Conundrum2p0

This is not your typical 4 quadrant chart. But it does reflect the growth challenge that faces the consumer packaged goods (CPG) industry.

Rapid expansion of the middle class in developing countries should present a windfall for consumer goods marketers. Unfortunately, harvesting this opportunity has proved more difficult than many imagined.

While the going for companies with legacy footprints -Unilever, for example, in Commonwealth countries- has been somewhat easier, most European and US CPG firms have run into real structural barriers trying to plant their brands in fertile developing market soils.

Lack of infrastructure and organization certainly present challenges. Less sophisticated retailing channels are harder to service and support. But the biggest problem is surmounting the high cost structure that comes with building a product portfolio that adequately serves emerging markets.

Organizing to sell large quantities of low to mid priced goods, often in smaller unit sizes, represents a major “trade down” in profitability for European and US CPG firms.

These firms have developed highly efficient money machines that sell large volumes of large sized and relatively high priced goods in their home markets. As growth in their home markets slowed, these firms goosed their profits by “tiering up” their portfolios. They added many “new and improved,” higher priced variants to their line-ups.

These product portfolios simply don’t match the consumer and retail needs of the developing world. The investment required to manufacture, sell, distribute and promote satchels of detergents, single ice-cream bars or trial size shampoo bottles diminishes the overall profitability of the firm.

Eventually, the consumer goods markets in many of these emerging countries will mature. But waiting is not an option if you want to establish a brand in the minds of consumers.

How long can a CPG firm accept margin-dilutive businesses on the hope of a bright future?

The fickle pundits on Wall Street are not known for their patience.