The Rules of the Game have changed – Scale doesn’t work anymore!

Often companies don’t realize when the rules of the game are changed until it’s too late. The music industry cried foul and despite the suits failed to stop digital downloads and music transfers. Ride-hailing platforms changed the rules by allowing non-licensed taxies to compete with taxi-cabs.

The food business has seen its fair share of change, but like all large businesses they sought to achieve scale. Scale meant lower unit costs, marketing and distribution leverage with equally large customer groups, like supermarkets. This low price, high volume strategy might not work today.

Starbucks expanded to 25,000 stores knocking over independent coffee shops who could not compete for locations, cost competitiveness and advertising spend, but they too are finding growth a struggle. The rules have changed for them, as small independent coffee-roasters and coffee-shop owners respond to consumer demands for the “artisan” experience. Companies spend years building scale and efficiency and now find that strategy failing. Jim Stengel, former global marketing officer at Procter & Gamble put it succinctly when he said, “This is in my mind the biggest issue for global, scale-oriented CPG [consumer packaged goods] brands: How to compete in a post-scale economy?"

Walk down the supermarket isle, and you will notice the price-led strategy from established “big food companies”. If you are buying yogurt, cereal, biscuits or chocolates, the competition had typically been on price, and so companies focused on bringing down costs. Cost cutting plus consistency of taste is easiest when raw materials are consistent, that means adding chemicals and using synthetic sugars and flavors. Plus adding preservatives to extend the shelf life. For a lot of companies, this means the use of less “natural” products and more chemicals. The aggregate of this experience moves them further away from producing whole foods. None of this can be good for us, consumers. Large companies like Campbell are under threat from new organic, gluten-free suppliers, who have smaller production runs but are mushrooming all around the world. These companies don’t have the scale advantage yet, but they are riding a global wave benefiting from, in essence, a crowd-driven move for “natural products”.

In the recent Edge review of Malaysian-listed snack food manufacturers, most reported lower earnings. Hit by rising costs, reduced consumer spending and increased competition their margins are falling. For so long they have been competing on price and succeeded in driving manufacturing costs down, but now higher food costs and the depreciation of the Ringgit is hurting. Whilst they compete on price other higher priced, gluten-free, sugar-free products and farm brands are taking more shelf space. Doesn’t it look like the “Rules of the Game” are changing?

What can they do? Well, there are only two choices - seek other markets that offer higher price points or look to reposition their products and hopefully raise prices. Repositioning is going to be tough, but necessary since there is an evolution taking place in the food and consumer goods industry. There are more choices on the shelves and this change is being driven by segments of consumers crying out for more “natural products”. Thankfully for us all, the movement against GMO products has finally prevailed. Food manufacturers need to improve the product and evolve, or hang in there for a little longer or risk a Kodak-ending!

How senior management respond will depend a lot on their vision of the future, how their business will evolve and of course their value system. They need to display the type of leadership courage more commonly associated with successful entrepreneurs and not corporate executives used to making compromises as they build their professional career. There are exceptions, though, like Steve Easterbrook who was appointed CEO of McDonald's in 2015, after re-joining the chain as Chief Brand Officer in 2013. Easterbrook grew up in Watford, United Kingdom and worked at PriceWaterhouse, before joining McDonald's in 1993. In a major effort to present consumers with “better food choices” he announced the serving of 100% cage-free eggs.

This is where entrepreneurial management comes in. Easterbrook has seen the change that consumers want and is willing to take bold steps to reposition McDonald's. Entrepreneurs are not different people, they just do things differently! And they are exactly the leadership you need when the Rules of the Game are changing.