FMCG sector current status and key trends

Transcription

1 FMCG sector current status and key trends March 2018

2 1 Market trends and consumer behavior insights PwC

3 Recent crisis in Russia in has led to reduction of overall expenses across categories, including food and fastmoving products, pushing consumers to buy more on promo Buying more on promotion or discounted items became the most growing savings tactic during the crisis on supporting crisis habits appeared at that time Share of consumers who have resorted more to specific savings tactic*, % Less impulse purchases Buying more private labels Less buying on credit Less savings Less eating out * more than 1 answer possible Sources: PwC Crisis Survey,

4 The Russian economy is finally recovering with consumers real wages starting to grow, but people are still conservative about the future There are signs of Russian economy recovery However, consumers don t expect economy to improve Real GDP growth, % y-o-y change Consumers expectations for the economy over the next 12 months, % of respondents 1.8% 0.7% -0.2% 1.5% 1.8% 1.8% 1.7% Same as this year 30% 33% 45% -2.5% F 2019F 2020F Real wages growth, % y-o-y change 4.8% 1.2% 0.8% 3.4% 3.7% 2.9% 2.8% -9.0% Better than this year Worse than this year Not sure 5% 16% 17% 17% 24% 23% 27% 27% 37% The share of people didn t increase in 2017 The share of people didn t decrease in F 2019F 2020F Sources: PwC Total Retail Survey 2017, the Federal State Statistics Service, international agencies, PwC analysis 4

5 Although some consumers are planning to increase spending, a large segment is likely to remain frugal A positive sign is that more consumers plan spending growth in the future However, economic improvement doesn t change buying behavior automatically Consumers plans for spending for the next 12 months, , % of respondents Around the same Income Slightly more 11% 8% 17% Much more 3% 3% 6% Slightly less 20% 23% 15% Much less 9% 18% 6% Higher income groups feel more confident while the lower groups are more impacted 57% 49% 56% Income 21% Income <70k 28% >70k In most European countries after the crisis of consumers continued to follow frugal behavior even in the post crisis period. Discounters share in retail turnover started to gain rapidly and sales of private labels continued to increase. Brands demonstrate higher than precrisis promotion activity. Sources: PwC Total Retail Survey 2017, Euromonitor, PwC analysis 5

6 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17 Buying on promo still sticks with Russian consumers as well as buying in cheaper formats Promo share in retail sales increased significantly during the crisis period as well as convenience stores popularity among consumers Sales on promo among retailers, , revenue % LfL growth rates of hypermarkets and convenience stores, , % According to key retailers as X5 Retail Group, DIXY, Lenta, promo share in retail sales achieved 30% in Convenience stores Hypermarkets Since 2014 recession convenience stores are outperforming the hypermarkets Sources: GFK, open sources, companies data, PwC analysis 6

7 Consolidating retail and increase of private label also put pressure on brands Retail market is consolidating during the recession Market share of key retailers in grocery retail turnover, , % Private label is gaining the share rapidly and has the significant room for increase Private label share in overall packaged food market value in Russia, , % 85.9% 1.2% 1.6% 1.3% 5.2% 4.8% 84.1% 1.2% 1.8% 1.6% 6.2% 5.1% 81.8% 1.2% 2.0% 1.9% 7.1% 6.0% 78.9% 1.3% 2.3% 2.2% 7.8% 7.5% 77.3% Other 1.2% O KEY 2.0% DIXY Group 2.5% 8.0% 9.0% Lenta Magnit , pp X5 Retail Group % % % 2015 During the crisis PL rapidly gained share 4.7% % 2017 Private label share growth in overall packaged food market value in different countries, 2017, % 34.8% 26.8% 26.8% 18.3% 17.7% Germany UK France Poland Czech Republic Sources: Euromonitor, the Federal State Statistics Service, open sources, PwC analysis 7

