Expanding Perspectives from Commodity to Differentiated
Creating a disciplined growth strategy framework will allow your leadership team to develop a clear plan for where to grow, how to grow, and why further investment makes sense.
The organic produce market, specifically fruit, provides a good example of the four important components for a sound growth strategy. These elements build upon and are informed by one another.
The four growth strategy framework elements are:
- market frame of reference and market “hot spots”
- customer segmentation and target selection
- competitor analysis, areas of leadership and competitive insulation
- 3-to-5-year brand roadmap with products and services
1a. Growth Strategy Framework: Market frame of reference and market “hot spots”
The first and most fundamental question is, “What is the relevant market frame of reference?” Taking a page from Goldilocks and the Three Bears, some market frames of reference are too broad, some are too narrow, and some are just right.
For instance, with organic produce, market frame of reference options include:
- A broad frame of reference is all food that is eaten for any meal ingredient, side dish, main dish, or snack, including both organic and conventional choices (i.e., not organic).
- An alternative frame of reference focuses on snacks only, or healthy snacks, still including conventional and organic options.
- A relatively narrow approach is all fruit, both conventional and organic.
- The narrowest frame of reference might focus on a particular type of fruit, for instance all berries or even all specialty fruit (i.e., less popular fruits like kiwis).
There isn’t one correct choice for all brands and situations. For instance, if the leadership team has a portfolio of fruit brands, they will likely choose the “all fruit” frame of reference. “All fruit” is a good choice for a company like Sun Pacific, which has multiple fresh fruit brands, including Cuties and Mighties.
Produce companies that offer more processed choices that compete with the broader healthy snacks arena include parts of The Wonderful Company portfolio, e.g., POM Wonderful drinks and fruit cups, Wonderful Pistachios and Wonderful Halos. Del Monte also offers a number of processed healthy snack choices with its Del Monte fruit cups.
While consumers consistently claim to want to eat more healthy snacks, at times they may not be willing to go to the extra effort to cut into, peel or otherwise prepare the produce.
The popularity of value-added produce, like fresh cut fruit, pre-cut veggies with dips, and prepackaged salads is growing.
Another example outside of the produce realm is Velveeta. In Velveeta’s case, the narrow frame of reference for the core product is processed cheese loaf. This is too restrictive to allow significant growth strategy, as Velveeta already dominates the processed cheese loaf market.
For Velveeta, a broader frame of reference that allows for growth is cooking cheese used for meal preparation. Today, Velveeta brand’s product line goes well beyond loaves, to include Slices, Shreds, Sauces and more complete meals such as Shells & Cheese, Cheesy Bowls, Skillets and more.
Market Frame of Reference Pro Tips:
- Explore several options for the frame of reference before selecting the best fit for your brand’s growth strategy.
- We’ve also seen that some leaders prefer the phrase “market landscape” to describe idea of the market frame of reference. In that case, substitute landscape if that is a better fit.
1b. Finding the Hot Spots in the Market
We also recommending carefully examining the growth and underlying demand drivers supporting growth in the market for hot spots. Hot spots are areas where the market is growing rapidly, and it is likely that ongoing demand drivers will fuel future growth.
IRI reported the 10 largest produce categories by dollar sales in 2021 as a mix of fruits and vegetables. The fastest growing in dollars from 2020 to 2021 overall were berries, melons and salad kits, all at more than 11% sales growth. Among the largest categories, grapes and apples also reported sales growth. Meanwhile, tomatoes, peppers, and potatoes declined, while bananas and peppers were flat.
Another produce category that saw growth during the pandemic is citrus. The citrus category includes popular brands like Cuties and Halos, navels, lemons, Sumos and others.
Mandarins showed strong performance in 2020 and 2021 overall. Dollar sales of mandarins grew:
- 7% in 1st quarter 2020
- 8% in 1st quarter 2020
- 14% in 3rd quarter 2020
- 16% in 4th quarter 2020.
