Commercial Leadership

Transcription

1 Consumer Packaged Goods point of view Commercial Leadership Unlocking hidden growth in mature markets Manufacturers and retailers have spent decades battling to increase their respective shares of the value chain. Manufacturers early consolidation and superior endconsumer knowledge gave them an initial advantage, and more recently they have begun developing direct-to-consumer operating models in pursuit of further gains. Meanwhile, retailers have themselves been consolidating, are continuing to build their private label franchises and are starting to exploit shopper data to greater effect. This battle has now reached a critical point. Backed into a corner by increased discounter and online competition, stagnating consumer spending, and a lack of emerging market growth opportunities, many retailers are fighting for survival. They are feeling compelled to compete more aggressively than ever on value, creating downward pressure on margins already squeezed by commodity cost increases. Improved negotiating capabilities are allowing retailers to pass on this pressure to their suppliers. This presents manufacturers with a significant challenge, but also with an opportunity. As retailers start to reallocate shelf space between manufacturers, there will be winners and losers: those with the strongest commercial capabilities will gain at the expense of their competitors. This paper highlights Oliver Wyman s perspective on how manufacturers should respond by achieving Commercial Leadership, and explains how our unique approach can help tap into hidden sources of organic growth.

2 Commercial Leadership: what it is and why it matters The immediate priority for manufacturers is to protect margins without putting share at risk. To do so effectively, they need to address many evergreen commercial challenges in a new way. These challenges are illustrated in Exhibit 1 below. Exhibit 1: Evergreen Commercial Challenges Partial How To List Product Portfolio Generate more for less i.e. increasing sales while reducing number of SKUs? Get rid of the tail of unprofitable SKUs without losing sales? Achieve a fair share (or better) of distribution in medium and small stores? Leverage local demand differences? Prevent retailer profitability pressures on the highest selling SKUs spreading back up the value chain? Use pack size differentiation as a competitive weapon? Price & Promotion Ensure the right balance between price and promotional investment? Minimize cannibalization and switching behavior? Manage list price increases when commodity price increases are higher than growth in consumer disposable income? Navigate volatility in input costs/use promotions as a stabilizing factor? Customer Commercial Model Put all aspects of the commercial relationship with retailers on a strong footing without incurring short-term financial costs? Advise retailers effectively category captaincy or not? Turn their perceived irrationality into a competitive advantage? Push back against their increasingly aggressive demands without putting share at risk? These issues are not new, and CPG manufacturers have addressed most of them at one time or another. But more often than not they have been treated as separate challenges requiring separate solutions, rather than as interrelated facets of the commercial relationship with retailers, requiring a holistic approach. This is not surprising, because manufacturers strategic agenda has usually been dominated by shaping and getting ahead of long-term consumer trends; moving into emerging markets; M&A; and efforts to improve organizational design and efficiency. Retailers have historically been viewed as simply a channel to the target end-consumer, rather than as a source of competitive advantage, let alone a strategic threat. However, the dynamics of the value chain have changed: retailers have simultaneously become more powerful and more desperate. As a result, there is now significant hidden value available to manufacturers who can address these challenges in a holistic way and to a world class standard this is what we call Commercial Leadership. Copyright 2011 Oliver Wyman 2

3 Oliver Wyman s approach to achieving Commercial Leadership 1. A fresh mindset 360 degree economics. Currently, most analysis that manufacturers perform focuses on the impact on their own metrics. By contrast, every evaluation we do takes a 360 degree view we thoroughly assess the impact on the retailer, the competitors, and the value chain as a whole. This provides a fresh perspective on where value is being created or destroyed, and the negotiating positions of different parties yielding new insights to inform commercial decision making. Retailer sociology. CPG manufacturers commercial departments are often frustrated by what they see as the irrational or unreasonable behavior of their retail customers. Rather than viewing this simply as a problem, we put retailer sociology at the center of our thinking. Better understanding the different archetypes of retailer sociology and systematically incorporating them in the commercial strategy can produce competitive advantages that are difficult to copy. Broad street fighting capability. We help commercial departments bring more of a street-fighting mindset to the competitive battles for distribution, shelf space, and position. While most competitive tactics are currently focused on promotions and displays, it is often valuable to systematically explore other options as well: one example is pack size differentiation, which can be used much more aggressively by players with strong brands to box-in competitors. 2. Industrial-scale predictive analytics We build large-scale what if models of the detailed economics of your business. This allows us to rapidly quantify for all relevant metrics, on a 360 degree basis any move at SKU-level and store-type within each retailer that you or your competitors might make, including: assortment, facings, position in the planogram, price, or promotions. This powerful forward-looking and scenario-modeling capability allows the systematic evaluation of thousands of different options to find the optimal win-winlose scenario: a win for you, a smaller win for the retailer (to provide an incentive for it to co-operate), and a loss for competing brands. We rapidly quantify any move you or your competitor might make whether on assortment, facings, position in the planogram, price, or promotions at SKU-level and store-type within each retailer for all relevant metrics, on a 360 degree basis. Copyright 2011 Oliver Wyman 3

