Three myths about growth in consumer packaged goods
We expect the sector
to grow strongly. The key for companies is to sell the right products in the
right markets at the right times.
Imagine, if you will, that over the next decade the world will
gain an additional 81 Procter & Gambles or 458 equivalents of Kellogg’s.
This is the sort of growth that will happen in the global
consumer-packaged-goods (CPG) sector, which will nearly double in size—to $14
trillion—by 2025, from $8 trillion in 2014.
It’s natural that for much of the past 20
years, the discourse on growth has highlighted the BRIC countries: Brazil,
Russia, India, and China. But with competition in these markets intensifying,
some companies have shifted their focus to other regions of the world, such as
Africa and non-BRIC Asia and Latin America. Everywhere, however, competition
and high capital requirements are making it increasingly difficult to achieve
growth and create value through geographic expansion, so it’s crucial for
companies to take the guesswork out of their plans.
The three myths
We used McKinsey’s Cityscope Navigator tool to
take a fine-grained look at the markets of more than 2,600 of the world’s
largest cities. Our analysis revealed some surprising truths about where the
most promising opportunities lie—and cleared up three widespread myths about
CPG growth.
Myth 1: The United
States isn’t a growth market
Most CPG companies have had very low
expectations for growth in the US market. They’ve long seen it as the scene of
a battle for distribution, where they must secure placement for their products
in the fastest-growing retail channels just to maintain their share of a pie
that’s not getting bigger.
But this no-growth (or, at best, low-growth)
picture isn’t entirely accurate. Somewhat surprisingly, a number of cities in
developed markets, including the United States and Western Europe, are growing
as rapidly as those in emerging markets. Companies that ignore these cities
could be missing out on opportunities very close to home. Our analysis
forecasts that between 2014 and 2025, certain product categories—including
anti-aging cream, still drinks, and mineral water—will grow at almost twice the
rate of overall US consumer spending (Exhibit 1). Companies can thus generate
above-average growth in the United States by not only taking market share from
competitors but also making targeted investments in high-growth categories.
In addition, demand within developed markets
varies by geography. The beer category illustrates this point: average US
consumption growth from 2014 to 2025 is estimated at 1.1 percent—but in some
cities, the projected growth rate exceeds 3 percent . In Arizona,
the city of Prescott is less than 100 miles from Peoria, but is predicted to
grow at least three times faster.
Western Europe also has pockets of rapid
expansion, with some categories increasing at two to three times the national
average in certain metropolitan areas. Beer consumption is growing three times
as quickly in Belfast, for instance, as in all of Germany.
Myth 2: It’s too late
to enter China or India
Some companies have written off China and
India as unrealistic expansion opportunities; they feel their capital base
isn’t sufficient for a credible entry or that the competitive environment is
already too tough for new entrants. But companies shouldn’t dismiss these
markets outright. Instead, they should ascertain whether building a presence in
only a few selected cities is feasible.
For product categories with low minimum scale
requirements, even a limited entry in China or India can yield returns
equivalent to countrywide coverage in other emerging economies—or higher. The
juice market, for instance, will grow more than three times as fast in Shanghai
alone as in all of Malaysia. Furthermore, many cities in China and India are
continually modernizing their retail and distribution infrastructures, making
market entry less complex than it would be in rural areas.
Myth 3:
Emerging-market consumers don’t buy premium products
As international CPG companies venture into
the emerging world, many of them choose to sell only simple products that meet
basic needs. And with good reason: fast-moving categories, such as soft drinks
and laundry detergent, offer the greatest reach and the highest market
potential.
Yet some large cities in emerging markets have
per-capita income levels comparable to those of large North American and
European cities. Demand structures in these emerging locales and their
developed-market counterparts are increasingly similar. Discretionary products,
such as premium cosmetics, disposable diapers, and pet food, therefore have
higher sales potential.
Companies that meet
this nascent consumer demand early will be well positioned to become market
leaders. Forward-thinking companies can even play a part in stoking demand, as
Procter & Gamble did with disposable diapers in China (until about a decade
ago babies there wore only cloth diapers—or none at all). In 2006, P&G
developed a cheaper but still absorbent Pampers diaper for the Chinese market.
Working with the Sleep Research Center at the Beijing Children’s Hospital, the
company conducted two studies showing that babies fall asleep faster and stay asleep
longer when they wear Pampers. These messages were extensively marketed to
Chinese consumers.1 Today, Pampers is the top-selling brand
in the $6.7 billion Chinese diaper market.
Developing strategies
for micromarkets
Taking a fact-based,
granular approach can change the entire outlook for particular markets. For
instance, we analyzed 58 product categories in 550 microregions and more than
5,500 cities in Brazil2 and found that it is poised for speedy
economic growth in this decade. One region in particular—the Northeast—will
grow fastest, with consumer expenditures increasing almost threefold by 2025.
Notably, we found that some of Brazil’s
fastest-growing cities aren’t sprawling metropolises or state capitals but
medium-size places with populations ranging from just over 20,000 to 500,000.
These cities aren’t even on the radar screens of many CPG companies, yet their
annual growth rate—about 7.5 percent—is comparable to China’s. Collectively,
they are projected to contribute approximately half of Brazil’s total growth in
consumer spending .
With the increasing affluence of Brazilians, a
number of products will experience explosive sales growth. One is sunscreen:
sales volumes of this previously low-penetration category are expected to
double by 2025. Others will grow at a more measured but still impressive
rate—50 percent for baked goods, for instance. But to date, the leading retailers
in Brazil aren’t capturing much of this growth. Many large ones, including
Walmart, Carrefour, and Companhia Brasileira de Distribuição, either are
underrepresented in some of the country’s fastest-growing cities or don’t have
even a single store.
In contrast, our work in India shows that most
of its growth will come from a small number of urban areas. For example, the
country’s 70 most populous cities, which account for only one-seventh of the
population, are expected to contribute one-fourth of the growth in the food and
beverage market from 2014 to 2025. Fortunately for CPG companies, accessing
these cities is significantly cheaper than reaching smaller ones and rural
areas.
Questions CPG companies
should ask
As we already know,
companies that rapidly and aggressively shift resources into growth areas tend
to outperform their more conservative competitors.3 We believe that consumer-packaged-goods
players should make bold moves, but only after answering these questions:
1. Hot-spot analysis. What are our top 100 cities—those where we
should build a presence to achieve our growth ambitions?
2. Category selection. Which categories and subcategories have the
greatest growth potential in those cities?
3. Market check. What specific market conditions can we expect?
4. Resource allocation. Which geographic regions should get
additional resources to ensure our future growth?
In the developed world’s cities, which
generally are more mature and thus have lower growth potential, a separate set
of questions is critical:
1. Granular analysis. Which cities or micromarkets offer the best
growth opportunities for our products?
2. Presence check. How strong are we on the ground in
high-growth regions?
3. Market positioning. In which high-growth areas is our market
share below average?
4. Resource reallocation. Have we reallocated our investments and best
talent to the highest-growth regions and categories?
The answers to these questions can also inform
decisions about product portfolios, marketing expenditures, labor (such as the
size and deployment of the sales force), and even the location of manufacturing
facilities and distribution centers. Companies that venture, ahead of the
competition, into high-growth regions and categories armed with granular data
will be better able to take—and hold—market-leading positions for years to
come.
byRogerio Hirose, Renata Maia, Anne Martinez, and Alexander Thiel
http://www.mckinsey.com/insights/consumer_and_retail/Three_myths_about_growth_in_consumer_packaged_goods?cid=other-eml-alt-mip-mck-oth-1506
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