Mandarins fell 1.0% in 1st quarter 2021, to return to 14% in 2nd quarter. In total, Mandarins grew 43% in dollars from June 2020 to June 2021. By comparison, the consistently-growing berry category was up 11%.
Looking at the fresh fruit market, there are several hot spots, including organic, branded and value-added choices that deliver convenience. The consumer demand for convenience in fresh produce can be seen in the growth of salad kits, compared with lettuce.
Organic Produce Hot Spot
Organic is on a long-term growth trend, with organic produce commanding a higher price than conventional in many situations.
Organic produce continues to grow, up 5.5% in dollars for the year 2021, to $9.2 billion (out of a total market of $76.8 billion). Organic produce growth compares with conventional (non-organic) dollar sales flatness– a slight growth of 1.9%.
Several fruit categories that we had data for saw organic growing faster than the total category.
- Organic berries grew 14%, compared with 12% for the total berry category
- Organic apples grew 6%, compared with 5% for total apples
- Organic bananas grew 4%, compared with 1% for total bananas
While organic salad kits only grew 3%, compared with total salad kits at 12%, organic now represents 48% of all salad kit dollar volume.
Organic has an estimated 18% dollar share of all berries, 16% of apples and 12% of bananas. The overall organic dollar share across produce is approximately 12%, while the unit share is 7%, demonstrating the price premium.
According to IRI, packaged salads (+$3.11/lb.) and berries, including blackberries ($3.01/lb.), raspberries ($2.52/lb.) and blueberries ($2.18/lb.), commanded significant price premiums over conventional. Organic bananas had a relatively small price premium, at $0.15/lb.
Today, some fresh fruit categories are much more developed for organic, while others are less developed. This raises questions:
- Do consumers care less about organic in certain categories? If so, is there less demand? ,
- Or has supply not been possible?
It looks like many farming organizations are betting on more demand for organics. The California Agricultural Organic Report 2019-2020 finds organic production has increased 44% from 2014 to 2019, with total organic produce sales of $10.4 billion in 2019, made up of $4.1 billion in producer, $5.2 billion in handler and $1.1 billion in processor revenues.
Top categories by California-harvested organic acres are lettuce and spinach (consistent with high penetration of organic in packaged salads), wine grapes, citrus, almonds and berries. This suggests that there will be more organic citrus in the market.
Branded Produce Hot Spot
Branded is another hot spot in produce. Branding has steadily increased in the fresh produce category over the years. NatureSweet tomatoes, Cuties, Halos, enormously delicious Sumos and Mighties all provide examples.
Branded produce grew faster than unbranded from 2012 to 2016, and branded was approximately one-third of all produce.
As of the 2017, 72% of the $1.1B fresh produce snack segment was branded. Branded fruit (+11%) grew faster than branded vegetables (+7%). Branded fruit (+11%) grew, while unbranded fruit declined (-4%).
Pablo Rivero, Fresh Del Monte’s vice president of marketing for North America, provided perspective on fresh produce branding:
“Fresh produce sections are one of the first things a consumer will see upon entering a store, ultimately setting the tone for the shopping experience. Fresh Del Monte recognizes the importance of branding and promotion, utilizing both tactics to distinguish our fresh fruits from the rest. We feel branded products allow Fresh Del Monte to live up to its name. Any fresh produce with the Del Monte logo ensures product innovation, quality and freshness that has been instilled over the past 125 years.”
Value-added Produce Hot Spot
Value-added produce has also been on a long-term growth trend, meeting consumer needs for convenience. In 2021, value-added produce grew 3.5%, compared with 1.9% for conventional. FMI estimates that value-added represent 12.5% of all produce.
Packaged salads deliver a salad in less than five minutes, compared with lettuce alone. In our household, the young adult family members favor the Caesar salad, and even eat extra helpings, something that did not happen with traditional home-made salads. As a consumer, it’s also nice to not see the waste of the lettuce going bad, as the whole packaged salad bag is typically consumed in one meal.