4 3. Multiple ways of engaging with clients We believe our combination of strategic insight, the ability to deliver tangible value, and technological expertise makes us unique. We help our clients in three different ways: Advisory services. This is the most common way in which CPG manufacturers engage with strategy consulting firms; and we usually start in this way to help clients tune perspective and shape commercial strategy. Our differentiation is that we can provide more granular insight to uncover hidden opportunity, and that our recommendations are based upon thoroughly tested predictive techniques. Tangible financial improvement. Consulting firms committing to performance improvement and putting fees at risk is a familiar idea on the cost-reduction side of the ledger what makes us different is that we do this on the revenue/commercial strategy side. We routinely commit to large scale performance improvement in organic revenue growth, percentage margin growth, or both simultaneously. Enterprise grade tools. Our ultimate aim is to help clients deliver a sustained step change in both their own capabilities, and in the performance of their commercial strategy. This often requires us to develop custom enterprise-grade tools for our clients: we typically build these around an SAP or Oracle backbone, to support both the improved commercial strategy and the performance improvement programs over the long term. Our clients tell us we are unique in being able to rapidly deliver insightful, user-friendly tools that genuinely help the end users to make better and faster decisions. We routinely commit to basis points of performance improvement in organic revenue growth, percentage margin growth, or both. Copyright 2011 Oliver Wyman 4

5 Financial Benefits In a typical client relationship focused on addressing its evergreen Commercial Leadership challenges, Oliver Wyman expects to deliver basis points of incremental revenue and percentage margin growth. This is accomplished by activating several Commercial Leadership levers in the appropriate sequence for example: Product portfolio optimization. We review our client s profitability SKU by SKU, by store type, by retailer, relative to competitors, with particular emphasis on a 360 perspective to understand how the retailer sees it. These analyses tend to show that for any given retailer, while some SKUs are at risk in some store types because they do not provide enough return on space, many others actually generate more profit for the retailer than is necessary to ensure continued distribution. Significant money is therefore left on the table, and clawing back part of this can be a source of margin improvement. Getting to grips with promotions. Promotional optimization offers major opportunities for improvement. Our experience is that, despite many attempts, the promotional programs of most CPG brands remain far from optimal: manufacturers do not make sufficient allowance for the fact that they and the retailers usually run a given promotion for mutually incompatible reasons. The retailer runs the promotion because it wants to capture volume from sales of the manufacturer s brands in competing retailers, which is cannibalization for the brand; and the manufacturer wants to run the promotion because it expects to capture significant volume from competing brands on the shelf, which is cannibalization for the retailer. The lack of 360 degree perspective and the fact that the cannibalization generally happens outside the organizational silo in which the promotion is decided explains why both parties believe promotions work much better than they really do. Planogram tailoring. Experience indicates most retailers do not get the most from their planograms, because they lack the industrial scale predictive analytics at the SKU/store type level mentioned earlier. This is a missed opportunity: it is usually possible to optimize planograms for increased sales and margin, particularly in medium and small stores, or in stores that face different local conditions to those which are typical for the chain. For a manufacturer, taking the lead in helping the retailer configure the shelf can generate real but modest benefits for the retailer, and very significant benefits for the brand. The revenue gain available varies, but is typically much larger than CPG manufacturers realize and can be demonstrated by piloting the process in trial stores measured against an appropriate control group. Manufacturers and retailers usually run a given promotion for mutually incompatible reasons. Copyright 2011 Oliver Wyman 5

