• by Karlene Lukovitz  @KLmarketdaily, July 13, 2010

To achieve sales growth and strong financial performance going forward, consumer product goods companies need to shift away from recessionary strategies and focus hard on two fronts: greater innovation and expansion in emerging markets, according to the 2010 CPG financial performance report from the Grocery Manufacturers Association (GMA) and PricewaterhouseCoopers (PwC).

The annual financial performance reports are compiled from interviews with senior leadership of GMA members, publicly reported company financial data, government statistics, analyst reports, and other published material on companies (152 analyzed for the 2010 report) in the food, beverage and consumer products sector.

In comparison with other industries, CPG companies as a whole performed well in terms of shareholder returns in 2008 and moderately well in 2009 -- partly due to their necessity-based food and beverage and household staples products, and partly as a result of strategies focused on divesting non-core brands, conserving cash and cutting costs, points out "Forging Ahead in the New Economy." The industry's median shareholder return in 2008, while negative (-25%), was actually strong relative to the rest of the market, and its median return in 2009 was 24.2%, compared to the S&P 500's growth of 27%.

However, median net sales growth declined in 2009 for all three CPG sectors: food, beverage and household products, according to the report. (Beverages, while very strong in terms of shareholder return by both CPG and general-market standards, with a 49% shareholder return gain, showed its first sales decline in five years, - 1.6%.

Furthermore, shifting consumer dynamics will result in continued downward pressures on net sales growth in the U.S. going forward. Key dynamics include reduced spending by Baby Boomers nearing retirement (due to declining property values and retirement fund losses), as well as general consumer tendencies to buy more carefully, take advantage of volume discounts, buy different package sizes, and trade down to non-premium brands.

To grow revenue in this scenario, CPGs will have to raise prices, drive volume or both -- which is where innovation comes in. Some innovation will come through products/packaging geared to specific consumer segment needs, which will require a deeper understanding of customer priorities (including how different U.S. consumer groups define "value"), notes the report.

And some innovation will come through new marketing methods/channels, such as expanding product/brand presence in the workplace and targeting Gen Y and younger demographic groups, in particular, through social media.

However, innovations that employ sophisticated operations technology, particularly data sharing between manufacturers/suppliers and retailers, will also be increasingly critical.

"Many CPGs are less focused on traditional innovation strategies like line extensions than on rethinking their strategic relationships with [retailer] customers and investing in IT capabilities to help customers better deploy their capital," says Jonathan Sackstein, partner with PwC's Retail & Consumer practice. Sharing data to help retailers hone product assortments as finely as possible -- in some cases, down to the store level -- as opposed to the much broader regional approaches of old, is a major focus for many, Sackstein told Marketing Daily.

At the same time, the existing trend for CPGs to look to emerging markets for growth has taken on a new urgency. "Looking to emerging markets for growth has been true for years, due to the maturation of the U.S. and Western European markets, but the lost capital as a result of the Baby Boomers' more conservative spending habits and consumers' general emphasis on 'value,' as defined in many different ways -- have made emerging markets a top-priority focus for companies of all sizes, not just the largest ones," says Sackstein.

While overseas markets for CPG goods contracted somewhat during the recession, the growing middle classes, with growing income -- in China, Russia, Brazil, India and Southeast Asia, in particular -- offer huge growth opportunities going forward, stresses Sackstein.

Furthermore, as the report points out, companies hoping to compete in these emerging markets have to move fast to secure capital and get in early to ensure that their products are available/visible as these middle classes form attachments to products/brands.

And as in the U.S., CPGs will need to be very sophisticated about targeting their emerging-market strategies to specific consumer groups -- starting with understanding the "tremendous differences in regional needs and preferences" within specific regions, says Sackstein.

To leverage emerging-market opportunities effectively, CPGs will also need to understand the greatly varying and rapidly changing supply-chain, regulatory and other operational factors in specific regions, he adds.

"The saying 'Think globally but act locally' has never been more relevant or critical," Sackstein sums up.