In fact, market data show that the core consumers for value-added produce are younger shoppers. Louis Scudere, principal at Chicago-based Riverbend Retail Consulting says,
“Many in the Millennial group aren’t used to cooking from scratch. There is a new generation who are used to eating at fast-food restaurants but haven’t during the pandemic… They are learning to cook and using value-added produce for two main reasons. First, they are not that familiar with using knives to peel and cut produce. Second, value-added produce minimizes the waste they have when buying conventional produce.”
Beyond packaged salads, other value-added categories vary from retailer to retailer, including:
- Cut fruit
- Sliced peppers and onions
- Butternut squash
- Broccoli florets
- Cauliflower florets
- Broccoli and carrots
After gathering the data on the current market hot spots, it’s critical to assess whether the growth is likely to continue. This assessment, called a demand drivers analysis, may look at factors such as consumer demographics and lifestyles, demand for convenience and portability, regulation and more.
And, the hot spots may work together– for instance, driving growth in organic value-added products, such as organic packaged salads.
Market Hot Spot Pro Tips:
- Require that the market analysis reveal several promising areas for growth for the brand. If none are found, either the analysis is not sufficiently detailed, or the market is not promising, or the frame of reference is too narrow.
- Explore whether the hot spots acting together present opportunity, e.g., value-added plus organic plus branded.
2. Growth Strategy Framework: Segment customers and select targets
In categories like fresh produce that are treated like commodities by brands and retailers, there is a tendency to skip over the discipline of identifying the customer target. Customer segmentation allows your brand to define who specifically it is focusing on for its products and services.
Commodity players may decide they are for everyone, and resist choosing a target. This generalization is a mistake, that leads to a watered-down approach of a little something for everyone, and nothing great for anyone. This decision reinforces that the idea that the product is an undifferentiated commodity, in the eyes of its own leadership team, as well as the market.
Customer segmentation is essential, and even more insightful when taken to the next step with need states to define strategic growth opportunity areas.
According to a Nielsen study, over half of all US households are already buying organic produce.
A sustainability-focused customer segmentation study found 19% of US households fall into the top two eco/natural segments, which are the core consumers for sustainable products, including organic produce. As might be expected, these consumers cumulatively contributed 27% of all fresh food spending, an index of 142, which is higher than their general food and beverage spending index of 121.
These two core sustainability customer segments are called “True Believers” and “Enlightened Environmentalist.”
- True Believers (10% of households) are “sustainably engaged, wealthy young families who will switch stores for sustainable products.”
- They take pride in choosing natural/organic products. It is a statement of their identity.
- These shoppers look for natural and organic products when shopping and are willing to pay more for the benefits they want.
- They claim to read product labels, shop online, and about 25% of them research online at manufacturer websites and social media.
- These consumers can be “won” by messaging about the environment, natural/organic and sustainability. They can be reached through social media, in-store QR codes and fresh foods e-Commerce.
- Enlightened Environmentalist (9% of households) are wealthy older adults who are committed to supporting the earth with their “choiceful spending.”
- Passionate about organic, they choose organic because of its environmental impact and have been making this choice for more than six years.
- They look for eco-friendly products and are willing to pay for the benefits. They seek out recyclable and biodegradable packaging as well as minimal packaging.
- They also claim to read product labels and look for products with seals and certifications on the package. They get product information in more “traditional” ways, such as newspapers, magazines and doctors.
- They can be reached with in-store execution and programs that highlight awards and certifications.
While there are five other segments of consumers in the market, they are either not interested in sustainability (i.e., Resistant Non-Believers, Struggling Switchers, and Indifferent Traditionalists) or less willing and able to pay for eco-friendly choices (i.e., Strapped Seekers and Healthy Realists).
Because these consumers don’t value sustainability benefits or are unable to pay for them, they are consumption targets who will only buy organic from time-to-time. They should not be the focus of innovation or product development for a brand that is concerned about sustainability.
While its focus is not on sustainability, a produce brand that clearly selected a target and made it a focus is NatureSweet tomatoes, with their target customer, Ana.
