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...