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Does the thinking you know deliver the results you need?

The balance of the consumer products (CP) industry continues to be disrupted. Companies know they need to change, and they are trying to change. But it’s a struggle to keep pace with everything from fast-changing consumer needs to evolving digital technology, and many companies are over-relying on cost-cutting to try to bolster margins. Almost all CP companies — except the industry’s smallest, newest players — are held back by their heritage. What’s needed now are much bolder moves — moves that are possible only if business leaders adopt broader mindsets. We pinpoint the five most important approaches that CP business leaders must demonstrate.

How confident are you that your business is geared for profitable growth over the next ten years?

Can you say that you know where exactly to cut costs without hurting investment? Is your company truly nimble enough to keep pace with the changing consumer? Are you sure you’ve got the right talent and capabilities — let alone the best portfolio of products — to sustain profitable growth?

Those are the towering questions that preoccupy CP industry CEOs everywhere. They expose all sorts of serious imbalances: a persistent tilt toward short-term results; over-reliance on cost-cutting to buoy the bottom line rather than fund growth; and on-again, off-again romances with emerging markets. And too often, consumers — the “C” in “CP” — still don’t get the attention that investors do.

The industry’s fundamental challenges are not new, of course. In 2012, we published Disrupt or be disrupted, calling for companies to reexamine their business models and operations. Little has improved since then judging by the results of The EY 2016 global survey of 212 CP leaders supported by more than 20 in-depth CEO and CFO interviews. Three-quarters say it has become harder to sustain profitable growth; just as many admit it’s far tougher to grow margins. Fully 68% concede they need to make significant changes to business operations; 74% agree they need to be bolder in tackling the challenges of sustained growth. Larger companies with greater than $10b in annual revenues are even more pessimistic.

Companies are trying to adapt, but nearly half of the CP companies surveyed concede that their attempts have not been effective. The frustrations of business leaders are palpable. They face a churning, chaotic world in which consumers seem more fickle by the day. “Consumers’ habits are changing. Millennials appear less brand-loyal than some earlier generations. They have a jaundiced eye when looking at big brands,” remarks Richard Smucker, Chairman of The J.M. Smucker Company. The need to keep up with the accelerated digitization of everything from the supply chain, to elements of marketing, to the consumer’s path to purchase adds to the headache.

And although many CP companies are rightly proud of their past successes, too many find that what worked before does not automatically work today. Their heritage and sheer size are increasingly likely to be hindrances, not advantages.

Our research highlights both the difficulties and the capability gap companies face in overcoming them. Only 22% of CP business leaders worldwide feel confident in their organizations’ ability to innovate in response to customers’ changing wants and needs; just 13% think they’ve got the talent to translate insight into action. The widespread belief is that five years from now, it will be even harder to do business in consumer products — and in retail, for that matter.

The imbalances have not escaped Wall Street’s notice. “After the 2009 recession, the industry started recovering and the mood was, “OK, everything is going to be fine,” observes Nik Modi, a leading CP investment analyst at RBC. “In fact, growth really hasn’t picked up. We’ve seen a very clear bifurcation between the winners and losers.”

Tougher challenges require intentional mindsets

These challenges calls for whole-hearted responses, but those responses will fall short unless CP leaders approach the new competitive landscape with broader mindsets. These new ways of thinking must be intentional — considered, discussed, debated, and communicated — because they are essential to strategic direction and are prerequisites for action. Shared broadly and communicated continually as part of the company’s statements about its purpose, they will underpin successful execution.

In our experience, these are the five perspectives that CP leaders most need to adopt:

As far back as the 1970s the consumer was being heralded by influential voices such as the Harvard Business Review as the focal point for all of a CP company’s strategic and operating decisions. However, despite the consumer being seen as increasingly powerful, many observers question whether companies are truly putting the needs of the consumer first. “I hear a lot of talk that the consumer is boss. But the investing population has been boss. That’s not the way it should be,” declares Nik Modi.

Some industry experts equate consumers’ growing fondness for newer, niche brands with a loss of trust in big brands. “It’s very, very, easy to lose touch with the consumer,” observes Peter Freedman, managing director of the Consumer Goods Forum. “The more complex the organization, the more culturally ingrained it is, the harder it is to put the consumer truly at its heart.”

We believe that sustaining profitable growth requires companies to look beyond the constant pressure on margins and avoid compromising their purpose. The consumer must be at the center of their decision making. “Ultimately, if companies do everything for the consumer, they will invariably benefit their shareholders,” states Modi.