8 In the meanwhile, consumers more often use online as an alternative channel Consumers continue to spend more and more in online % of spend via online by selected categories, Daily e-shopping is gaining rapidly Frequency of buying online (non-food categories), , % of respondents Consumer Electronics 14.6% 22.3% 29.2% 34.1% 30% 30% 38% 36% 27% Moscow and St Petersburg citizens 23% Home appliances 15.9% 16.5% 3% 7% 1% 4% Apparel and Footwear 7.1% 7.4% 7.4% Daily Weekly Monthly A few times a year 2015 Once a year 2016 Sources: PwC Total Retail Survey 2017, Euromonitor, PwC analysis 8

9 Consumers started to use social media more for shopping Social networks are the most influential when finding inspiration for purchases Share of respondents choosing online channels when doing purchases, , % Social networks Mobile apps Visual social networks Price comparison websites Individual retailer websites s from brands/retailers Multibrand websites Digital press and magazines Blogs 26% 34% 18% 31% 19% 29% 28% 25% 21% 21% 17% 22% 15% 10% 10% 8% 8% % Most important channels for consumers Importance of brand websites shrank dramatically due to the active usage of smartphones and mobile apps Sources: PwC Total Retail Survey

10 2 Key challenges and opportunities for FMCG companies in the current conjuncture PwC

11 Current environment creates challenges for FMCG producers, resulting in higher competition and squeezing margins Revenue impact Cost impact Price-sensitive, less loyal customers Increasing share of promo sales Increased role of private labels Shift to cheaper channels Increasing pressure from retailers trying to compensate for decreasing margins Demand for niche and craft products Squeezing margins Increased complexity of portfolio as a result of increased demand for special products Increasing expectations for service level Increased complexity of channels Increased cost of raw materials. 11

12 Up to 90% of companies have been negatively affected by the current situation Share of respondents who experienced effect from negative aspects of the crisis, % Increase of material cost Sales decrease due to lower demand Increase of overheads Inability to finance new projects Increase of working capital cost 90% 67% 60% 47% 29% 12

13 Changing for the new normal becomes imperative as the road ahead promises to be challenging From managing rapid expansion to optimizing for the new normal Supply driven market: Focus on fast growth Competition for customers new to the market Customers are more focused on availability than on costs Riding the wave Success factors: Rapid expansion Good distribution Reliable quality Demand driven market: Customers are more price and quality conscious Competition is higher Market is oversupplied Switching between the suppliers is more often Fighting for every inch Success factors: Consumer insight Cost excellence Flexible operating model 13

14 Global FMCG industry has been experiencing this challenge earlier, indicating a path for Russia Significant decrease in sales growth Top Global FMCG Revenue Growth, % 6,3% 4,6% 4,3% 2,0% which puts pressure on operating margins, causing 0,6 p.p. decrease in Top Global FMCG operating margin growth, p.p. 0,9 0, ,6 1) Represents median data for 89 CPG companies; 2014 data reflects for only those companies that have released 2014 annual report; Op. Margins are adjusted for one time events (Adjusted OP. Margin = (Revenue-COGS-SGA)/Revenue; Sources: PwC CPG Industry Data; Capital IQ, Strategy& analysis 14

15 The big brand, large scale industry model has been somewhat disrupted, ceding to small authentic brands OLD Mass consumers Superior innovation and big launches NEW Increasingly fragmented socioeconomic and demographic Nimble, targeted and quick Market growth and share performance for packaged foods in the U.S. Three-year compound annual growth rate Medium, $1-3 bn -3,7 % Large, >$3 bn 1,6% Private label 2,8% Small, <$1 bn 6,2% Mass advertisement Fragmented media including social/mobile Share of growth 43% 30% 42% Mass channels Scaled production and supply Fragmented, on-line breaks physical limits Craft quantities, complex routes to market Market share change (percentage points) -15%

16 JMSmucker Hershey Unilever McCormick KraftHeinz GM Mondelez Campbell Snyders ConAgra Median 160bps The industry is cutting costs to fill part of the performance Improvement (bps) Net SG&A (excl. A&P) Reduction within Last Five Years Improvement (bps) 1,200 Gross SG&A + COGS Improvement Targets in Next Several Years Food Household Rubbermaid Many continue to ratchet up goals to Coca-Cola Kraft-Heinz 600 Clorox Colgate ConAgra P&G Nestle Kellogg Campbell General Mills Unilever Kimberly Clark Expected Timing 1) Calculated as highest point in 2010 to 2014 relative to Source: Public financial information, earnings calls 16

