New Realities for Consumer Goods and Retail in 2011

Speedbeing early to innovate and early to imitatehas always been a critical success factor. We believe that it will become an even more important source of advantage in the next decade. In the 1980s, consumer product makers competed on technical superiority. In the diaper category for instance, market shares rocketed with innovations such as dry technology. In the 1990s, however, higher-quality private labels entered the picture, claiming to be as good as brands at half the price. In response, brands invested in further innovation and focused on emotional values to create differentiation, and private-label growth was contained. At the beginning of 2000, the top five retailers worldwide were spending more on advertising than the top five makers of consumer products. Many brands shifted their spending to create visually stunning effects at the point of saletargeting the moments of truth when consumers first see and touch the product on the shelf and then buy it. Today, competing for those moments of truth is no longer easy or even possible, as retailers cut back on SKUs, restrict shelf activity, and police merchandising. But fast innovation continues to offer real advantage. Some companies have become masters of speed. When one companys material innovations were attacked by private label, for example, it launched a new wave of technically superior products six months later and then immediately followed up with an environment-friendly innovation. Launching a new SKU as frequently as every six months, the company just keeps steamrolling over private label. As other sources of advantage disappear, fast innovation and imitation remain powerful. Cycle times for imitation have been cut in half, which ups the ante for differentiation in technical, functional, and emotional benefits. Instead of assuming declining returns, brands should invest relentlessly in innovation. Key areas of competition will involve materials, fabrication, formulation, packaging, price points, and the entire usage cycle. Think better, faster, and more for less. Ivan Bascle, partner and managing director in the Munich office of The Boston Consulting Group; Michael J. Silverstein, senior partner and managing director in the firms Chicago office Consumers have become more open to experimentationmany are now willing to try local brands instead of famous multinational names, ready to sample an unfamiliar private-label product, and even eager to check out new online channels for researching and purchasing products. Their sense of adventure in shopping will shape the competitive arena over the next few years. I see at least four implications

for consumer product companies: To compete against private labels, which consumers no longer equate with inferior quality, brands need to invest in meaningful innovations. Communicating a products true value will be crucial in a world in which jaded consumers are tuning out advertisements in favor of recommendations from people they trust. To justify price premiums, products will need to deliver more than bells and whistles.

Multinational brands in emerging markets should look to local markets as opportunities for new growth. While international brands have been distracted by their rapid growth in the top-tier cities, local brands have been sailing along just under the radar, building entrenched positions in smaller cities where a solid middle class is rapidly emerging. Companies first need to identify their local competition and then figure out how to best them in product benefits and rapid distribution.

Brands must stay one step ahead of the rising crowd of online consumers. The burgeoning online channel is already critical for communicating with consumers in the developed world, as well as gaining insight into their needs. Increasingly, it is becoming an important outlet in emerging markets as well. Companies need to understand how to leverage social media, mobile commerce, and location-based promotions. They also need to understand what effect these tools will have on their marketing, pricing, loyalty programs, and customer relationships.

Health and wellness products have never been more important. In our recent research on consumer sentiment, increasing numbers of consumers are citing health as a key reason to trade up (especially in emerging markets). Companies need to think about how to address the emotional and functional needs driving these health concernswhether consumers are seeking product safety, organic ingredients, or an assurance of sustainable quality. Catherine Roche, partner and managing director in BCGs Dsseldorf office In the developed world, growth rates have fallen considerably from historic levels. However, both retailers and manufacturers have been slow to adjust to this new reality. Consider the retailers challenge: Before the crisis, most retailers grew by

adding more stores. But now, as markets become saturated, outlet expansion has become difficult. Instead, retailers need to pursue same-store sales growth by capturing market share from competitorsthrough increasing traffic or increasing sales from current shoppers. Winning in todays world will require insight into consumer behavior, store remodeling, tailored assortments, precise pricing, and promotional strategies. There are challenges on the supplier side as well. Retailers are facing cost pressures in addition to their growth issues, especially for labor. As a result, some retailers in the U.S. and Europe are asking manufacturers for more concessions than we have seen in years. To maintain win-win results in negotiations, manufacturers must offer insights that retailers will value on shoppers, category growth, and category profitability. In emerging markets, by contrast, growth in consumer businesses is accelerating. Having the right go-to-market strategy to reach consumers in these areas is critical, however. This often means delivering products to stores that are different from the ones suppliers are used to in the developed world. Manufacturers also need to modify their product assortment to support more affordable pricessmaller packs that sell for much less than value packs, for instance. But beyond these tactics, manufacturers need to invest in brand building to create a pull business. Market share can shift rapidly in the developing world. The winners will be the brands that consumers think of first and that are established in the stores where they shop. To deliver profitable growth today, consumer companies need to overcome the challenges in the developed world by capitalizing on tailwinds in the developing world. Jeff Gell, partner and managing director in BCGs Chicago office The media are full of stories about emerging markets and the rise of middle-class consumers. Although executives are aware of this trend, many have not yet fully grasped its implications for their businesses. BCG research shows that many categoriesincluding automobiles and luxury goodsbegin to experience significantly higher penetration rates once consumers within a population attain middle-class or affluent-income status. Where are these new middle-class consumers to be found? Not where you might expect. Only a fraction of them reside in large cities, such as Shanghai, Jakarta, or Mexico City. Instead, the biggest areas of middle-class growth are in cities that most developed-country executives have never heard of. That makes developing successful value propositions and go-to-market business models an even greater

challenge. It is easy to become complacent when emerging-market businesses reach doubledigit growth rates. But impressive growth in large cities can actually mask the beginning of a decline in market share that results as growth in middle-class markets begins to take hold in smaller cities, which are not as easy to service. Companies should be asking, Which competitors are winning in new markets and how? They should also focus on city-level location strategies and complementary business models to capture this new opportunity. Abheek Singhi, partner and managing director in BCGs Mumbai office Multichannel strategies are transforming the retail industry. I offer just three sources of immediate threats or opportunities for retailers in the coming year. Living in a world of increasing price transparency. How should a company change its pricing policy, given consumers ability to compare prices in real timeeither online or by using their mobile phones? What categories of products or which segments of consumers will be most affected by price comparisons? How will this change over time?

