Consumer Goods Industry: Strategic Trends and Issues


The consumer goods industry can be characterized by companies selling and or manufacturing the following items: clothing; cosmetics; household items; electronics; beverages; drugs; food products; etc. In the manufacturing sector one can include key players like PepsiCo Colgate-Palmolive, and Philip Morris. Retail giants on the other hand include Wal-Mart, Amazon, and Arcandor. For many years these companies enjoyed phenomenal growth in the early phase of the 21st century they faced challenges that could either make them stronger or force them to go under. Moreover, in 2009 the global financial crisis as well as the uncontrollable effects of globalization is hurting these companies. Thus, they were forced to innovate, to move into emerging economies and to find ways to streamline their operations.

Economic Downturn

There could be no denying it and there is no way that one can hide from the negative impact of the global financial crisis. Banks are reluctant to lend money but more importantly consumers are wary of spending. This has created a two-punch combo that made many companies to tailspin in a downward financial crisis. There is no need to elaborate here that many established companies and financial organizations were hit and went down in flames because they were unable to anticipate the problems up ahead. These companies also filed bankruptcy or asking their respective governments to bail them out of a sinking ship because they erroneously believe that the good times will continue to roll.

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These problems and examples of how companies mismanaged their resources can be used as a wake-up call for others. It can be said that many key players are already on the move and doing everything they can to increase their profit and to strengthen investor confidence. Still, many key players are dealing with the impact of bad economy and even before the financial turmoil of 2008 became prominent in news headlines many of the key players in the consumer goods industry already felt the heat of the negative effects of globalization and intense competition.

One good example of this phenomenon is Amazon. As the say numbers do not lie and in Amazon’s case one can get a better understanding of how it has struggled by comparing data from 2005 to 2008. In the span of four years Amazon revenues more than doubled but there is fear that it will not be as profitable as in the past years. In fact, in order to keep up with competitors Amazon was forced to reduce its profit margins. Operating costs are escalating too, yet this is just one of the many problems that this giant retailer is facing. For one its competitors are more than capable of eating into its market share. Still Amazon has defied expectations considering that this is supposed to be gloomy year for retailers. Amazon was able to survive because of innovative solutions and strategies that enabled it to increase sales.

Aside from Amazon there are other key players who are feeling the pinch of financial downturn. Key players like Colgate-Palmolive, Uniliver, and Procter and Gamble took a different approach and instead of increasing sales they decided to protect their margins and increased their prices. One can say that these three retail giants were forced to behave this way due to factors beyond their control such as the decision of many consumers to save rather than spend. It is already a foregone conclusion that revenues will drop and it therefore made sense that these companies decided to increase prices.

Innovation and R&D

Since the global financial crisis had affected every major business group in the planet the best way to weather the storm and to prepare for a turnaround is to invest in Research and Development and hope that innovative products can be produced to gain a competitive edge over others. In the case of Philip Morris a key player – in the business of selling cigarettes – the company that is popular worldwide due to its Marlboro brand of nicotine-filled products is experiencing two sets of problems that it has to address differently but can be solved with the expert use of R&D. Philip Morris is not only experiencing escalating costs but also the fact that over the years it has faced legal problems due to the idea that cigarettes can cause cancer.

Philip Morris responded not only by going global and to penetrate markets in China and Russia but also made it a point to invest in research, hoping to develop innovative products. As of this time there are reports that Philip Morris is in partnership with a European-based research group that will help them create “smokeless” products. This is perhaps the result of a collaboration to understand the full impact of cigarette smoking and smoking related illnesses. Aside from pouring money into research a common trend among key players in the consumer goods industry is to establish businesses in foreign countries and opening new opportunities for the said companies as well as local players.

Emerging Economies

Globalization is here to stay. It has become an accepted fact that in order for a giant retailer to survive these tough times, there is a need to expand. There are three countries right now that are very attractive to investors and business leaders. These are China, India, and Russia. At this point Russia is in a slump but it will not be difficult to analyze the immense potential of this country. It has emerged as one of the most exciting foreign market in recent decades and because it has significant oil reserves one can expect Russia to be booming once again. Before that will happen key players must think in the long term. Wal-Mart is in serious negotiation to buy Lenta a supermarket chain in St. Petersburg.

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There is no need to fill in the details about China. The only thing that business leaders need to know is that there are more than 1 billion people in this country. As a result Philip Morris secured a partnership deal with the China National Tobacco Corporation. If Philip Morris can sustain its drive to establish a name in China then it can expect an increase in sales in the coming years. It must be pointed out that together with India, Banladesh and Vietnam, Philip Morris decision to move into these territories will give them a chance to take a slice of 40% international cigarette consumption. Those are big numbers and Philip Morris does not need to spread far and wide, by only focusing on these four it can already establish a significant global presence.

In India the same thing can be said, a country with a retail market of US$511 Billion in 2008 will definitely attract investors. For key players struggling to make a profit in their traditional markets it is time to expand. Companies like Carrefour and Metro AG are already drawing up plans to move into the retail market. While the retail market is worth hundreds of billions of dollars, India is a nation of small shopkeepers and this is a challenge that giant retail companies could not afford to miss. One could just imagine the profit that can be made if an organized group will come in and with their streamline operations can cut costs while at the same time drive up revenues.

Analysis

Key players are doing everything they can to survive the tough economic times. They are moving into emerging markets. They are expanding their operations. They are investing in research and development. They are constantly innovating. But instead of becoming more stable these groups are becoming more unwieldy. For some the investments are risky as can be seen by the speed in which Amazon buy companies that are not yet proven cash cows. Still there is no choice but to go forward. These companies fear being caught stagnating rather than doing risky business decisions. Thus, one can expect this trend to continue.

It is also interesting to point out that the main goal for key players is to establish their presence in regions where they used to have no influence. This will create both positive and negative consequences. For business leaders heading these conglomerates it would mean salvation and the solution to sagging profits. For their investors this is a great solution that will ensure sustained growth in the next few years. But for the local players, the local businessmen who will be affected by their presence no one can really predict if they can survive the onslaught. For instance India is a land of small shops. The coming of a retail giant like Wal-Mart can be a disastrous event for many.

On the other hand this must be the expected outcome of globalization. The only problem is that companies with deep pockets may have a better chance of determining their future while small companies are at the mercy of global forces that they could not even begin to comprehend. The best solution perhaps is to be proactive and to anticipate these changes. The respective local players must work hand-in-hand with their government to mitigate the risks of an invasion by the key players. For many it has begun but for some the coming of European and American firms can change their lives forever.

References

Rangan, S., & Adner, R. (2001, Summer). Profits and the Internet: Seven misconceptions. Sloan Management Review, 42(4).

Shapiro, C., & Varian, H.R. (1999). The art of standards wars. California Management Review41(2).

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Tallman, S., & Fladmoe-Lindquist, K. (2002, Fall). Internationalization, globalization, and capability-based strategy. California Management Review, 45(1).

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