As personalization increases, brands will find growth opportunities in niches rather than mass markets.
Growth looks small these days. Most large, multinational brands are finding it difficult to grow not because growth is unavailable, but because when growth looks small, big brands struggle to see it. This shift is here to stay.
An analysis by the Financial Times Stock Exchange reported that profits for its more than 700 global firms located in developed markets declined by a jaw-dropping 25% in the five years prior to 2017. Yet at the same time, profits of smaller, national firms rose by 2%. Admittedly, profits aren’t the same as revenue, but this pattern of profitability is illustrative of the shift in the marketplace.
More to the point, an analysis by the competitive intelligence firm Craft found that the combined sales of Fortune 500 firms dropped from 2014 to 2016, largely due to poorly performing large companies, which have a disproportionate influence on aggregate results. When individual firms were broken out and assessed, nearly twice as many grew as shrank. Growth was occurring, just among the smaller firms, not the large ones.
From 2013 to 2015, Kantar Worldpanel tracking of fast-moving consumer goods (FMCG) categories worldwide showed a shift of nearly two points of aggregate share from global brands to local and regional brands. Boston Consulting Group has estimated that from 2011 to 2016, the shift of share from large to small or midsize FMCG firms in North America totaled $22 billion in topline sales, and Europe experienced a similar shift.
The mounting clout of local brands is visible in the WPP/Kantar Millward Brown BrandZä Power Index as well. For example, the power of local Chinese brands has been growing. In 2016, for the first time, the average power of local Chinese brands exceeded that of multinational brands; 15 domestic brands are now in the Chinese Top 100 ranking, up from seven in 2010 and just one in 2006. Similarly, in India from 2014 to 2017, there was an increase in the number of local brands in the Indian Top 50.
Across the board, the big propositions that dominated the marketplace in years past are now behind the curve when it comes to the future. Certainly, big firms still earn most of the revenue, but they no longer dominate growth opportunities or command much, if any, of the growth. Smaller brands are producing most of the dynamism that is churning the marketplace. Globally, this is compounded by the fact that in emerging markets—which will account for the bulk of growth in future demand—the consumer preference for smaller brands over big brands jumped from 46% in 2016 to 54% in 2017, according to Kantar Consulting Global MONITOR.
Shifts in demand are not new; companies have dealt with them successfully before. But this time, shifts in demand are part of an historic pivot in the marketplace. Big, established companies have built their position by mastering a particular confluence of macro forces, consumer lifestyles and competitive situations, but those forces have shifted, and lifestyles and market demand have changed as consumers have adapted to new conditions. Big companies entrenched themselves in the old environment, embedding their outlook and operations to monetize it at scale, but competitors have moved into this evolving configuration and found growth outside the boundaries of the previous environment.
When change is contained and uncomplicated, big companies can migrate in measured ways that sustain their dominance through the barriers to entry they have erected. But change doesn’t look like that anymore. Incumbents now find themselves a step behind new, smaller competitors that move with greater agility and speed. The advantages of size have been lost to outsourced production, expanded retail options and digital marketing channels.
Going forward, mass markets will not be available. Every brand knows this, but the imperative of scale keeps big firms from following the ongoing shifts in demand. The first requirement of growth is to identify an available market large enough to scale. Conventional metrics favor a big, cohesive opportunity, so the comfort zone in which most companies have operated is to scale mass markets into big brands. Even strategies like segmentation that divide mass markets into smaller pieces are just tools to give companies manageable entry points into mass markets.
Nowadays, growth opportunities are coming more from the edges than the center. In accordance with the insights surfaced by Kantar Worldpanel and others such as Byron Sharp (author of How Brands Grow), companies are adopting penetration strategies on the notion that brands are built by growing the number of buyers, not by deepening the loyalty of buyers. Inherently, this means achieving scale by adding up small, disparate niches.
The standard operating procedure of scaling one product for everybody is not transferable to a marketplace that requires customization for niches, particularly personalization for niches of one. Scale is still needed, but the available market will be an ensemble of individualized, granular pieces, not a single, unified base. Success will come from scaling small niches into big brands.
Some experts have characterized the scaling of niches as a “conglomerated niche” strategy in which production, delivery and marketing have to be done for an aggregation of small batches. Companies that have begun to make this transition are finding that it requires relocating production facilities closer to buyers, digitizing supply chains, utilizing predictive technologies, adopting faster learning systems that guide production and employing greater flexibility in procurement and hiring. In effect, a whole new way of working.
Brands will have to master “reverse segmentation,” which is to say, putting lots of small things together rather than breaking one big thing apart. In the past, mass markets were segmented from the top down into smaller pieces. Going forward, niches will have to be aggregated from the bottom up into bigger pieces that give companies a sizeable enough platform on which to scale niches into big brands. Many of these new segmentations will be problem-specific, and all of them will require rich, integrated data sources.
Companies that are growing nowadays are not encumbered by the weight of expensive assets or large investments; they can innovate and adapt at speed. They thrive by trying new angles. This is the only way to win at a small scale.
Big brands are lumbering giants that have always relied on a large footprint to keep erosion and irrelevance at bay. In today’s environment, big brands must make a conscious effort to fight off the risk aversion inherent in large organizations. Innovation scholar Clay Christensen once said that mustering the resources it takes to compete outside a company’s comfort zone is like flapping one’s arms in an effort to fly because it runs contrary to the ingrained ways in which big companies work. But big brands have to do better. Otherwise, they will not measure up to the challenges or enjoy the opportunities of a marketplace in which growth looks small.
J. Walker Smith is chief knowledge officer for brand and marketing at Kantar Consulting and co-author of four books, including Rocking the Ages. Follow him on Twitter at @jwalkersmith.