consumption patterns. There are specific differences in what children, young adults, middle-aged parents, and retirees need and buy. As demographic trends shift towards older average populations, consumption patterns also shift. Economic status and purchasing power is another macro trend that is important for companies to understand, as more or less wealth drives the types of staple products and the categories of luxury products that people buy.
Shortening Cycles of Change
One of our high-level themes at Grayline is that the cycles of market change are shortening. This results from both technology and the connectedness of international markets and networks, which we explore in more detail in our catalyst overview.
These changes impact the consumer products industry more quickly than any other sector. Personal buying preferences, especially with regards to discretionary purchases, are a leading indicator for impending change. This benefits consumer products companies, as they are at the forefront of the data acquisition that allows them to understand something important is happening. It also provides a challenge, as their businesses will be the first to be disrupted by change.
Many of the constraints consumer products companies operate under differ for each segment of the market, but some constraints are more broadly applicable.
Customer Preferences and Purchasing Power
Customers have to want to buy your products, which obviously affects product and pricing decisions. Consumers have more power and options than ever in most product categories, a feature that is likely to expand rather than reverse. Even products that we used to consider commodities (bread, eggs, paper, etc.) have become highly competitive as marketing and branding teams have successfully created differentiation.
Additionally, consumer product companies are constrained by the purchasing power of their customers. Purchasing power is a macroeconomic trend which companies have to account for and adjust to, as opposed to being something that they can influence. As we are currently in a period of genera (comparative) wage stagnation, which manifests in general pricing pressure and specific challenges for luxury and discretionary goods.
There is a natural and inevitable delay between the decision to build a product and the end customer buying it. This constrains the agility of consumer products companies, as customer buying preferences can change during that time. Such delays can present a significant problem for companies in markets where preferences can change rapidly due to factors outside the company’s control, and where unsold inventory represents a significant financial impediment. Imagine a clothing company that decides to capitalize on a trend, only to have that trend end before the products get to market.
Risk cannot be completely eliminated, but it can be mitigated to some degree by shortening the time between the idea for a product and its arrival in market. Addressing this challenge involves internal business and decision-making processes, supplier agreements, logistics systems, and retail arrangements.
Suppliers and Logistics
Consumer products companies, whether on the product or retail side, require suppliers and logistics providers that enable them to build, distribute, and sell their products. In some cases these supply chains are simple and locally contained. In other cases companies have extremely complex global supply chains with partners in dozens of countries geographically distributed around the world.
Companies are constrained by the behavior and economic viability of their suppliers and logistics providers, and by the necessity of having such partners. Only the truly largest corporations are able to vertically integrate to the extent that they own their supply and distribution chain, and even these companies rely on third-party suppliers for the majority of their products. Supply-chain risk is diverse, ranging from weather and natural disasters, to human rights violations in third-party factories, to price fluctuations that can drive end-good prices outside of the competitive range overnight.
A large part of the anticipated future growth for consumer products companies is in international markets. More people entering the consumer class in developing markets results in larger markets for consumer products companies. This has provided the primary accelerant for packaged consumer products companies over the past decade, and will extend into the future.
As companies grow market share in developing companies, they become increasingly exposed to political risks in those markets and constrained by the decisions of those governments. In many cases that risk manifests as protectionist policies, taxes, and import duties. Depending on the nation, these policies could be designed to protect domestic industries, enhance the personal wealth of the country’s leadership, or some combination of the two. Regardless, these policies constitute risks, and the aggregate risk grows as the portion of total company revenue generated in developing markets grows.
Global Apparel Market Size Projections by Region, 2012-2025
|Market||2012 Market Size (in billions USD)||2025 Projected Market Size (in billions USD)||Compound Annual Growth Rate|
|China||$ 150||$ 540||10%|
|EU-27||$ 350||$ 440||2%|
|United States||$ 225||$ 285||2%|
|India||$ 45||$ 200||12%|
|Japan||$ 110||$ 150||2%|
|Russia||$ 40||$ 105||8%|
|Brazil||$ 55||$ 100||5%|
|Canada||$ 30||$ 50||4%|
|Australia||$ 25||$ 45||5%|
|Rest of the World||$ 75||$ 195||8%|
|Global||$ 1,105||$ 2,110||5%|
All companies are different, but there are common imperatives that compel companies who operate in the consumer products industry. Similar pressures upon different types of companies can result in wildly different strategies and tactics, but understanding constraints and compulsions helps frame how the industry operates.
1) Know your customers intimately, and structure your organization to be sensitive to the most minute changes in purchasing power or preference. This can be accomplished via a combination of analytics tools, industry research, and direct feedback mechanisms to learn immediately from customer-facing employees.
2) Maintain agility to ensure that you are fast enough to both capitalize on emerging customer preferences and shift production away from products that fall out of favor. Agility is a function of excellent logistics, diverse supplier base, and marketing and product teams that are close to or part of your customer base.
3) Constantly expand and diversify your customer base to ensure you are selling into a broad market. A niche, homogenous customer group raises the risk of unsold inventory resulting from products falling out of favor. A broad customer group increases the chance that you will be able to sell items to other sub-segments of your customer base.
4) Innovate your products and supporting product infrastructure. Keeping a rapid pace of innovation is essential in highly competitive and fast-moving markets. This does not necessarily mean changing products that do not need to be changed; price models, supply chains, and marketing strategies are all important vectors of innovation. Ensure digital commercial enablers are part of your overall innovation strategy.