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Survival for consumer goods companies requires becoming leaner, stronger, and more agile.
Under mounting external and internal pressures, consumer organizations can no longer reliably deliver a steady stream of profits in Europe. The diversity of regulations, languages, and cultures that characterizes Europe and the profusion of acquisitions over the past two decades have added to the cost of doing business.
Add to that heavy local operating structures, complex legal setups, and fragmented portfolios, and most organizations are unprepared to face the perfect storm of a maturing consumer market and tightening macroeconomic conditions. The cost structure generated by this legacy has become unsustainable, especially in smaller markets where the rapid development of modern retail has chipped away at sales but general and administrative costs have remained high, drastically reducing manufacturers’ margins.
Incremental, functionally targeted reorganizations are no longer enough. Global headquarters and shareholders are now challenging the status quo and calling into question the European exception. The same holds true for global companies headquartered in Europe, which are becoming more impatient with dwindling profitability and looking to invest elsewhere. This is now a driving force for radical transformation. The end of the European exception is forcing leadership teams to prioritize, optimize, and realign investments to regain the competitive edge.
The immediate priority for European management teams is to stem the current loss of profitability, but the longer-term goal is to once again become a target for investments. Doing so will require going well beyond low-cost operating models and building organizations that can respond to local market needs while also creating a structural cost advantage.
Ultimately, there are two options: Lead the transformation and develop solutions based on local knowledge, or follow as a frustrated global head off ice takes charge in response to slumping performance. Several players have already begun: Danone and Unilever recently launched large-scale restructuring plans to target redundancies, and Kimberly-Clark and Reckitt Benckiser went a step further by announcing their withdrawal from entire categories or a transfer of resources to developing markets.
The need for a radical transformation is clear, but the road map to get there is less so.Close
- The 2013 Global Retail E-Commerce Index™
E-commerce websites are no longer just offshoots of retailers' physical stores but valid alternatives for global expansion.
Today’s most successful retailers see global expansion as a crucial platform for growth. Wary of “real estate wars” and long ROI horizons, many have seized the online retail opportunity to overcome these challenges. Retailers everywhere are diving into online retail as consumers across the globe in both developed and developing markets go online to buy products. They are using a variety of growth strategies, from grassroots websites to acquisitions of smaller online retailers or expansion of international shipping capabilities.
A.T. Kearney 2013 Global Retail E-Commerce Index ranks the top 30 countries in both developing and developed markets for their online market attractiveness. The rankings are based on nine variables that measure both the current size of the online retail market and its potential for growth.
Following are some major findings of this year's index:
China takes the top spot. China occupies first place in the index. The G8 countries all fall within the Top 15. India is not ranked. India, the world’s second most populous country at 1.2 billion, does not make the Top 30, because of low Internet penetration (10 percent) and poor financial and logistical infrastructure compared to other countries.
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Developing countries feature prominently in the Index. Developing countries hold 10 of the 30 spots, including first-place China. These markets have been able to shortcut the traditional online retail maturity curve as online retail grows at the same time that physical retail becomes more organized. Consumers in these markets are fast adopting behaviors similar to those in more developed countries.
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Several "small gems" are making an impact. The rankings include 10 countries with populations of less than 10 million, including Singapore, Hong Kong, Slovakia, New Zealand, Finland, United Arab Emirates, Norway, Ireland, Denmark, and Switzerland. These countries have active online consumers and sufficient infrastructure to support online retail;
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Today's most successful retailers see global expansion as a crucial platform for growth. Retailers everywhere are diving into online retail as consumers across the globe in both developed and developing markets go online to buy products.
With a new economic community around the corner, Southeast Asia is poised for massive growth.
The Association of Southeast Asian Nations (ASEAN) encompasses 600 million people across 10 countries, with a combined GDP of $2.3 trillion. In two years, the ASEAN Economic Community (AEC) will come into effect to form a single market and production base with a free flow of goods, services, investment, and skilled labor.
JWT and A.T. Kearney recently conducted an in-depth study of the AEC bloc and its impact. Our conversations with 50 corporate leaders, most from domestic companies across Southeast Asia, and leaders of key Asian and Western multinationals that operate here, show the AEC is high on their radar screens. Sixty-four percent say their organizations plan to enter new markets in the region once the AEC kicks in; 60 percent say they will expand their existing brands or product lines; and 24 percent say they will add completely new ones to their portfolio after 2015.
