Despite the enormous buying clout of mega-merchants like Wal-Mart, Target and Carrefour, fast-moving consumer goods (FMCG) companies have actually outperformed retailers in the capital markets over the past decade. From 1994-2003, the mean annual total return for the top 25 U.S. and European FMCGs was 11.8% compared with 9.6% for the top 25 retailers, a nearly 25% difference. Consumer products makers also earned 74% of the 50 companies’ combined economic profit over that timeframe.1
How did they do it? Through massive cost reductions and disciplined product portfolio pruning. For example, Unilever, the Anglo-Dutch consumer goods giant, has shuttered more than 100 factories, cut its workforce by 33,000 and pared its number of brands from 1,600 to 400 since 2000.2 Procter & Gamble, Cadbury Schweppes and Nestlé have gone through similar cost-cutting and portfolio restructuring initiatives. The products and brands that survived have the strongest consumer franchises and the largest appeal to retailers.
Today, however, as investors look increasingly for top-line growth, many consumer goods makers seem to be reversing themselves by adding costly new products to their portfolios. In addition to developing line extensions for product categories they already participate in, FMCGs are increasingly introducing new products into "adjacent" categories – product categories that are similar to the ones they already cater to and that are often sold in the same supermarket aisle.
For example, Kraft Foods’ Nabisco, known for its cookies and crackers, rolled out a low-fat wheat chip, Ritz Chips, in 2003 to steal sales from the potato chip aisle. More recently, the makers of Huggies (Kimberly-Clark) and Pampers (P&G) have introduced lines of toiletries for babies and small children to leverage their diaper franchises. Why the focus on adjacent markets? By moving into neighboring categories, these companies and others have sought to significantly reduce the risk of innovation by launching new products that are close to their core businesses – products they think can capitalize on their brand names, consumer understanding, distribution systems and shelf space access.
While the wheat chips and children’s toiletries appear to have been successful introductions, our experience in advising several FMCG companies suggests that adjacencies are not a panacea for sluggish growth. They often disappoint. Consumer goods makers frequently overestimate their knowledge of the adjacent segments and the potential advantages they bring to the new product category – i.e., the value of the brand, distribution system and other assets. Think of Dryel, P&G’s home dry-cleaning kit. After a promising introduction in 1999, sales of Dryel plunged in its second year once its promotional budget dried up and rival kits from Dial and Clorox hit the market.
In other cases, consumers do not benefit enough from the company’s entry into a category because the new products lack superior features or fail to provide superior value. Two classic examples: BenGay aspirin and Bausch & Lomb mouthwash.
Furthermore, in almost all cases, consumer products companies grossly underestimate the response of competitors, which quickly introduce a rival product of their own, cut prices or increase spending to protect their turf – all of which erode margins and shrink the profit pool for everyone in the category. One FMCG that recently recognized this and made the smart decision to scrap a costly launch in the UK was Gillette with its Gillette Complete men’s skincare line.
With new entry into adjacent categories increasingly in vogue (and admittedly a number of recent successes to point to), attention is being diverted from other, potentially more lucrative opportunities for growth. Leading consumer goods companies know this and pursue multiple avenues simultaneously. The breadth of options can be illustrated by the matrix in Figure 1.1
Along the horizontal dimension, we look at the relatedness of a business to the company’s existing businesses. In-market growth is about getting more new or existing products into categories and to consumers already served. Adjacent growth represents entry into reasonably related products and services to existing and/or new consumers. New platforms – also sometimes referred to as "far from the core" or "unrelated diversifications" – are products/services and/or consumers that are not at all similar to those of the company’s current businesses.
