Packaged-goods manufacturers in the United States have great expectations. A McKinsey survey of 24 of the country’s leading manufacturers (see boxed insert, "The customer and channel management survey,") showed that they had average revenue growth targets of 7 percent for 1999, and Wall Street is projecting double-digit annual growth in earnings per share (EPS) over the next three years.

Given the difficult environment facing packaged-goods companies, these are ambitious targets. In most categories, consumption has grown slowly or not at all over the past five years and shows no sign of picking up. Meanwhile, retailers are becoming increasingly powerful. Domestic grocers are consolidating, which gives them the clout to demand larger discounts and slotting fees. They are also reducing their in-store inventories and the number of store employees available for resets and merchandising. Retailers based outside the United States are expanding their presence in it and demanding global—and typically lower—prices from manufacturers.

In addition, private-label and prepared foods are threatening the branded manufacturers’ long-established relationships with consumers. In 1994, 50 percent of all consumers had purchased a private-label food product during the previous month; by 1998, that figure had jumped to 88 percent. Indeed, private-label products now seem to be capturing all of the consumption growth in the consumer packaged-goods industry (Exhibit 1). Supermarket sales of prepared foods rose at a rate of 9.7 percent annually from 1992 to 1997 while sales of packaged groceries rose by only 2.7 percent.

Finally, the packaged-goods industry is being transformed by the emergence of new and different customers, including supercenters and retailers, such as Toys "R" Us and Home Depot, that in the past were not associated with food sales.

Do branded packaged-goods manufacturers have what it takes to sustain growth in such a difficult operating environment? Much of the industry’s recent growth in profits came from cutting costs—specifically, sales and supply chain costs. We believe that these expedients have now been largely exhausted, since there is nothing more to cut. Manufacturers must therefore grow internally by selling more goods more profitably—which in large measure means relying on the caliber of the sales force.

So the key question is whether today’s sales forces are equipped to help their companies grow in a sustainable way. To find the answer, McKinsey conducted its survey of the sales forces of leading packaged-goods manufacturers. Our studies of a host of packaged-goods companies suggest that new approaches to selling can secure margin improvements of up to 8 percentage points, as well as increased volume and market share. Yet the survey shows that current sales force practices at many companies will not produce such returns.

The obstacle is the way sales forces are perceived and managed: businesses should treat them as investments, not as cost centers. A cost mentality concentrates on minimizing expenditures. An investment mentality treats the sales force as an engine driving profitable growth. A company with an investment mentality measures the performance of the sales force by its return on investment and compensates salespeople accordingly. Ultimately, the biggest rewards will go to those companies prepared to break the mold. Merely adjusting the way the sales force operates, without changing its mindset, will not deliver substantial growth.

Companies that have the best position for sustaining growth use their sales forces to improve margins on their existing businesses, to increase their top lines by winning market share from competitors and expanding their categories, and to drive new business in the more distant future by experimenting with new approaches.

Improving margins

Over the past five years, the cost (as a percentage of sales) of maintaining a sales force has dropped by almost 1 point as manufacturers have focused on making their retail coverage less expensive. At the same time, network consolidation, improved information systems, and productivity initiatives have driven down the cost of logistics. By now, any margin improvements that could be made through these means will be minimal. The way to raise margins is thus to use current resources more productively.

Poor retail execution. One problem for packaged-goods companies is poor execution. More than half of the manufacturers in the McKinsey survey found that conditions in retail outlets—everything that might influence a customer’s purchasing decisions—failed to meet expectations at least half of the time. One senior sales executive noted that in the past two years, he had never been in a store where retail conditions corresponded to plan. The most frequent lapses are out-of-stock problems, delayed resets, badly built or nonexistent displays, and poor compliance with planograms. Each of these problems can mean not only wasted resources but also lost sales.

Surprisingly, the survey showed that none of the current approaches to retail coverage seemed to offer measurably better results than the others. Companies that accepted the higher costs of a direct retail sales force fared no better on average than companies that opted for the less expensive choice of contracting out all retail activities to brokers and third parties, or companies employing hybrid approaches.

These results suggest that something more radical is needed. In view of the cost of retail coverage—0.5 to 3.5 percent of sales—manufacturers may want to segment their markets into categories based on the manufacturer’s ability to influence retail conditions. Of course, that approach is easier to execute if store managers rather than corporate headquarters determine those conditions. Where store managers have maintained some influence, manufacturers might want to double their retail spending on resources to improve out-of-stocks, build displays, and set shelves, or they might offer retailers incentives to achieve desired in-store conditions. Where the store managers’ influence is low, manufacturers might decide to eliminate retail spending altogether. Another solution might be to restructure the compensation of brokers to reflect retail conditions and performance rather than volume.

