express r&c worlds Growth reimagined Succeeding on the world stage Highlights

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1 May 2011 r&c worlds express Growth reimagined Succeeding on the world stage Retail and consumer CEOs see opportunities in both developed and emerging markets Now that the Great Recession has passed, one narrative that s become popular in business circles points out the relatively weak economic performance of developed markets when compared with the performance of emerging markets. This story line presents the slow economic decline of the United States, in particular, as a fait accompli accelerated by events of the past few years. The other side in this competition is led by China, which reported GDP growth of 9.2% in 2009 and 10.1% in 2010 making US 2010 GDP growth of about 2.7% look puny in comparison. But according to PwC s 14th Annual Global CEO Survey of 1,200 business leaders in 69 countries, the vast majority of the world s business leaders including CEOs in the retail and consumer sectors don t view the world this way, rejecting the notion that global economic competition is a zero-sum game. In fact, CEOs around the world who participated in the survey continually cited the many strengths that will continue to fuel investment in, and attract workers to, developed markets: the most innovative companies, the wealthiest domestic consumers, and some of the world s best universities. The message retail and consumer CEOs are sending is that while consumers in emerging markets will serve as the growth engine in the years to come, the interconnected global economy can benefit everyone when government, business, and market interests align. Highlights More than nine out of 10 consumer goods and retail CEOs are very confident or somewhat confident about growth prospects over the next three years. But 62% of these same CEOs say that a permanent shift in consumer spending and behavior could pose a threat to growth. Seven out of 10 consumer goods CEOs say that emerging-market businesses will drive growth for their respective companies. We interviewed 153 consumer goods CEOs in 48 countries and 75 retail CEOs in 30 countries for PwC s 14th Annual Global CEO Survey.

2 In brief Consumer goods company CEOs on the challenges of entering new markets 1 In the 1990s, it was all about global expansion in the markets that opened up for capitalism: Eastern Europe, Russia, China. This decade for us, I think, will be about getting our categories into every country around the world. Bob McDonald, Chairman of the Board, President, and CEO, Procter & Gamble Finding the appropriate talent to take advantage of the growth prospects of emerging markets is one of the biggest challenges we face There is a high level of education, there s a lot of enthusiasm, but there is a pretty steep learning curve as well. Louis Camilleri, Chairman and CEO, Philip Morris International The economic crisis has prompted the economies of the East to assume a level of economic and political maturity much faster than they might otherwise have and that s going to have a major impact on business. Paul Polman, CEO, Unilever We must now place a high priority on human resources recruiting and training that s geared toward serving a global marketplace. Senji Miyake, President and CEO of Kirin Holdings Company, Limited 1 All quotes from PwC s 14th Annual Global CEO Survey. 2

3 Rising confidence levels tied to emerging-market potential, developedmarket realities Figure 1: For future sourcing needs, China is far and away the top choice of consumer goods CEOs Q. Which countries, not including the country in which you are based, do you consider most important to your future sourcing needs? China US Brazil India Germany Consumer goods Total sample Base: All respondents (total sample, 1,201; consumer goods, 153) Note: Respondents could select up to three countries. Source: PwC, 14th Annual Global CEO Survey What do retail and consumer (R&C) CEOs say about the future of the global economy? Like their peers in other industries, business leaders in the R&C sector are today less likely to be playing defense or sitting on the sidelines than they were a year or two ago. Instead, they are driving strategic makeovers to meet the demands of a growing economy. Eighty-nine percent of retail CEOs and 85% of consumer goods company CEOs, for instance, told us in our survey that they expected to change strategies in the next 12 months, and one-third of the CEOs describe that change as fundamental. Twin growth engines It s no secret what s driving the change. Unlike in previous recessions, emerging economies have served as the engine for growth. The International Monetary Fund predicts that overall global growth rates will be sluggish in 2011 but that the emerging markets will continue to boom 2 providing huge opportunities for consumer goods companies. Nearly seven out of 10 consumer goods CEOs (69%) said emerging markets will drive growth for their companies in the next year. As Louis Camilleri, chairman and CEO of Philip Morris International put it, Long-term future growth will definitely come from emerging markets. Does that mean that companies are abandoning developed markets? Absolutely not. Large, developed economies still have their attractions. The US was the second most popular choice (after China) for a growth market, with 21% of CEOs naming it among the three most important for growth. Another 12% selected Germany. For retailers, the US market was considered more important than Brazil, India, or France. Sourcing the world over We also asked CEOs which countries would be most important for their future sourcing needs. China dominates the list, largely for reasons of cost competitiveness. But since quality control, risk profiles, innovation capabilities, logistics, and existing relationships all remain factors to many CEOs, the US and Germany joined China, India, and Brazil in the ranks of the most important future suppliers. 2 IMF World Economic Outlook (October 2010). 3