The AEC will be a game changer. Companies across Southeast Asia are going to have to work harder to defend their home turf against a growing number of global and regional competitors.Close
The fresh prepared foods department offers one of the best opportunities to truly differentiate.
Food retailing is more competitive than ever, with mass merchandisers and warehouse clubs joined by drug and dollar stores, online providers such as FreshDirect and Amazon, and others encroaching on supermarket territory. Retailers need a unique offering to shift decisions about store choice beyond the traditional criteria of prices and location. Emphasis on perishables is a prevailing theme, but the fresh prepared foods department offers one of the best opportunities to truly differentiate. In addition, it brings higher-margin categories that can serve not only as a traffic driver but also as a potential growth avenue and profit center that will be critical for retailers to survive in today’s environment.
The key to achieving differentiation and growth is to develop a product mix and merchandising strategy focused on freshness, healthfulness, and value, and to build an efficient supply chain with the right economics.Close
Despite a host of new shopping options, talk of the demise of brick and mortar is premature.
Brick and mortar is dead. That's what many seem to believe. Reality, however, suggests a far different picture, one in which stores and store networks continue to play the leading role in building customer loyalty and supporting financial performance. In fact, our online study of 3,200 U.S. and UK consumers shows that stores remain at the heart of retailers' relationships with consumers, even in today's omnichannel world.
That's not to say that retail is business as usual. It's not. The advent of new retail channels has increased competition and price pressures. Stores, on their own, have become less productive and profitable.
The trick for retailers is to approach this new market context strategically, not only to understand the best roles for stores and the store network to play in today's retail ecosystem, but also to keep stores at the center of the customer relationship while maximizing value across channels. This paper provides four strategies to ensure that retailers' stores and store networks remain exactly there.Close
The methods of getting products to market in India and other developing countries are outdated. These days, direct coverage is better than indirect.
For consumer products companies in India, getting goods to retail locations faster and more cost effectively than competitors is key to top-line growth and competitive advantage. Yet India, like many other developing countries, has yet to update its distribution models to keep up with today's competitive, connected markets. As soaring costs put pressure on margins, and channel partners want better returns and faster growth, rethinking distribution and developing the right "win-win-win" distribution model could well be the ticket to improved sales and top-line growth.
Developing such a model requires taking a close look at three dimensions: coverage of retail outlets by channel partners (direct versus indirect), channel productivity (more sales, lower costs), and the payout (total retail expenditures). The paper focuses on the first dimension—direct versus indirect coverage—and explains why now is the ideal time to take another look at direct coverage.Close
Not only is the concept of merging without merging not crazy, it's already happening. And the results can be significant.
Collaboration is not new. Companies have exchanged data and forecasts for years. Virtual vertical collaboration, however, means capturing the benefits of M&A without the associated complexities, and involves a retailer and manufacturer acting as though they are about to merge, and creating the efficiencies that come with merger integration. Abandoning their traditional adversarial relationship, they build a bond, make mutually beneficial business decisions, and gain advantages including a 10 to 15 percent increase in sales, 40 to 60 percent faster new product launches, and 20 percent reduction in cost of materials.
In the old way of thinking, such possibilities would be almost unattainable, since the costs would likely fall on one party and the benefits accrue to the other. That's why it is important to act as though a merger is just a touch away. If you can trust each other, then figuring out how to pay for your collaborative efforts and how to distribute the benefits is transformed from a matter of competitive survival to a value-sharing opportunity.Close
How can CPG companies cut waste and improve companywide P-O-P efforts.
Most CPG companies allow multiple internal groups with differing priorities to plan, develop, and execute their point-of-purchase (P-O-P) strategies, making the entire system difficult to manage and almost impossible to measure.
This paper, underwritten by RockTenn and produced in collaboration with A.T. Kearney and the Path To Purchase Institute, highlights a new A.T. Kearney framework that helps companies improve their in-store marketing efforts. The framework can bring savings of up to 12 percent sales increases, unit cost reductions of 45 percent, and increased speed to market.