In an age when private equity is challenging established margin benchmarks, shareholder activism is rife, and pressure to maintain returns despite falling volumes is intensifying, too many CP companies appear intent on cutting costs at all cost. That will help margins in the short term, but risks damaging the company’s long-term health. "There’s no question the margin benchmark is going up,” says Irene Rosenfeld, CEO of Mondelez. “I think the question of how far it should go up in order to preserve sustainable growth is very much an open debate right now. Simply adopting higher benchmarks without considering the trade-offs is dangerous.”

“You have to play a balancing act,” believes the CEO of a European food company. “On one hand, you have to drive cost out of your organization, but on the other hand you have to keep investing in your growth product lines and not choke them.”

Efficiency is critical, but in our experience companies need to encourage a company-wide mindset that cost cutting is ‘fuel for growth.’ Benno Dorer, CEO of Clorox, substantiates this: “The more cost we take out, the more we can invest in growth, the more we grow market share, the more we grow sales, the more people will get paid. People understand that it’s a recipe that works for the company and for them individually.”

Short-termism isn’t new, but it continues to hamper the CP industry’s ability to gear for consistent long-term growth. Paul Bulcke, CEO of Nestlé, offers this analogy: “If you’re a motorbike rider, the first rule is, don’t look just in front of your wheel, because if you do, you’ll always feel unbalanced. Look further ahead — around the curve — and your brain is going to put you in balance permanently.”

Short-termism cannot be blamed entirely on Wall Street or on activist shareholders. There are plenty of investors who recognize its dangers. Says industry analyst Modi: “I am actually looking for companies to invest in their product at the expense of gross margin because I think invariably, that’ll help expand competitive advantage.”

Leading CP companies exemplify an “and” mindset — striving to balance short-term and long-term measures, and aiming for equilibrium in other dimensions too, including growth and cost-cutting, innovation and efficiency, outside hires and company careerists, centralization and decentralization.

The immediacy and always-on nature of digital, coupled with greater market volatility, means that speed and agility are increasingly prerequisites. “The only thing that I would say I want this company to be better at is speed,” says Paul Bulcke. “To win you have to be faster than the others, and sometimes I think we can be speedier. There’s a tradeoff between riskier and speedier, but that balance is shifting slightly toward speed.”

Cecile Cabanis, CFO of Danone, believes that in today’s volatile environment, the fixed budget process is obsolete. “It doesn’t build visibility. It builds an illusion of visibility in numbers,” she says. “Instead of fixing resources a year and a half in advance, we’re building the capacity and flexibility to review them each quarter to make sure that the resources are where they’re supposed to be.”

Companies must ensure clarity and agreement of strategic priorities across the organization. They must empower managers to make rapid decisions. And they must invest in both the analytics technologies and the talent that can identify where investment can unlock growth.

CP companies can rightly feel proud of the businesses they have built. However, sustaining profitable growth amid ongoing disruption requires companies to re-imagine business models and transform consumer experiences. It is one thing for leaders to acknowledge that their companies need to change, but quite another for them to plan for and put in place the far-reaching and often disruptive initiatives that can lead to lasting transformational change.

John Bryant, CEO of Kellogg, believes companies must make conscious efforts to look forward rather than back. “When companies get focused on protecting what they have, they fail to create what they need to be. We need to focus much more on the future and where the consumer is going,” he states. “That requires an element of creative destruction. That’s easy to say, but it’s hard to do. It requires an element of risk-taking that has not been required in these businesses in the past, when they were operating in a more stable environment.”

Companies must nurture a culture in which ideas and experimentation are encouraged and embrace failure as an opportunity to learn, while ensuring the benefits of the past are not lost. “Clorox historically has been a very operationally-minded company, and we want to sustain that, but a growth mindset requires different skills, a different level of leadership, a different type of willingness to make decisions and take calculated risks,” says Benno Dorer of Clorox. “We’re trying to create a culture where debate is encouraged and not just tolerated, and where people feel safe to make decisions and make mistakes doing so, because they know that they will be supported by their managers through those mistakes. And perhaps they will even go a step further at times and celebrate failures, to make sure that people understand that it’s better to do something and fail than not to do something and miss an opportunity to grow.”

Risk-taking, by definition, implies boldness — a characteristic of great leaders and something that industry observers say is in short supply.

About the authors

Kristina Rogers is Global Sector Leader for Consumer Products and Retail, responsible for shaping the strategy and enabling the implementation of EY’s go-to-market strategy in the sector. Kristina is an experienced senior leader in the areas of strategic marketing, corporate strategy, and global business development. Before taking on the Global Sector role, this Harvard Business School alumnus was the Emerging Markets Leader for Consumer Products and Retail.

Andrew Cosgrove is Global Lead Analyst for Consumer Products and Retail at EY. Andrew has significant experience in the Food and Beverage industry in both Europe and Asia. He is co-author of Managing Profitable Growth in Emerging Markets: Scaling the Tail, published by Palgrave Macmillan.