Competing with free shipping and quick deliveries. Amazon is increasingly able to deliver most orders within a day or two, for free, to its Amazon Prime customers. When such service is coupled with easier returns, what does this mean for brick and mortar players? Does it entirely negate the consumers need to visit a store? Does it negate the advantage of buying online and opting for in-store pickup? What must physical retailers do to draw traffic to the stores? Once customers come to the stores, how do retailers ensure salesand avoid serving as a showroom for competitors? How do the required actions vary across categories?

Responding to the need for superior analytics. The bar is rising quickly for analyticsincluding metrics in pricing, cost of goods sold, customer relationship management, assortment planning, labor scheduling, and return on marketing investment. Many retailers lack sufficient skills in these areas. In a fluid and rapidly evolving environment, the ability to analyze the situation and adapt quickly can be a competitive advantage in itself. Brad Loftus, a partner and managing director in BCGs Washington office

The return of healthy profits and generous bonusesat least in some industries suggests that there will be a resurgence in luxury spending. In a recent Wall Street Journal article, the sector was described as going from bust to boom. In midOctober, The Economist noted that Bling Is Back. But is it really? Were not so sure. Demand is certainly inching back, but fundamental changes in the world of luxury have, perhaps for the long-term, altered the mystique of highstatus products. The Great Recession did more than dampen demand. It made people of all income levels aware of just how far spending had spiraled out of control. That awareness has caused a profound change in consumer behavior. Consumers are willing to spend on luxury, but its no longer about flaunting their wealth. They need other, better reasons to buy. In 2011, demand must be triggered by something more meaningful than a label or a celebrity. By re-emphasizing the artisan quality or rareness of their goods and highlighting the rich creative process that designers and their teams undertake for each collection, the smartest companies will distance themselves from their everyday competitors. Values such as stability, family, home, and spirituality will become more important than status symbols and bragging rights. Premium experiences will generate more growth than premium products. Jean-Marc Bellaiche, senior partner and managing director in the firms Paris office Increasing numbers of consumers say that they trust the comments of friends, experts, online ratings, and even celebrities more than corporate marketing messages. Theres no denying the enormous influence of advocacy, but how do you control it? The answer is, you cant. But you can manage it to create long-lasting competitive advantage by transforming recommendations into rich relationships. Advocacy marketing is a gift that keeps on giving because advocates beget advocates. In addition to promoting products, an advocacy program can also generate ongoing conversations between companies and customers, contribute creative ideas for new products, and facilitate real-time feedback. And thanks to the digital revolution, companies can enlist advocates in conversations with large groups of consumers. Its no wonder that robust advocacy-marketing programs are achieving significant revenue gains10 to 20 percent for established products and up to 100 percent for new products, according to BCG research. Cultivating advocates has become a critical part of deepening consumer relationships. Not all products lend themselves to advocacy marketing, however. It cant rescue an

inferior product or service, for instance. But a product is a prime candidate for advocacy if it stands out from the competition, or it is new; if it offers consumers something positive to talk about; if the product line is regularly updated to offer a fresh subject for discussion; and if the products targeted consumers are likely to seek recommendations before purchasing. The secret to a winning advocacy strategy is to find the right people and get them talking about the right things, in the right places. It requires three key capabilities: customer insight, message creation, and digital outreach. And it takes work. At BCG, weve incorporated our best practices into a simple mantra: interact, listen, and respond. What if you declared victory when you created an advocate rather than when you made a sale? Advocates are the new authorities in town. Advocacy marketing can bring companies and customers much closer together in ways that will benefit both parties. Kate Sayre, partner and managing director in BCGs New York office Rising commodity prices and inflation rates have exceeded expectations in Europe and in many developing economies. Inflation has a corrosive effect on consumer companies business performance. It undermines profits even as it causes managers to think their company is doing better than it really is. It encourages underinvestment. It distorts resource allocation. It also depresses market values; stocks generally underperform during inflationary periods. At the same time, as with any economic threat, inflation tends to separate the wheat from the chaff. Those companies that find a way to protect themselves from inflations negative effects may find that they can exploit an inflationary period to take advantage of weaker competitors and improve their own competitive advantage. With prospects for inflation on the rise, companies need to start now to prepare for the possibility. They need to make their organizations inflation ready. At BCG, we see it as a two-step process. The first step is to assess a companys vulnerability to inflation by determining the impact of inflation on its profits and capital expenditures, as well as the organizations readiness to respond effectively to the changes. Think of this as an inflation exposure diagnostic. The second step is to use that analysis to develop a holistic plan that addresses a companys vulnerabilities and protects it from inflations negative consequences. In other words, it must build an inflation protection plan.

The sooner a company completes this process, the more likely it will be able to limit the effect of inflation on its business. The longer a company waits, the harder it will be to respond effectively. Companies need to start developing an inflation mindset now and prepare for this risk. Their decisions today will determine whether they will be the wheat or the chaff when inflation finally arrives on their doorsteps. Daniel Stelter, senior partner and managing director in the firms Berlin office and the global leader of the Corporate Development practice