Customer Segmentation Pro Tips:
- Resist targeting all consumers and develop or leverage an existing customer segmentation study to segment the relevant market.
- Identify where your brand resonates today, and where the competitors are getting traction. Develop a set of criteria to assess the market segments and work together as a leadership team to choose clear customer segmentation targets.
3.Growth Strategy Framework: Competitor analysis
The market assessment should include category competitors. One factor that many organizations consider is the market share that they currently hold in the category or that they expect to be able to capture.
While some brands and organizations may choose to enter very large markets where they can only capture a very small share, many larger CPG organizations have strategic guidelines that require them to be among the top three dollar market share leaders in order to invest ongoing in that market. If they are unable to attain a market leading position, they will exit that business. In many cases, the requirement is even more stringent, to be number one or number two.
An alternative to the market leadership requirement may be to compete as a private label producer, with a significant share of the overall market’s unit volume, at a lower cost and price. Most large CPG companies eschew the private label strategy as they are focused on building brands and capturing pricing for the value of those brands.
For example, 90% of Clorox’s products ranked first or second in their categories. While recent sales have slowed, Clorox category market share was high:
- 70% for charcoal (Kingsford)
- 61% for bleach (Clorox)
- 52% for water filtration (Brita)
- 50% for wipes (Clorox)
- 43% for premium trash (Glad)
- 26% for salad dressing (Hidden Valley)
- 24% for cat litter (Fresh Step)
- 21% for lip balm (Burt’s Bees)
To be sure, niche brands may co-exist with these large market leaders, owning a few points of market share. In a sufficiently large market, they can build a moderately-sized business, typically under $100 million in revenue.
Competitor Analysis in New Product Categories
In the case of a “new to the world” business, there may not be a clear existing category of competitors. Still, the new business will compete for the customer’s time and attention with the existing substitutes.
Category-creating ride sharing apps like Lyft and Uber fell into this designation of new-to-the-world prior to 2007. Before Lyft’s creation in 2007, the choice of an affordable, just-in-time private car service didn’t exist.
Notably, Uber dominates Lyft, with approximately 70% share, although it was second to market in 2009 and lagged on a number of service offerings. This is a fairly common pattern, where the first-to-market innovator is surpassed by a close follower.
Similarly, Airbnb, which was founded in 2008, is reported by Statista as the leader (sources differ) compared to VRBO, which created the category in 1995. While they are both in the short-term private vacation rental industry, Airbnb and VRBO each have a distinct brand strategy.
Competitor Analysis Pro Tips:
- Take a clear-eyed look at whether your organization can be a market leader. If you are not a market leader, identify how you will be competitively insulated from larger players duplicating your products and services under their own name.
- Consider barriers to entry that may insulate your business from competition, such as capital investment, marketing spend to acquire customers, and/or patents.
4. Growth Strategy Framework: Defining the brand’s 3-to-5-year roadmap with products and services
With the understanding of the market, target customers and competitors in place, the leadership team will need to work together to define the strategic growth opportunity areas to mine, as well as the specific products and services that make up the three-to-five-year roadmap.
The time horizon will vary from industry to industry, with some like semiconductor fabrication requiring a 10-year investment, but most find a three-to-five-year horizon is a good fit. With the disruption of demand from COVID, many brands have focused even closer in on the one-to-three-year timeline, but we are seeing a return now to longer-term planning.
We previously explored the example of the three-to-five-year roadmap for products and services for Barilla. This looks at how the brand expanded from its focus on dried pasta to additional product categories, such as microwaveable meals over a five-year period. The brand also used Strategic Growth Opportunity Areas (SGOAs) to define its focus.
Strategic Planning Pro Tips:
- Hold workshops with the leadership team to align on the implications of the market, hot spots, customer segments and competitor analysis.
- Define a three-to-five-year roadmap for the brand, with specific initiatives, milestones and accountable leaders.
For more resources on growth strategy, customer segmentation, competitor analysis or brand strategy visit the resources page. Or, share your perspectives and join us at an upcoming office hours.