4 Catering to the newly savvy global consumer Just like the old American political saying that all politics is local, retail and consumer companies have long held the view and rightfully so that consumer choices in food and other staples are intensely national and even regional in nature. The empowered global consumer While consumer choice may still be dictated largely by geography and culture, retail and consumer CEOs are seeing a new trend among consumers regardless of location: empowered customers who want a greater say in how they shop, where they shop, and what prices they pay for goods. That American consumers have tightened their belts isn t news. But the worldwide nature of the Great Recession has helped create a global consumer who demands greater value, especially when it comes to price. For example, Senji Miyake, president and CEO of Kirin Holdings Company, Limited, told us, In Japan, one of the key trends we see is a new found attraction toward lower-priced products. In fact, 62% of consumer goods CEOs say a permanent shift in consumer spending and behavior could pose a threat to growth. And 40% say it s one of the three most important risks they plan to mitigate over the next 12 months. Taking action to connect with consumers Many companies are already taking action: working more closely with retailers to understand how consumers are behaving at the point of sale; engaging customers in product innovation, embedding employees with families in emerging markets to understand local buying and eating patterns, and using social networking to spread the word about promotional or marketing activities. Where global consumer goods companies go, retailers are sure to follow, particularly because regulators in certain emerging markets appear ready to ease restrictions for big international retailers. Only single-brand foreign retailers are currently allowed a significant presence in India, for example. But the Indian government, as of early 2011, is considering allowing foreign big-box retailers to own up to 49% of a joint venture with domestic Indian retailers. 3 62% of consumer goods CEOs say a permanent shift in consumer spending and behavior could pose a threat to growth. 3 Strategic Issues for Retail CEOs: Perspectives on Operating in India s Retail Sector, PwC and Retailers Association of India (2010). 4

5 It s 9 a.m. in Shenzhen. Do you know where your competitors are? Meeting the demands of the newly savvy global consumer means that consumer goods CEOs need to be nimble to stay ahead of changes in consumer preferences, or they risk watching faster competitors grab market share. And the competition may come from unexpected directions, as Camilleri of Philip Morris International, explained: I don t think Sony ever viewed Apple as a potential competitor. And suddenly, boom! For that matter, Nokia probably didn t view Apple as a competitor, either. So when it comes to how to view competition, the world is shifting, and it s shifting fast. Finding a footing in emerging markets Sixty-two percent of consumer goods company CEOs say emerging markets are more important to their companies future than developed markets are. For many, that means forging a significant presence in these countries to compete with local players. According to Bob McDonald, chairman of the board, president, and CEO of Procter & Gamble, P&G currently has 20 new factories under construction around the world 19 in developing markets and just one in a developed market, the US. But emerging markets are not simply sources of customers, materials, and labor; they are home to potentially powerful emerging competitors as well. For example, Chinese manufacturer Haier is now the world s fourth-largest producer of consumer household appliances and the world leader in refrigerators. In fact, as of March 2011, three of the world s top 10 companies by market capitalization were Chinese, while only two Walmart and ExxonMobil came from the US. As global consumer goods companies fight to tap rapidly growing emerging-market middle classes, domestic competitors will be trying to do the same thing, but with the home field advantage of innately understanding local tastes and customs. Ultimately, the effort to upend entrenched domestic brands may mean a host of changes for most R&C companies. As Unilever CEO Paul Polman told us: Within 10 years, 70% of our business will come from the Far East. That shift eastward has tremendous implications for our company s structure and culture. 5

6 To thrive globally, innovate globally Today, nearly every new item we bring out was produced with at least one partner somewhere in the world. Bob McDonald, Chairman of the Board, President, and CEO, Procter & Gamble The rise of middle-class consumers in emerging markets has consumer goods companies developing products and services tailored to those high-growth locales. So, innovation, in the context of new patterns of demand, is a clear strategic focal point for CEOs. The rise in importance of new products and services, in fact, marks a significant shift for CEOs as to where their best avenue for growth lies. Thirty-nine percent of consumer goods CEOs say the majority of product innovations will be codeveloped with external partners. In some cases, this means working with retailers to understand and address the needs of the consumers. It also means opening up the process to partners throughout a company s global supply chain. For example, far more often than not, Procter & Gamble s innovations crystallize in partnership with an external organization. As CEO Bob McDonald put it: Today, nearly every new item we bring out was produced with at least one partner somewhere in the world. So, for example, we co-locate scientists from partner organizations and from our organization in the same laboratory. It s amazing what you can do when you knock down the barrier in an organization or the barriers between organizations. Not just about products In addition to how integral they view innovation to the quality of actual products and services they provide, consumer goods CEOs are believe innovation is central to the global operating model. You end up having to innovate simply to provide the same high standards across very diverse operating environments, said Douglas M. Baker, CEO of Ecolab. So, innovation is a constant in our business. Figure 2: Consumer goods CEOs expect innovation to drive new revenues Q: To what extent do you agree or disagree with the following statements about your expectations regarding your company s innovation over the next three years? % Disagree strongly Disagree Agree 6 20 Agree strongly Our innovations will lead to significant new revenue opportunities Our innovations will lead to operational efficiencies that provide us with a competitive advantage An important part of our innovation strategy is to develop products or services that are environmentally-friendly We expect the majority of our innovations to be co-developed with partners outside of our organisation Base: All respondents (consumer goods, 153) Note: Neither agree nor disagree and Don t know/refused excluded. Source: PwC 14th Annual Global CEO Survey 6

7 Resources Editorial team John Maxwell Global Retail & Consumer Leader Denis Smith Retail & Consumer Global Accounts For more information on issues affecting retail and consumer companies, please contact: John Maxwell Global Retail & Consumer Leader Mike Brewster Retail & Consumer Global Accounts PwC firms provide industry-focused assurance, tax, and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience, and solutions to develop fresh perspectives and practical advice. Visit for more information. PwC is the brand under which member firms of PricewaterhouseCoopers International Limited (PwCIL) operate and provide services. Together, these firms form the PwC network PwC. All rights reserved. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Not for further distribution without the permission of PwC. PwC refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm s professional judgment or bind another member firm or PwCIL in any way. NY