GMA/PwC Report: 'Demand Chain' Driving CPG Growth
Having more or less maximized returns from the supply chain, top-performing food, beverage and household products companies are increasingly focused on the “demand chain,” according to the 2012 Financial Performance Report from the Grocery Manufacturers Association and PwC.
A relatively new term, the demand chain refers to activities that drive growth by driving customer interactions with a company’s brands and products.
“The demand side consists of innovation, marketing and sales—and I would say the key is how these activities are integrated to identify and exploit opportunities,” says Sunny Delight CFO Bill Schumacher, as quoted in the report.
Today, operational excellence is a given, the researchers stress; what will differentiate companies and drive their bottom lines is anticipating and meeting emerging customer needs.
“Companies can still drive competitive advantage through the supply chain, but the margin on that advantage is getting narrower,” observed Don Mulligan, CFO of General Mills. “Going forward, the winners will be whoever has the best marketing ideas, the strongest sales organizations and the right service delivery. That is the demand chain.”
“There is a greater focus on consumer trends and exploring the consumer landscape now,” agreed Hershey CFO Bert Alfonso.
The report, noting that a quarter of global consumers and a third of U.S. consumers say that companies usually fail to satisfy their expectations—and that most say they’d be willing to spend more with companies capable of doing so--stresses that “the gap in companies’ ability to anticipate and create demand is huge, and therefore so is the opportunity.”
Companies are just starting to truly grasp that consumer expectations and attitudes are changing radically, and that keeping pace is critical to their survival, the researchers point out.
CPGs that shift new strategic investments to their demand chain “will stand the best chance of creating new growth,” sums up Susan McPartlin, PwC’s leader, retail and consumer industry.
Consumer preferences and insights should be the core of all CPG growth strategies, influencing all functions and driving change, McPartlin emphasizes. The challenge—and the opportunity—she adds, is that companies need to reach consumers not only through physical stores, but through e-commerce and social media. And those involve considerable research and groundwork, including determining which brands and products are suited to e-commerce platforms, and how to glean and make sense of the fragmented, unstructured but hugely valuable insights in social media.
Consumers are now “omnichannel” shoppers, and they “expect a seamless experience,” McPartlin says. CPG companies need to address consumers in all of their channels of choice, and map their demand chains based on consumers’ “shopping journeys.”
Three-quarters of CPGs report that they’ll leverage social media for brand promotion over the next 12 months, and nearly a third will use social media to increase consumer loyalty (versus 17% saying the same last year).
To stay relevant to consumers, CPGs must rethink their demand chains to drive awareness, conversation and loyalty across channels, the report sums up. They must be on the digital platforms that their customers prefer so they can influence the buying process directly, and they must also be ready to adapt as digital touchpoints evolve. And they must also, of course, develop metrics to measure the effectiveness of digital efforts.
Further, since emerging markets continue to represent the largest growth opportunities, CPGs must stop thinking that they can simply rebrand legacy products for these markets, and invest in R&D and social media conversations with consumers in these markets to glean meaningful insights.
Financial Performance Trends
The relevance of all of the above becomes clear in the context of the CPG 2011 financial data in the report.
Some key highlights:
* Food, beverage and household products companies realized median net sales growth of 9.5%, 10.5% and 7.5%, respectively.
*However, food sales growth was primarily driven by higher prices in response to input-cost increases, rather than unit growth. The food sector’s return on sales and EBIT were relatively flat, and other metrics (including gross margin, inventory turnover, return on average assets and cash conversion cycle) saw only slight improvement.
*Beverages showed stronger trends, including improvement in return on sales and gross margins, productivity as measured by sales-per-employee; media cash conversion, and return on average assets. Inventory turns were flat.
*Worst-faring were household products, reflecting many consumers’ continuing cautiousness about spending on non-foods with economic recovery still slow. After seeing strong EBIT growth in 2010, these products’ EBIT dropped by 5.6% in 2011. This sector also saw a decrease in its return on sales. One challenge: increased borrowing costs.
*Very large CPG companies (net sales over $10 million) continued to thrive through international expansion and investments in digital and e-commerce (being where consumers are). Their net sales growth was 10.9% last year, and the largest-company sector was the only one to see EBIT growth. They also maintained their margins, supporting the theory that larger companies generally have stronger brands and so are better able to past price increases along to the consumer. Moreover, these very large companies’ return on invested capital was 12.5% last year (and 12.1% on both a three-year and five-year basis).
*Still, large, as well as medium and small companies, saw declines in average shareholder returns. However, small companies were the only ones to see returns actually go into negative territory, and the drop was severe: from 26.6% in 2010 to negative 31.9% last year, a 58.5% swing. Small companies also saw EBIT drop by 29.2%. Medium (as well as large) companies saw modest EBIT growth.
*U.S. exports of CPG products to the largest emerging nation purchasers (China/Hong Kong, Taiwan, South Korea, and the Philippines) almost tripled between 2005 and 2011, from $5 billion to $13 billion. Total global exports during the same period essentially doubled, from $40.3 billion to $80.3 billion. The $40 billion increase was split evenly among traditional export markets (the E.U., Canada, Japan and Mexico increased from $26 billion to $46 billion) and emerging economies (which increased from $14 billion to $34 billion).
*The report also emphasizes that CPGs’ global and domestic sustainability initiatives—and conveying these effectively through social networks and media influencers—continues to grow in importance. They increasingly affect CPGs’ bottom lines (and brand equity value) through the sales impacts of consumer perceptions, as well as by helping companies reduce operational costs.