Online shopping, curbside pickup and two-hour delivery have become pervasive and expected in the retail world, to the point that many of us are surprised when they are not an option. These changes, now firmly embedded in the purchasing experience, are the bellwethers of what’s to come. Customers today demand convenience and technology enables it, opening up every facet of the CPG industry to new opportunities—and challenges.
These changes have created unprecented possibilities for innovative companies. Companies like Dollar Shave Club, which operates at a fraction of industry giant Gillette’s budget, have exposed the vulnerabilities of dated business models, paving the way forward for agile innovators.
Perhaps no one understands these trends or sees these opportunities better than our featured independent CPG expert, John Schroeder, who we recently caught up with for an exclusive Q&A session.
Q | Tell us about your background as a CPG expert.
I have more than 20 years of experience as a CPG consultant. My teams have provided consulting services for several national and global CPG companies with a focus on growth strategies, including new product development and testing, positioning, pricing, distribution and customer experience.
In the past, I served as a global practice leader in innovation, among other positions, at Nielsen. I founded and led the beverage alcohol practice, during which I was responsible for all analytic R&D, team building, business development and P&L. In addition, I headed Nielsen’s Retail Group, wherein I managed a portfolio of Fortune 500 CPG forecasting and innovation clients, driving increased sales each year.
I later founded the CPG division at the consulting firm Resource Systems Group. Past clients include AB InBev, Clarisonic, Kraft, Kroeger, Honda, PepsiCo and WalMart.
Q | Tell us about a project you’ve worked on surrounding strategy and innovation in the CPG industry.
Due to the trend towards fresh food, organics and ready-to-eat pre-cooked meals, sales of shelf-stable foods have steadily declined over the past decade. This has rendered ineffective traditional marketing techniques used in grocery settings, such as big center-aisle food displays.
However, I recently helped a client develop a winning strategy for a line of shelf-stable food products. The client needed my help to overcome two specific strategic challenges:
- Which line extensions should they launch and in what order?
- How can they present a compelling business case to WalMart to increase prices?
Complicating the first question was the fact that they faced a nearly limitless number of alternatives for their future portfolio growth. To narrow this down, we held a series of discovery meetings with key executives, concluding with a strategy session that focused their approach on a discrete set of actions.
We ran an initial wave of consumer research to further narrow the line extensions, then used the results to build a sophisticated market simulation. This incorporated sales and margin data for existing SKUS, margins for proposed line extensions and consumer data in a model using an analytic technique known as MDCEV, which allows the simultaneous modeling of choice and quantity. It became clear that two of the line extensions had greater demand. Those were obvious candidates to launch first.
As for the second question, WalMart had negotiated a price low enough to nearly eliminate the company’s margin. We suggested a 15 percent increase over their current price. To make a compelling business case, we compared the gross margins before and after the price change, demonstrating via modeling that this would be far more profitable for both WalMart and the company. The increased profitability per item made up for the reduced number of units sold. WalMart accepted the recommendations, increased the price and saw almost the exact profit increase we had forecasted.
Q | What was the impact/ROI of your work on this project?
First, the ROI of this project was measurable because the client leveraged the project to take immediate action on their product portfolio. The resulting increase in profitability from changes in WalMart alone resulted in an ROI of well over 10X. We also found that a few low-margin items in our client’s line could be replaced with little loss in demand and significant margin growth, which increased ROI even further. The replacement items had nearly the same demand, but far higher margins. So, when substituted, overall profitability increased significantly despite the slight decrease in sales.
Q | How does your firm approach volatile business needs differently than a big consulting firm?
In my experience, global consulting firms won’t work for less than, say, $500k, which is often out of reach for smaller firms. Additionally, engagements are sold by partners and then delivered by junior staff, many of whom have little knowledge of the industry or client, greatly reducing impact and ROI. Combined with inevitable attempts to expand scope and duration, this likely explains why a recent survey of management consulting clients found that less than half believe the large consultants added value.
I founded Nova Foresight to address this need. Our mission is to help our clients navigate changes and accelerate growth. At Nova Foresight, all engagements are led by seasoned marketers. We understand the difference between pie-in-the-sky recommendations and practical, implementable solutions and center our engagements around specific business decisions. Where our analysis stands apart is the rigor in our method, and because our overhead is lower and our deliverables are clearer, our projects typically deliver an ROI in the area of 10X.
Q | What kinds of challenges do you see most in the CPG industry? What’s being done to address these challenges?
