This post is sponsored by EY.
Consumers’ changing habits and evolving demands are putting increased pressure on consumer packaged goods companies to innovate and offer products that cater to a particular diet or set of beliefs. Large legacy food and beverage companies often lack the agility to quickly change course or bring new products to market and, as a result, many major companies are looking to invest in or acquire small startups.
In this interview, EY Americas Consumer Product Leader for Transaction Advisory Services Greg Stemler discusses best practices for large CPG companies looking to integrate small brands into their portfolios, as well as the trends and issues that are affecting CPG companies both big and small.
How are consumers’ changing needs and demands impacting both large legacy CPG companies and small upstart companies?
Large CPG companies are increasingly battling consumer distrust and looking to incubate, innovate or acquire smaller startup companies in order to follow changing consumer sentiment. Changing consumer demand has increased the importance of using analytics to develop go-to-market strategies for large CPG companies. We’ve also seen mega-deals and consolidation in the market as CPGs look to improve operational efficiency and take out costs in this low-growth environment, while looking for the next high-growth opportunity. Large CPG companies’ thirst for growth and inability to maneuver quick enough has driven significant increase in enterprise values for upstarts, sometimes regardless of profitability. These small upstarts are taking advantage of the shift in consumer sentiment away from legacy CPG “fastballs” and this creates an opportunity for new entrants in niche sectors. Small companies’ ability to meet consumers’ demand for variety and authenticity, and offer products tailored to a particular mission or ingredient — such as plant-based proteins — is a particular advantage.
What can CPG companies do to find balance between achieving growth in a low-growth environment and maintaining or improving profitability?
Companies should take a long-term view and focus on funding growth and innovation while maximizing sustainable cost reductions across all non-growth oriented functions. CPGs may need to rethink their current operating model in light of shifting consumer trends, i.e. subscriber-based purchasing, e-commerce platform development, etc. Successful integration of acquired brands is key to capitalizing on growth projections while minimizing operating costs, and companies should capitalize on partnerships, alliances and outsourced vendors to maximize efficiency. Technology plays an important role in optimizing performance, from consumer tracking to digital marketing and supply chain efficiency.
Large CPG companies are increasingly turning to acquisitions of niche brands to capture the next generation of growth. What can established companies do to realize value from these acquisitions?
After acquiring a niche brand, large companies must first identify and understand the drivers of the brand’s creative successes and develop an operating model to protect and preserve those drivers, particularly in marketing and innovation functions. The parent company should develop in conjunction with the acquired brand and communicate up front. It is wise to keep the founders on board and actively involved as long as possible to retain a culture of innovation, as well as maintain a separate R&D function. All other functions should be quickly integrated and the parent company should re-evaluate the total company portfolio to ensure all brands align with its strategic business imperatives. There is no one-size-fits-all solution, so it’s important to maintain flexibility in the chosen operating model for various acquisitions.
How do you see the increasing impact of digital – whether in advertising, operations, consumer experience or new product development – influencing the growth strategy and M&A landscape in the next few years?
Digital advertising increases the reach of new market entrants exponentially. Digital advertising allows for more successful “grassroots” campaigns — particularly for mission-based brands. It creates additional transaction opportunities and market competition while expediting the test and learn scenarios around brand messaging and new products for marketers who are prepared to move beyond their traditional annual plan and adopt newsroom-style brand engagement strategies.
New technology and analytics-driven supply chain designs are reshaping how products are made and distributed through innovations such as warehouse drones, SKU rationalization and route to market optimization. It also supports premium product personalization opportunities a la “custom Oreos.”
What were some top trends on display at Natural Products Expo West? What are some key takeaways from companies that are successfully navigating the changing food and beverage market?
Expo West was a microcosm of broader consumer shifts. The key points I came away with include the rise of “cleaner” food and clearer labeling, as well as the popularity of more natural processing methodologies or less overall processing. There is also an increased emphasis on mission-based or socially conscious brands — consumers are willing to pay a premium for purposes that resonate with them, such as environmentally friendly production methods, employee fair pay or non-GMO and organic certifications.
Consumers’ changing lifestyles are creating opportunities for natural food trends to become mainstream. Key trends with mainstream potential include pre- and pro-biotics and other functional foods, non-meat based proteins such as plant or insect proteins, Paleo/high-protein diets and mission-based or socially conscious brands.
Greg Stemler is EY’s Americas Consumer Product Leader for Transaction Advisory Services.
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