Loading the system. Most companies continue to load the system with inventory to achieve short-term volume targets. Indeed, some two-thirds of the companies in the survey try to meet internal targets by loading during the last week of the month, often by offering heavy discounts. Nearly all companies load heavily toward the end of each quarter to fulfill the expectations of Wall Street. But since consumers usually don’t buy on its schedule, loading plagues the system with costs for unnecessary warehouse space, overtime, expediting, shipping, and, of course, inventory.

When a company takes weeks of excess inventory out of its system, it experiences an immediate though short-term volume hit, which could hurt its stock price. But for the sake of the company’s longer-term health the pain is probably unavoidable. Moreover, manufacturers are arguably better off addressing inventory problems than waiting for them to hit when retailers consolidate and reduce inventories to cut costs. One way for manufacturers to stop loading is to stop compensating sales forces for meeting volume targets that fail to help profits.

Trade spending. Among the companies surveyed by McKinsey, trade spending has expanded during the past five years to 11 percent of sales, from 9.5 percent. Although it represents, on average, about 50 percent of the marketing budget, it has had little effect on incremental volume (Exhibit 2). Moreover, despite the emergence of new analytical tools, only 22 percent of the companies surveyed measured their return on trade spending at the event level. The other 78 percent have hardly any way of distinguishing poorly performing promotions from more profitable ones so that they might shift their resources accordingly.

A few companies are becoming more analytical, both at the account and the event level—usually, soon after a promotion is over. The very best trade promotion performers in the survey had incremental volume increases from trade promotions that were two and a half times those of competitors in their category, despite spending 25 percent less than the other survey participants. These companies charged their field personnel with the task of analyzing their trade expenditures and tended to make their customer team leaders responsible for designing and tailoring promotions. Finally, they used information about the profitability of events to establish account-specific profit objectives, to tailor account plans, and to reward team members.

Sales forces that manage trade promotions well reallocate resources among different types of promotions—fewer price reductions, perhaps, but deeper discounts—and among different product lines. (Promotions might prove to be more profitable on ice cream, for example, than on vegetables.) Shifts in the allocation of funds have generated margin increases of up to 2 percentage points for some companies.

Pricing and terms. The McKinsey survey showed that over the past five years, pricing and trade terms have changed little. Only a handful of companies use menu pricing to differentiate service levels they provide to retailers. (Such companies might, for instance, charge a fee on top of the base price to perform resets.) Other than by offering discounts for early payment, even fewer companies have changed their terms of trade to reflect the true cost of sales. Making retailers pay for the extra costs of service they receive would have a significant impact on profitability and make them value that service more.

Increasing the top line—profitably

Margin improvements alone won’t capture the kind of profit growth most manufacturers want, so many of them are looking for ways to increase the top line too. Changing the structure of the sales force by replacing geographic coverage with teams for individual customer accounts is a common approach, and so is investing in category captaincies. But the survey suggests that neither has as yet produced the kind of positive results that are possible.

Account management. Most of the companies in the survey have reorganized around customer teams, which now make half of all sales. Although this kind of account management will become more essential as stronger global retailers emerge, its potential is far from realization. Compared with the kinds of broad partnerships companies such as United Parcel Service and IBM are creating with their customers, the efforts of branded-goods manufacturers have a long way to go. On the whole, the largest accounts still receive the most attention and resources. Not many companies have acted to segment accounts and assign resources on the basis of profitability. Few customer teams develop account strategies jointly with retailers or share consumer research with them so that they can improve their marketing plans.

Furthermore, very few manufacturers include logistics, finance, marketing, or other experts on customer teams. Those that do include these specialists make little effort to specify the contributions they are expected to make, the people to whom they report, or the way their performance will be measured. What is more, instead of letting the specialists work directly with their retailing counterparts to find improvements, team leaders maintain most of the contact with customers. One sales executive noted that team members spend the bulk of their time responding to problems raised by retailers rather than developing programs to increase business from their accounts.

Even when companies adopt a profit-based, customer account approach, information systems and planning processes generally continue to create reports based on the old geographic-coverage model, which prevents companies from guiding and rewarding the performance of teams. Although 65 percent of the companies in the survey claimed to measure the profitability of accounts, only 5 percent have systems to measure their actual profitability; the rest use standard cost allocations (Exhibit 3). In any event, few team leaders have received any training in how to manage the profitability of accounts, something that traditional sales jobs don’t require.

To some extent, companies link the compensation of teams to their performance (Exhibit 4). Yet fewer than 30 percent of the companies in the survey link a team’s compensation to any measure of an account’s profitability, actual or standard. A team would be more likely to achieve a step change in the profitability and growth of its account if the members’ success could increase their compensation by as much as 100 percent.

Category captaincies. Most manufacturers in the survey have become category captains, teaming up with retailers to enlarge the category overall; the captain, for example, decides how much of a competitor’s product the retailer should carry. However, in a significant number of the categories we examined, branded competitors beat the category captains in dollar growth, volume, or both (Exhibit 5).

