Cradle to grave, lots of change is occurring in the consumer-products sector. These changes will produce new challenges and cause significant restructuring of operating business models as to how products are made, distributed and sold. The size and impact of these changes will have a noted effect on the consumer-products marketplace for years to come. They will also affect our lives both as consumers and restructuring professionals. Here are some of the key strategic drivers behind these changes:

The gap between the good and not so good continues to widen in the retail channel. Good retailers continue to operate and perform in ways that make it very difficult for more marginal retailers to compete. Good retailers are able to maximize the leverage created by their financial, technological, logistical and marketing resources. The effective retailer is focused on increasing market share, improving margin and growing profits. Those retailers who have made missteps in the development of their financial, technological, logistical and marketing platforms have transitioned into survival mode. Expect the downturn in the economy to result in cash-flow challenges for retailers in this survival mode, which will compel them to continue to consolidate, downsize and close stores.

• Many consumer-products manufacturers and distributors depend on the existence of department store concepts and specialty stores as outlets for their products. However, there are those who believe it is reasonable to consider that the department-store concept and mall-based specialty store concepts are outdated and challenged to find their place in the retail marketplace. Recent reports by leading specialty chains such as The Gap, Eddie Bauer and J. Crew, among others, have reflected significant declines in comparative store performance. Well-established department store chains such as Federated Department Stores and Dillards have recently closed stores.

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  Earnings performance, return on invested capital, return on equity and the performance of consumer-products companies in the public equity markets has all made equity investment in the consumer-products sector unattractive.

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• Department store operators are increasingly engaged in a searching evaluation as to the highest and best use of department store properties. In many cases, the value of department store real estate has been depreciated on a retailer's books to the point where significant gains in ROI (return on investment) can be realized from the redevelopment or redeployment of those assets. These gains may in some cases outweigh the expected ROI from continued operations. These operators must re-invent their operating models in order to justify continued investment.
• Specialty store concepts have become duplicative to the point that their sales are driven primarily by discounting. In the last decade, we saw the success of private-label brand development in mall-based specialty stores. Success bred imitation, and now it is difficult to differentiate one popular private label from another. Moreover, with standardization in overseas production, the differences in quality between brands is difficult to discern, forcing the specialty retailers to spend more on advertising while taking earlier and larger markdowns.

China leads the Far East in reestablishing its competitive advantage in the manufacturing sector. Standardization in manufacturing technology, supply-chain software and logistics software coupled with inexpensive labor has allowed manufacturers in China to start producing high-quality consumer products at low prices. The difference in quality between products manufactured in the Far East and Europe and the United States is fractional at best. This phenomenon has resulted in the commoditization of many consumer products, thereby deflating the price and margins for such products. The Internet has provided the necessary communication link for dramatic sales growth and marketplace expansion for many of these Far East suppliers. Their fanatical zeal to drive inefficiency out of the manufacturing and delivery process has resulted in spectacular growth and created further competitive pressure for consumer products manufacturers in the rest of the world. Entire sectors in the American manufacturing base are headed the way of the domestic consumer electronics and apparel manufacturers. They will become small or not exist at all.

Driven by efficiency and focused on eliminating cost within the supply chain wherever possible, retailer demands on suppliers are daunting. It's not just about the product. A supplier had better have and understand the information, and manage inventory, price and logistical support to meet an ever-increasing list of demands from the best of its retail customers.

American business has made progress. Managing obsolescence profitably still continues to challenge even the best of the group. Concept, product, inventory, location and consumer taste change quickly. Product innovation remains the driver of growth in sales, margin and profits. However, for every 10 new products, only two will be successful. Liquidity is an absolute requirement to leveraging opportunity in this competitive environment. The lack of acceptable ROA (return on assets) from underperforming assets coupled by an economic slowdown has resulted in an oversupply of product, price deflation, duplicative concepts, an oversupply of underutilized real estate, tightened credit markets and, for some, a liquidity crisis. The supply channel is overburdened with obsolete assets. The market will continue to lower values and depress growth in its own natural correction. Many companies will be directly affected by this challenging set of circumstances.

Finally, we look at the capital side of things. Earnings performance, return on invested capital, return on equity and the performance of consumer-products companies in the public equity markets has all made equity investment in the consumer-products sector unattractive. The balance sheets of consumer-products companies are becoming increasingly leveraged. In the current environment, vendor debt really takes on the character of traditional equity. Operating capital, now generally collateralized debt, continues to become more expensive for marginal players. These costs shorten the timeframes for correction, and leverages up operating risk.

We have spoken about many of the current challenges faced by consumer products companies today. Yet with all the challenges, some companies continue to prosper. Capital, cash flow, growth and innovation are the ingredients that typically fuel successful efforts. Given current rates of return and the competitive environment discussed above, it is at best difficult to expect significant new financial investment in consumer products companies.

If they are to survive, consumer products companies must continue to challenge themselves to find ways to differentiate on terms other than price alone. Companies must be willing to look at unproductive assets and manage obsolescence in a way that increases ROA. Concept, location, inventory, customer focus and market share all should be evaluated in the consideration of changing and redefined strategies. An honest look at a company's capabilities and competitive position is a good starting place. Asset-reconfiguration strategies require the conversion of obsolete assets as part of the liquidity strategies to fund change. There must be reasonable timelines for correction and re-growth given the competitive and changing marketplace. Eventually the marketplace will self-correct. Between now and then there will be lots of activity, lots of challenge and lots of opportunity.