How consumer products companies are gearing for growth

In a fundamentally changed global economy, consumer products companies are facing more competition for the reduced disposable income which now characterizes their customer base. On the back of new research, Ernst & Young has insights on how the winners are positioning themselves for profitable growth in the post-recession economy.

In September and October 2010, Ernst & Young surveyed some 1 400 senior executives globally. In so doing, it set out to gain a detailed understanding of companies’ plans, and what sets the strategies of the high performers—the top quartile in terms of EBITDA and revenue growth—apart from the lowest quartile.

The research showed that, in general, the highest-performing companies are further advanced in four critical areas: customer reach, operational agility, cost competitiveness and stakeholder confidence. “Each industry sector has its own nuances, and so we looked at what consumer products companies in particular are doing in each of these categories,” explains Derek Engelbrecht, Retail & Consumer Products Sector leader at Ernst & Young. He notes that eight percent of the sample was drawn from the consumer products industry.

“The ability to meet market demands is the prerequisite for growth. Consumer products companies were focused on building a deep understanding of their customer base and then tailoring products to specific segments and channels,” Engelbrecht says.

These companies used branding to counteract sluggish sales and consumers’ tendency to trade down. “A characteristic of consumer products companies as opposed to the general sample is their exposure to emerging markets,” Engelbrecht notes. “They are in pursuit of the 1 billion-strong new middle class. In this area, managers should be asking themselves just how detailed, current and accurate their customer segmentation information is.”

For example, to extend its customer reach in India, Procter & Gamble offered detergents at three distinct performance and pricing levels to make its Tide brand affordable for about 70% of the potential market.

If customer reach represents the potential for growth, actual growth is determined by a company’s ability to develop and market products and services. “Consumer products companies invested in fewer, bigger innovations and rolled them out across markets faster,” Engelbrecht continues. “They balanced the need to maximize global efficiencies and local flexibility by reducing supply chain complexity, by limiting the number of stock-keeping units, factories and distribution centres.”

Other focus areas included greater collaboration with retailers and reducing decision-making cycles. “Managers should be looking at ways to evaluate the players within their supply chains—and how flexible the chain is,” adds Engelbrecht. “In Russia, by reducing 100 price lists to just over two, Heinz was able to resolve the pricing confusion that was curtailing expansion. “

Meeting the demand for its products and services profitably is determined by a company’s cost competitiveness. High-performance consumer products companies made sure to secure the best terms with retailers and to track value leakage to ensure channel and product profitability. They also leveraged economies of scale. “For managers, a key priority should be ensuring that cost reduction is an ongoing strategic priority,” he observes.

For example, he says Kraft is ensuring its cost competitiveness by reducing overhead costs to 12% of net revenues by 2013, capturing $1 billion in procurement savings by rationalizing its supplier base, and another $1 billion by rolling out high efficiency principles across its manufacturing plants.

Finally, with one of the major casualties of the recession being trust, both within and outside of the organization, winning companies are focusing on this factor. “Like other sectors, consumer goods was characterised by a focus on increasing the depth and transparency of communication on non-financial performance and risks, embedding sustainability into the corporate DNA and collaborating with policy makers on regulatory reform,” Engelbrecht says.

“Managers should establish their organization’s risk profile and appetite, as well how confident their key stakeholders are about the effectiveness of their risk management.”

Nestlé, for example, has committed to creating ‘shared value’, both for investors and the societies in which it operates.

The ‘new normal’ marketplace is volatile, stresses Engelbrecht. “It is far from uniform and it is highly competitive—nowhere more so than in the consumer products sector. The insights from this research can give companies valuable pointers when it comes creating their own strategies for success,” he concludes.