The CPG model is in desperate need of innovation

Below is the text of my recent post at Blogging Innovation:

While recent years have been a boon for innovation in various industries such as consumer electronics and automotive, the consumer packaged goods industry seems to be stuck serving up warmed over versions of past innovation. But while product innovation in CPG is badly needed, the true innovation crisis in CPG has to do with the fundamental business model. Although the players have been changing due to industry consolidation, the CPG industry continues to labor under a decades old business model whose foundational truths evaporated years ago.

The essence of the CPG business model is as follows: One group of companies manufactures products that are perceived by consumers as significantly better than the alternatives. Over time, these products serve as the backbone for brands that are loved and trusted by consumers and which are relied on as shortcuts to simplify purchase decisions. These companies sell their products to a second group of companies (retailers) who have expertise in merchandising and who, in turn, sell the products to the end users (consumers).

This model worked out well for the manufacturers when two things were true: 1) Their products were perceived by consumers as significantly better than the alternatives and 2) They had the trust and attention of consumers and were able to motivate consumers to go to the retail stores to buy.

Today, these essential truths are no longer true.

With ample contract manufacturing capacity available in the market, private label goods are proliferating. More importantly, a sizable and growing share of consumers perceive private label versions of products to be as good or better than their branded counterparts. Just as troublesome is the fact that manufacturers no longer have the trust and attention of the consuming public which means they cannot influence consumers to go out in droves and shop in retail stores as once they could. In a world where manufacturers are not producing products that are perceived as significantly better than the private label alternatives and where the 30 second commercial no longer holds a mass audience in rapt attention, manufacturers of branded consumer goods are in a very precarious position. One has to wonder whether the role they play in the CPG value chain is still needed. I can assure you that the retailers are asking this very question and are answering it ever more vociferously in the negative.

Sadly, some of the CPG players draw the wrong lesson from their current woes. Some have declared a war on costs, seeking to drive cost out of their system so that they can reinvest back in their brands. This is an example of trying to play your game harder. Playing your game harder makes sense when success is a function of skill. But success in CPG today is not a function of skill, it is a function of position. The retailers occupy a privileged position on the competitive landscape. They own the shelves and they own the stores in which consumers shop. Trying to win a battle of costs against private label goods is a waste of time. Branded goods will not only lose this battle, they will undercut whatever raison d’etre they still possess.

All is not lost for the CPG community. As always, innovation is the key to success. Branded goods manufacturers need to focus on two things: 1) Knocking the socks off of their consumers with products that are not easily copied. These fantastic products will earn the attention of the consuming public. 2) Finding a way to recapture the relationship with the consumer.

The 30 second commercial is not coming back as a means of building consumer relationships. Brand stewards must leverage new technologies to turn the attention that their products earn into brand loyalty that can deliver financial returns. Once these two fundamentals have been re-established, CPG manufacturers would be wise to re-evaluate the rationale for funneling all of their sales through a channel that has demonstrated robust support for building its own private label business at the expense of the big brands.

The path of meaningful innovation is the only path to success for the manufacturers of branded consumer goods. They can choose to continue tweaking the current model or to seek a new model. One thing is clear: The market will not wait for them.

Tagged as: business model, CPG