In Europe, modern trade retailers account for 40% to 80% of annual sales and gross profit for most consumer packaged goods companies (CPGs). Much of that profit is concentrated in four to five main customers in each country. A good year with one of these key customers typically translates into a good year for the consumer goods company. Unfortunately, many are having more bad years than good with their retail customers. Despite a substantial increase in trade investment, annual negotiations are getting tougher and more complex to manage. It has become more common for many consumer goods companies to end up in conflict with one of their critical retail customers in any given year.
Retailers’ net favourable opinion of consumer goods companies in Western Europe declined by one point in the past four years, from an already noticeably low base (23 points on a scale of –100 to 100), according to Advantage. That’s 26% lower than the average retailer’s perception of consumer goods companies globally, which rose by four points over the same time.
Among the root causes of the poor grades: Many of the levers that consumer goods companies use to grow the joint profit pool are close to the saturation point. For example, 59% of all promotions deliver no incremental value but just subsidise baseline sales, according to Nielsen research.
Yet, the best performing consumer goods companies manage to deliver more than 10% of incremental profit pool growth in a given year for all parties. Here’s what they do differently:
Understand their retailer customer’s economics and strategy, as well as their own. Few companies actually go through the effort of trying to build and understand their customer’s profit and loss (P&L) statement. Consequently, many initiatives in customer plans often create value for the consumer goods company but fail to deliver net value for their customers.
Expand the value creation horizon to 360-degree levers. The opportunities to engage with partner retailers in joint value creation are substantial. For example, the best-ranked consumer goods companies proactively look for ways to improve their end-to-end supply chain, co-invest in-store operations, and look for ways to increasingly digitalise their interactions.
Take a medium-term view to get structural results. Many consumer goods companies have a short-term, tactical view of their annual customer negotiations, focusing on monthly sales targets. Companies won’t boost joint profit pools by merely adding minor incremental changes to last year’s plans. Instead, consumer goods companies need to engage with their customers on a three-year vision of their joint business.
Raise the number and quality of customer touchpoints. The best plans are typically co-developed in detail with customers. Companies understand the customer organisation inside out. They know who their buyer is, how important their business is to the buyer compared with competitors, and how the buyer is evaluated and incentivised. They have a clear understanding of all the key people in the other areas of the customer organisation and set up direct and regular contact points across different functions. They create new opportunities to expand the conversation through new areas such as online marketing and digital shopper activation. They elevate discussions by organising regular top-to-top meetings.
Break through internal silos to get to the best plan. Many companies have large internal teams for their top customers, with dedicated functional expertise. In our view, the backbone of that team should be built around category, revenue growth management, key account management, and in-store execution expertise. The best companies make sure that all team members have skin in the game and are not just representing their particular functions. These teams should own the customer P&L and be collectively responsible for producing plans that grow the joint profit pool for both parties. The most successful use agile approaches to co-create innovative ideas while keeping a focus on the activities that might truly move the needle. Teams present the most important customer plans to senior leadership, as they would with different country plans or business unit plans.
Considering the pressures on their retail customers’ profitability, the only sustainable solution for consumer goods companies to grow themselves is to develop the joint profit pool. This is not easy, and we see only about 25% of companies succeed. It requires creating a truly customer-focused organisation and building win-win partnerships with retail customers. The most successful companies understand the economics of the trade, expand the scope of their collaboration, take a longer-term perspective, and work in an agile way, both internally and with their customers.
This blog was written and contributed by:
Bain & Company
SVP, Intelligent Analytics
Chief Customer Officer
Advantage Group International