17 % of Revenue (Excl. Advertising) Most margin expansion (for the few who get it) is due to this cost reduction 22% 21% 20% 19% 18% 17% 16% 15% 14% 13% 12% Top Quartile Food cost and EBIT % of Revenue Pre-Recession: GM improvements driving EBIT Growth Post Recession: cost optimization driving EBIT Growth and Investment Funding 80%+ of margin expansion driven by cost reduction Top Quartile Food EBIT 11% 10% 0% Companies included: Nestle, McCormick, Snyders, Hershey, Mondelez, Kellogg, Campbell, GM, JM Smucker, Unilever, Kraft-Heinz, Pinnacle, ConAgra, Tootsie 1) Extrapolation based on publicly announced cost programs and assumed SG&A portion. Top quartile expected to improve by another 148 bps Note: Based on public financial filings. Excludes distribution, advertising and publicly reported comparability items such as restructuring Top Quartile Food cost (ex. ad) 17

18 How can you respond to these challenges? Improve revenue Optimize costs Leverage data capabilities 18

19 Revenue improvement Promo optimization EBIT +0,7-1,9% Pricing optimization EBIT +0,4-0,8% Sales force effectiveness 3-5% increase in sales 19

20 Increasing trade budgets combined with typically poor promotional performance are draining profitability of retailers and consumer goods companies. Application of strategy and analytics can lead to significant profit increase through promo optimization Smart way to tackle the promotional profitability drain Market context Solution Market proven results 30% 60% Of turnover in modern trade is sold via promotions Of trade activities does not bring expected results and leads to negative ROI Strategy good understanding of shopping missions and purchasing patterns per format and category Analytics profound understanding and actionable insights providing intelligence about most effective actions Support toolkits bringing decision taking processes to data driven reality and speeding up trade workflows 15% Of trade budget can be either saved or reinvested in order to dramatically increase promotional ROI 20

21 Via price excellence profitability can grow even on highly competitive markets Key areas addressed by pricing strategy 1 Challenges Growing competition Impact on profitability Understanding of price premiums Solutions and impact on profit Results 2 3 Commoditization of goods Growth of private label Need to defend price premiums Value justification and need to defend price premiums Smart, value based pricing with value justification Up to 2 p.p. EBIT improvement 4 Rise of discounters Increasing price pressure of top performers Protection of price points and portfolio differentiation 5 6 Growing importance of distributors in traditional trade Channel conflicts Renegotiation and harmonization of terms of trade X-channel price pressure Smart management of terms of trade and flow of goods Up to 3 p.p. increased market share 7 Pressure on terms of trade Need to defend private label 21

22 Costs optimization Cost structure transformation 30-40% improvement Logistics optimization 5 20% cost savings Procurement optimization 5 20% cost savings Production optimization 5 10% cost savings Working capital optimization % improvements 22

23 Re-aligning company's set up and resources to drive growth with efficient cost base Holistic approach integrating strategy and operating model alignment, cost improvement, capability building and culture Clear articulation of the overall vision, strategy & capabilities Company s strategy Invest in higher value-added priorities Enable & sustain Build leading capabilities Invest in sustainable & relevant service capabilities, funded by improvements in the back office cost structure Release Funds Transform cost structure Design a cost efficient model, making deliberate choices on areas within the back office functional to be lean and opportunities for scale and leverage Reorganize for growth Implement function specific organization model, processes and systems that unlock potential and enable agility for growth Enable change and cultural evolution Create an environment and culture that embeds change in the DNA and enables a sustainable future Integrated approach helps deliver transformational performance outcomes usually 30% - 40% improvement 23

