NEW YORK, NY--(Marketwire - November 11, 2010) - For years, experts in the consumer packaged-goods (CPG) industry have been predicting that most CPG categories would narrow and be led by one or two national brands. They believed that in a consolidating market, winning companies would be defined by scale: that bigger is better.

This strategy idea is widely held and intuitively appealing, but may be very dangerous to follow. While categories are consolidating, other categories are fragmenting. Between 2004 and 2008, the top two or three brands in a given food category were just as likely to lose market share as to increase it.

Gaining Tactical Advantage Requires Knowing Which Markets Are Consolidating and Which Markets Are Fragmenting -- and Having a Coherent Strategic Response

That's the message from Booz & Company Partners Paul Leinwand and Steffen Lauster. Mr. Leinwand is co-author of the recent Harvard Business Review article "The Coherence Premium" and the forthcoming book The Essential Advantage: How to Win with a Capabilities-Driven Strategy (Harvard Business Press, December 2010).

"Consolidation and fragmentation are driven by different dynamics, so CPG companies first need to understand the dynamics in their chosen category," according to Mr. Leinwand. "Then they need to build appropriate capabilities to win in that market."

"In consolidating categories, scale matters, including distribution, mass advertising, and control of shelf space," says Mr. Lauster. "Fragmenting categories are driven by customer engagement and require different capabilities, like innovation, R&D, and a highly differentiated brand position."

A New Competitive Mindset Required for CPG Companies, Focused on Coherence

Mr. Leinwand and Mr. Lauster believe that once companies know the dynamics of an individual category (i.e., consolidating or fragmenting) they will be better positioned to leverage the right capabilities for that market, and deliver value and earn loyal customers. They cite three reasons why scale is paying diminishing returns in many categories:

1. Media fragmentation and the impact of new media.
2. Outsourcing of key capabilities.
3. Consolidation and evolution of the retail industry.

They offer multiple examples of consolidating and fragmenting CPG categories:

  • Consolidating: salty snack foods, carbonated beverages, batteries, baby food.

  • Fragmenting: coffee, pasta sauce, vodka, balsamic vinegar, toilet paper, shampoos and conditioners, premium chocolate.

Coherent Strategic Response is the Key to Success in All CPG Categories

The authors argue that coherence is key to success in both consolidating and fragmenting markets. They define coherence as having three key components:

1. Way to play: How are we going to face the market and create value for customers?

2. Capabilities System: What do we do well that customers value and competitors can't beat, and how do these capabilities work together in a system that can be leveraged over and over?

3. Product & Service Portfolio: What are we going to sell and to whom? Is every product and service offering aligned with the capabilities system and way to play?

As measured by shareholder return, coherent CPG companies that focused on a narrow product portfolio and capabilities system (e.g., Church & Dwight, Alberto Culver, NuSkin Enterprises, Tupperware, and Kellogg) vastly outperformed large, diversified CPG companies like Colgate Palmolive, Kimberly Clark, and even heavyweight Procter & Gamble.

Best Approaches to Consolidation and Fragmentation

Given the shifts in the CPG sector, Booz & Company analyzed how coherent companies are responding to consolidating and fragmenting categories. For instance...

  • Frito-Lay used coherence to succeed in a consolidating industry: The company streamlined its product portfolio and used its world-class distribution system (which reaches every kind of outlet from supermarkets, gas stations, vending machines, corner bodegas) to apply pressure to the competition. Within a decade, Frito-Lay's two biggest competitors, Borden and the Eagle Snacks division of Anheuser-Busch, exited the market for salty snacks, and Frito-Lay's category share in the U.S. jumped to 55 percent from 38 percent.

  • Alberto Culver, recently acquired by Unilever for US$3.7 billion in cash ($37.50 /share), is winning in a rapidly fragmenting market by focusing on just two categories: skin and hair products. Alberto Culver's capabilities system includes mass marketing of niche salon products, premium branding, international distribution, and disciplined R&D. In the hair styling category, which is even more fragmented than hair care, Alberto Culver's TRESemmé brand pushed past two far bigger companies (L'Oréal's Garnier and Procter & Gamble's Pantene) in 2008 and 2009. And the company recently acquired the second largest skin care brand in the United Kingdom. It had a valuation multiple in the top range of its peer group.

"In consolidating categories, customers often make choices on price and convenience," says Mr. Leinwand. "In these markets, a meaningful difference in quality is absent and customers aren't concerned with what a non-differentiated brand says about their own image or sophistication."

"In fragmented categories, mass and price usually don't matter as much as perceived quality and the customer's emotional connection to making a product choice," says Mr. Lauster. "It typically isn't the players with scale that are successful in grabbing the high end of these markets."

Mr. Leinwand and Mr. Lauster are available to discuss CPG dynamics in greater detail. For instance, they can elaborate on:

  • The role of consumers and retailers in driving consolidation and fragmentation.
  • Why scale matters more in emerging markets than in developed markets.
  • How merger and acquisition strategy can help CPG companies compete.
  • How CPG companies themselves can influence category dynamics.

About the experts
Paul Leinwand ( is a Partner in Booz & Company's global consumer, media, and retail practice. Based in Chicago, he serves as chair of the firm's Marketing Advisory Council. He supports clients undertaking significant strategic opportunities, and in building capability systems in marketing innovation, and customer management.

Steffen Lauster ( is a Partner with Booz & Company in Cleveland. He specializes in strategy development and revenue management initiatives for consumer products companies in the U.S. and Europe.

About Booz & Company
Booz & Company is a leading global management consulting firm, helping the world's top businesses, governments and organizations. Our founder, Edwin Booz, defined the profession when he established the first management consulting firm in 1914.

Today, with more than 3,300 people in 61 offices around the world, we bring foresight and knowledge, deep functional expertise, and a practical approach to building capabilities and delivering real impact. We work closely with our clients to create and deliver essential advantage. The independent White Space report ranked Booz & Company #1 among consulting firms for "the best thought leadership" in 2010. 

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