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Consumer Packaged Goods (CPG) manufacturers face a lot of pressures: fickle consumers, powerful retailers, globalization, and more. The CPG manufacturing industry is large and thriving; however, margins are slim and competition is furious. There are hundreds of product categories, and to compete, firms must constantly innovate. Even industry giants cannot afford to sit back. How can the small-to-medium CPG manufacturer survive in the face of the same external pressures and fewer resources?
CPG Manufacturers-The Big Get Bigger and Everyone Else Struggles
As an example of what is happening to CPG manufactures, a five-year financial analysis of the small-to-medium food manufacturing enterprise versus larger companies reveals a dim picture. In terms of net sales growth, return on sales, and return on assets, mid-size manufacturers trail their larger counterparts. While the small companies (classified as $50 million to $300 million USD in the study) are at least close, the micro companies (less than $50 million USD) lag far behind.
All CPG manufacturers face the same market pressures, but larger companies enjoy some distinct advantages. For example, they have more power with major retailers. Their broad product lines, greater geographic coverage, and typically stronger brands result in customers finding it easier and more effective to deal with them than their mid-sized counterparts.
With the large retailers demanding specific business process and technology investments, the larger manufacturer has the advantage of being able to write off these investments over a larger volume.
With the big manufacturers having many advantages, how does the mid-size CPG manufacturer compete and survive? To answer this question, we will examine the major pressures on CPG manufacturers today, analyze what these pressures mean to the small-to-medium manufacturer and describe the systems that can help meet these challenges.
Retailer Consolidation
From convenience stores to big box specialty stores to warehouse clubs, the big have gotten bigger while smaller retailers-from mid-size regional chains to the mom and pops-have been on a slide. Ten years ago, there were nearly 500 public retail companies in North America; today there are fewer than 300. "Size matters" is the rule that has driven consolidation. Economies of scale lead to greater efficiency and lower prices, generating greater volume at a lower cost per unit sold. This, of course, results in greater profits. And the ability to invest means an increase in size, which means even greater economies of scale. The result is a productivity loop.
Today's typical CPG manufacturers are seeing a greater concentration of demand in their top few customers. Often, the top five customers make up the majority of revenue-sometimes as much as 80%. As one executive told us, "The small customers are getting both fewer and smaller while the large are getting fewer and bigger." With fewer, larger customers, the CPG manufacturer is increasingly reliant on keeping those few customers happy. The effects of having one of the top five go away could be devastating.
Retailer Demands
Consolidation means fewer decision makers with more power. Each controls a greater volume and market coverage. More importantly, a "no-thank-you" from one of the major retailers eliminates the manufacturer from a large segment of the business, with decreasing options to make up the lost opportunity and volume.
The term "channel master" describes the developing role of the major retailers and CPG service companies. A channel master controls access to the market, decides which products will make it onto shelves, what the prices will be, and how business will be conducted.
TECHNOLOGY HURDLES
In the business press, we frequently see articles about radio-frequency identification (RFID). Major retailers are increasingly setting technical and business process requirements and deadlines for their suppliers. No one doubts that RFID will be an absolute requirement in the future; in fact, the issue is not if, but when. However, RFID is just one element of a continuing process on the part of the retailers to drive costs out of the supply chain. Other elements have included electronic document interchange (EDI) and, more recently, data synchronization, such as UCCNet and EAN. These technology-driven requirements represent an ever-higher technology hurdle that manufacturers must clear to participate in the retailer's sales success.
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