24 Typical cost saving optimization levers can be grouped along three main clusters Typical Optimization Levers Savings Range 1 Streamline & Optimize Organizational Leanness Delayer and flatten the enabling functions organization to cut cost and spend decision making Process Optimization Redesign core processes and optimize performance. Realize low hanging fruits Identify internal practices and disseminate through the enterprise 5-15% 2 Bundle & Centralize Shared Services Provide cost-effective transactional and expertise services Capture best practices and build capabilities and standardize processes Outsourcing / Off-shoring Manage outsourcing relationship to meet customer requirements Leverage scale, technology and competitive factor costs of third parties 15-30% 3 Eliminate & Reduce Organizational Design Define organizational structure and role of enabling functions and incentives Clarify decision rights between enabling functions and business units Demand Management Reduce consumption by accurate and transparent pricing Perform service segmentation Prioritize demand (e.g., must-have or nice-to-have ) 20-40% 24

25 Big data capabilities Data analytics and Big Data 27

26 Data-driven FMCG organizations have a competitive advantage Highly data-driven companies are three times more likely to report significant improvement in decision making, but only 1 in 3 executives say their organization is highly data-driven. Data and Analytics insights increase the speed and sophistication of decision making. 75% Of Global Consumer Goods CEOs say data mining and analysis is strategically important to their organization Source: PwC's 2015 Global CEO Survey Unlock data possibilities Breakthroughs come to organizations that master the potential of data and analytics to unlock the opportunities our connected world provides. 61% Of Consumer goods senior executives say they changed the way they approach big decision making as a result of big data or analytics Source: PwC's Global Data & Analytics Survey: Big Decisions 28

27 Customer Data analytics and AI can play a key role in supporting you to address the big topics in the various areas across the value chain Product Development Sourcing Production Supply Chain & Logistics Marketing Sales Customer Service Consumer Upstream Supply Chain Downstream Supply (Demand) Chain Needs based segmentation and development of value propositions Predictive analytics Demand forecasting MROI of paid, Pricing owned, elasticity and modeling earned media channels Market Store footprint structure, brand optimization portfolio, and site and architecture selection optimization Price Social laddering media, and category mobile, management and text analytics Virtual prototyping and testing Industry 4.o analytics Price-product Promotion effectiveness architecture and discount models optimization SKU Sales rationalization territory and product design delisting Consumer Customer experience loyalty analytics research and optimization modeling 29

28 Some examples of D&A applications in the FMCG markets industry include.. Dynamic Pricing Consumer feedback and interaction analysis on social media Customer complaint resolution Predictive inventory management Recommendation engines Market segmentation and targeting 30

29 Level of sophistication Med. Term (3-7 yrs) Near Term (0-3 yrs)..but the whole landscape of D&A applications in FMCG is much more Top use cases by value chain and time to adoption stage 1 Strategy & business model 2 R&D & 3 Purchasing & 4 Supply Chain 5 Marketing, sales, 6 Innovation Production & Logistics customer service Enabling functions 1. Strategic scenario simulation* 2. Product re-design with usage data* 3. Virtual simulation and training assemble and maintenance* 6. Product recommendation 7. Dynamic Pricing 8. Smart Manufacturing Analytics Platform 9. Dynamic order scheduling 12. Optimize supply chain 13. Workflow optimization 15 Call center customer Sentiment Evaluation 16. Next best offer recommendation assistance 17. Churn modelling 18. Consumer biofeedback on packaging and marketing 24. Fraud detection 25. Smart home devices* 26. Compliance monitoring 27. IT transformation 19. Personalized advertising 4. Trendbased product innovation 10. Product Assortment Optimization 20. Automated customer service and cross-selling* 28. AI enabled adaptive games 5. Custom Product Creation 11. Demand Prediction and Inventory Optimization 21. Call center practice monitoring 22. AI-driven marketing campaigns 23. Automated ad placement for human and machine buyers Automated Intelligence Types of D&A Assisted Intelligence Augmented Intelligence Autonomous Intelligence 31

30 Thank you! Martijn Peeters Partner, Retail & Consumer Leader +7 (495) OOO PricewaterhouseCoopers Advisory. All rights reserved. In this document, PwC refers to OOO PricewaterhouseCoopers Advisory. which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.