Many CPG companies are still married to growth strategies developed 20 years ago, which simply aren’t as effective in the current rapidly evolving market. A big challenge stemming from this outdated approach to innovation is looking for growth within categories that don’t align with the needs of actual customers.
For instance, a professor at Kellogg Business School and I once interviewed the VP of Innovation at a large CPG company with a rich history of new product development but had suddenly found itself flailing. Their hit rate had declined in the prior 5 years, and the VP of Innovation confirmed that category misalignment was one of his biggest challenges in getting the company back on track.
As the VP pointed out to us, category definitions are often simplifications developed by Nielson to provide an “analytic slot” for data, but do not necessarily reflect actual differences in consumer needs. Unfortunately for many CPG companies, this approach to innovation has become so ingrained within company culture and lore that it’s difficult to change.
An alternative to the category-centered approach to product development is outlined by the well-known HBS professor Clay Christensen in his most recent book, Competing Against Luck. The heart of this method is a concept he calls “jobs to be done.” With this approach, you reimagine a product by understanding the “job” it accomplishes.
For example, when Apple created the iPod, they recognized that the job of an MP3 player wasn’t just to play digital music, but also to provide an easy source to buy music and a simple way to transfer songs to the device. Leveraging this observation, Apple developed music software and the iTunes store, quickly dominating the market.
As more and more CPG companies learn about this new approach, I expect it will replace many of the traditional innovation methods.
Q | What new trends are you noticing in the CPG industry?
When I was working with the Nielsen team, I helped launch the Gillette Fusion. The challenges of Gillette’s business model serve as a case study touching on many of the trends in the CPG industry. Gillette’s strategy was to introduce a major new product once every 7–8 years and add on line extensions in the intervening years. This worked extraordinarily well in 2005, convincing buyers to upgrade to increasingly expensive razors, marketed through traditional media and sold through traditional channels.
The Fusion’s first-year launch budget was $200MM. However, the unexpected arrival of Dollar Shave Club in 2012, launched in a seminal YouTube ad, led to the Fusion’s eventual downfall. At a cost of $10,000, Dollar Shave Club’s spot was viewed over 22 million times in the first year alone. They sold a “good-enough” product, marketed largely through social media, distributed exclusively online and used a subscription model.
All of these elements were foreign to Gillette. Dollar Shave Club has since sold for $1B to Unilever, while Gillette has lost market share and been forced to drop prices approximately 20 percent just to stay in the hunt. Since I had left Nielson long before Dollar Shave Club entered the market, I watched this whole evolution unfolding from the sidelines. But this CPG example illustrates many of the key trends in the industry:
- Growth of online channels and disruption of traditional distribution.
- Declining importance of branding in the traditional sense.
- Opportunity for tech-based disruptive business models.
- Alternatives to traditional media.
- Increasing importance of customer experience.
Q | As related to technology and innovation, what does the future of retail look like?
In my view, two major forces will accelerate over the next 5 years: tech-based alternative business model enablement and generational-based values shifts. For example, existing retailers have seen modest growth in curbside pickup, and this service will likely expand to other retailers. Once the kinks are worked out, curbside will represent a powerful response to Amazon’s convenience allure. Curbside, in turn, opens up subscription-based shopping and increases the stakes for AI-based personalization and product recommendations. A traditional retailer may find technology-based opportunities previously unavailable to offline businesses.
The wildcard is the Amazon/Whole Foods partnership and the potential for delivery of virtually any retail product, including fresh foods. To date, no major retailer has made a significant portion of their sales through delivery, and even the logistical sophistication of Amazon may not be enough to crack the last mile of distribution difficulties with fresh food.
Both curbside and delivery present challenges to the rules of CPG marketing that will need to be overcome. Slotting fees traditionally charged to secure shelf-space, or premium fees for end-cap displays, might be replaced with virtual slotting for higher visibility on the screen. Again, these changes represent great opportunities for forward-thinking brands.
Q | Leave us one with one piece of advice for business leaders in need of a CPG expert.
In my experience, the most impactful engagements start with a clear vision of the end state. In some cases, this can be developed fairly easily, wheres in others it requires additional discovery. Finding a CPG expert who can help with this and who will stay personally involved throughout the engagement will greatly increase the value of the work to your organization.
Many CPG companies still rely on old-school business models. However, these approaches have been superseded by more agile strategies. Today, the CPG industry is rife with opportunities for business leaders who are ready to embrace tech-based solutions to consumers’ pain points.
Ready to tackle innovation in the CPG industry? Find a Catalant expert like John Schroeder, who can guide your business towards growth.