These startling results raise an important question about the future of category management: can it really work both for the manufacturer and the retailer in view of their different objectives and their traditional disparity of interests? Category captaincies offer retailers a free resource, but the benefits for manufacturers are less clear. Certainly, companies must examine the return on these investments more carefully. They can test the impact of category management by relinquishing their captaincies in selected accounts and measuring the outcome.

New channels. Food sales in supercenters, food service channels, and other nontraditional channels have grown by almost 7 percent over the past five years; during the same period, traditional grocery sales rose by less than 3 percent. Nontraditional channels are expected to continue this fast pace of growth through 2005, but capturing it will be difficult for most packaged-goods manufacturers in view of their limited resources and mismatched business systems. On average, companies in the survey have only half as many full-time salespeople per billion dollars of possible sales in the nontraditional channels as in the traditional grocery channels. Furthermore, fewer than 35 percent have adapted their customer service operations, manufacturing specifications, or logistics to these customers’ specific requirements; for instance, they may fail to provide food service channels with precooked or portion-controlled items.

Some companies, however, have reallocated their resources and modified their business systems to meet the needs of the new channels more satisfactorily. These companies have enjoyed tremendous growth as a result, but the potential gains demand still bolder action. Imagine the growth that might be captured if a company chose to triple the resources it devoted to new channels or to focus its best talent on them.

New products. Companies expect a single common growth lever—new products—to deliver 34 percent of future top-line growth. But since over the next five years, they plan to introduce 21 percent fewer new products than they did in 1998, whatever products they do bring to market will have to generate significantly more volume than new products did in the past. Since these companies’ first-year sales of new products have declined by 14 percent over the past three years, this seems unlikely to happen.

Companies should get salespeople more involved in developing new products

If packaged-goods companies are to have a chance of making good on the kind of growth they envision, they will have to increase the involvement of salespeople in the development and launch of new products, for ignoring insights from customers and the marketplace would court further declines. And since new products are so important for growth, companies might consider forming sales teams dedicated solely to promoting them and getting them distributed.

Coordinating sales and marketing. Although most sales forces describe their relationship with marketing as collaborative, the evidence would suggest otherwise. About half of the companies surveyed have different incentives for the heads of marketing and sales. A company may be pulled in opposite directions if, say, marketing people are rewarded for increasing the profitability of the business and for introducing new products successfully, while the sales team is told to meet volume targets. Moreover, in most companies there is limited career mobility between these two functions, so people from marketing and sales have little chance to absorb each other’s perspectives. Indeed, few companies have customer team leaders with functional experience beyond sales.

Yet some leading manufacturers have managed to build sales and marketing operations that collaborate. Such companies see to it that functions outside of sales share information on what works and what doesn’t and on the activities of competitors. They prioritize initiatives so that salespeople aren’t overwhelmed by a multitude of different programs created for different brands. And they work to devise common goals. But even at such companies, there is room for further experimentation. They might, for example, ask people holding pivotal jobs in the two functions (such as brand managers and customer team leaders, or the heads of sales and marketing) to exchange jobs. Day-to-day exposure to the other function could help managers in both find better ways to serve customers and enhance growth.

The future

A high-performing sales force improves the profits of existing businesses and secures top-line growth. But to sustain this, a sales organization must experiment with new approaches that might not be profitable today but could be winners tomorrow.

One of these possibilities is the World Wide Web. To be sure, the Internet now represents less than 1 percent of the volumes of the companies in the survey, but over the next ten years they expect that it will come to represent as much as 13 percent. Even at this relatively low level, the Internet would be more important than the food companies’ mass-merchant, club, and drug channels combined. Despite all the prognosticating, these companies have done little or nothing to build the necessary infrastructure; in 1998, 64 percent of them had made no investments at all to create Internet business models.

Yet a handful of companies are placing a number of bets on the Internet. These leaders are simultaneously communicating information through their Web sites; selling products through partnerships with Internet grocers, such as Peapod and NetGrocer; and advertising on the Internet. In addition, they are building consumer relationships by offering coupons or special promotions on line, conducting research by soliciting consumer feedback, and managing supply networks by making inventory and production schedules available over the Internet to suppliers.

New business models have not been explored sufficiently, given the dynamic nature of the competitive environment. Companies too small to compete effectively with the giants, for example, could outsource selling, just as companies now outsource advertising and marketing services. Or they could create joint ventures with complementary manufacturers to perform critical in-store activities more satisfactorily at a lower cost. To make real progress with top retail accounts, companies might create a strategic business unit for each of them, committing resources, determining objectives, and establishing processes in the way that would be done to launch and nurture major brands. Top customers generate more revenue for most manufacturers than do many of the individual brands in their portfolios.

The packaged-goods industry is mature, and operating conditions are difficult. But sustainable growth is possible for manufacturers that improve the performance of their sales forces. A high-performing sales force will look different from its conventional counterpart today and will behave quite differently as well. The first step in building such a force is honestly assessing the capabilities of the present one. Equally important is a willingness to start experimenting and to adapt rapidly to change.