6 Granular price balancing. Improving price competitiveness to the end consumer can also be a driver of revenue growth. CPG manufacturers typically overlook SKU by SKU differences in price sensitivity, leaving some of their SKUs over-priced. Furthermore, there is often a bias of simultaneously overstating promotional sensitivity and understating price sensitivity: this drives the wrong balance between price and promotional investment. Correcting these effects at scale is a rich source of revenue growth. Targeting competitor weaknesses. The mounting pressures retailers face make them more willing to challenge the status quo than was historically the case. The industrial scale predictive analytics at the SKU/store type/retailer level mentioned above enable a manufacturer to rapidly pinpoint the vulnerable SKU positions of its competitors, and recommend plans that drive significant revenue growth for them as well for the retailer. Reconstructing commercial agreements. This is the way much of the value is actually captured. As we touched upon before, achieving full potential requires putting retailer sociology center stage. Manufacturers are very sophisticated at understanding and leveraging the needs and emotions of their end consumers at a highly segmented level. Yet they fail to apply the same discipline when designing their commercial agreements with customers, focusing instead on what sounds rational and simple to control from a financial perspective. In light of this, designing commercial agreements that are tuned to meet the true needs of different retailer archetypes is a hidden source of share growth. Designing commercial agreements that are tuned to meet the true needs of different retailer archetypes is a hidden source of share growth. The list of levers highlighted above is far from exhaustive: other examples include boxing-in competitors through pack size differentiation, tuning the earn and burn structure and timing elements of the retailer discounts and allowances, and optimizing variants for increased sales per SKU and distribution. The common theme in each case is one of developing deep insights to allow each lever to be better tuned, and thereby delivering real, sustained performance improvements. Copyright 2011 Oliver Wyman 6

7 Organization Benefits In a world where competitive advantage is ever harder to sustain, it is vital to instill systemic cultural changes, capabilities, and processes to maximize its longevity. We strive to embed new mindsets and ways of working in our clients organizations: Elevated customer agenda. A realization at the most senior levels of the company that retail customers should be put near the top of the corporate agenda, for both defensive and offensive reasons. A multi-dimensional mindset shift. Routinely thinking 360 degrees, systematically leveraging differences in retailer sociology, bringing a higher degree of street-fighting capability to commercial departments, and upgrading capabilities, processes, and tools. Newfound revenue & margin. Relentlessly delivering large scale and largely hidden organic revenue and percentage margin growth. These gains are large enough to have a transformative effect on a manufacturer s strategic agenda opening up growth opportunities that were previously unavailable. It is vital to instill systemic cultural changes, capabilities, and processes to maximize the longevity of competitive advantages achieved. This can all be achieved in a way that is customized to your business objectives and acceptable to your retail customers as some of the value from the initiative can be passed on to them as a quid pro quo. In addition, capabilities can be embedded in powerful enterprise grade tools to ensure the sustainability of the benefits and competitive advantage generated. Summary This is the first time in history that retailers have been so powerful yet so desperate, driving them to apply unprecedented pressure back up the value chain. For manufacturers, better management of the relationship with retailers is a priority both for defensive and offensive reasons because as well as protecting margins, it can unlock new sources of growth. Commercial Leadership is Oliver Wyman s approach to managing the array of commercial challenges which manufacturers face. We bring a fresh mindset to these problems, based on deep analytical insight, industrial-scale predictive capabilities, and an understanding of the perspective from both sides of the negotiating table. At the same time, we provide our clients with much more than just consulting advice, and commit to delivering measurable performance improvements and building the capabilities and tools needed to sustain them for the long term. For our clients, the financial benefits of establishing Commercial Leadership are substantial typically basis points of percentage margin improvement and organic growth. Copyright 2011 Oliver Wyman 7

8 About Oliver Wyman Oliver Wyman s Retail & Consumer Products Practice has a 20-year track record of helping clients develop and execute programs that have a demonstrable and sustained impact on the way they operate. We help our clients achieve improvements in their organic revenue growth and profitability often in situations where the client business model faces growth challenges and would benefit from rejuvenation or reinvention. Our focus is on measurable results that are sufficiently large to have a significant impact on enterprise value. Our value proposition is underpinned by innovative fee structures when appropriate. We believe our approach is unique, combining as it does state-of-the-art analytical techniques with real-world experience of making lasting change happen by working at multiple levels within client organizations. Oliver Wyman is an international management consulting firm with more than 2,900 professionals in over 40 cities around the globe. It is part of MMC, a $10 BN+ publicly quoted premier global professional services firm. For More Information Please Contact: Jacques César Mike Matheis jacques.cesar@oliverwyman.com mike.matheis@oliverwyman.com Copyright 2011 Oliver Wyman. All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Oliver Wyman and Oliver Wyman accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions in this report were prepared by Oliver Wyman. Oliver Wyman has made every effort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. Oliver Wyman disclaims any responsibility to update the information or conclusions in this report. Oliver Wyman accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of the possibility of such damages. This report may not be sold without the written consent of Oliver Wyman.