Finding the best person to oversee P-O-P efforts is step one. Step two is creating an enterprise-wide system to address the problems of waste and inefficiency. The framework addresses three primary issues: strategy design and planning; supply chain; and improving execution.Close
Home delivery of large-format products—appliances, furniture, electronics—falls short of today's expectations. Isn’t it time to deliver all the goods?
The market for home delivery of large-format products such as appliances, furniture, and electronics is poised for growth but structural hurdles are blocking retailers and home delivery service (HDS) providers from capturing that growth. A nationwide HDS integrator could resolve these issues—while also unlocking sizable savings and improving customer service—but it hinges on the willingness of retailers, HDS providers, and investors to work together. Each side faces unique challenges: For retailers, these include disagreement on “role” in home delivery, near-term cost pressures, and no immediate HDS option; for HDS providers lack of size and density, operational issues, and investment muscle are the biggest hurdles.
Similar to UPS and FedEx in parcel delivery, an integrator would be a national service provider offering an end-to-end (line haul and last mile) network with leading capabilities and technology to sustain best-in-class performance. In addition to unlocking and passing on significant cost savings to retailers large HDS integrator networks would unlock breakthrough scale and density while reducing coordination complexity. The value created by integrating will increase the pie for both retailers and HDS companies.Close
- Chain Drug Review, 17 June 2013
As consumer desire for organic beauty products increases, drug retailers need to take full advantage of consumer demand while understanding the risks of product availability, quality, and reputation and collaborating along the value chain.
- 2013 Global Retail Development Index™
As developing markets mature, retailers are expanding more carefully.
A.T. Kearney’s Global Retail Development IndexTM (GRDI) has guided global retailers with their strategic investments for more than a dozen years, and the 2013 Index reflects some important changes to the retail environment. But one thing hasn't changed: As developed markets face flat or anemic growth, developing markets remain important sources of growth. The 12th annual edition of the GRDI finds many opportunities for retailers seeking to grow and expand in fast-growing developing markets big and small.
Of course, there's nothing easy about a global expansion strategy in retail. Every market has unique challenges that require unique strategies for success. And this year’s GRDI finds several examples of countries where global retailers are taking a step back from the aggressive expansion of the not-too-distant past in favor of more cautious strategies. For example, as retailers confront challenges in China, many are scaling back plans for new stores and choosing sites more carefully. In some regions, such as Latin America and Central Asia, more retailers are opening in smaller countries to hone their regional strategies before entering larger markets.
Highlights of the 2013 GRDI include:
- Brazil takes the top spot for the third straight year, followed by two other Latin American countries, Chile and Uruguay. A strong and growing middle class, controlled inflation, sustained economic growth, and continued economic and political stability have increased consumer and investor confidence and created a favorable environment for retail development.
- China dips to fourth but it remains a retail powerhouse thanks to double-digit sales growth and rising consumer demand. However, many luxury retailers are rethinking their expansion plans as Chinese consumers purchase more goods abroad. China is first in the Retail Apparel Index.
- Once again, the Index sees the rise of “little gems”—small-population countries with unique characteristics. This year’s gems include Uruguay (3rd in the rankings), Mongolia (7th), Georgia (8th), and Armenia (10th), among others. For luxury retailers, these are newfound hubs. For general retailers, they can be the beginning of a regional strategy.
- India has its lowest ranking in the GRDI’s 12 years, amid high operating costs, low bargaining power with vendors, and heavy discounting to improve sales. However, the long-term fundamentals remain strong: a large, young, and increasingly brand- and fashion-conscious population.
About the Index
Published since 2002, the GRDI helps retailers prioritize their global development strategies by ranking the retail expansion attractiveness of emerging countries based on a set of 25 variables including economic and political risk, retail market attractiveness, retail saturation levels, and modern retailing sales area and sales growth. The GRDI focuses on opportunities for mass merchant and food retailers, which are typically the bellwether for modern retailing concepts in a country.Close
China’s apparel industry continues to expand rapidly in all categories—with some major challenges. While there is no one-size-fits-all strategy for success, finding the right fit is vital.
It is never easy to spread a brand’s presence across a national market, let alone one as heterogeneous as China’s, where disparity of spending power and brand awareness persists. As the country's apparel industry continues to flourish and grow at an estimated rate of 14 percent, established and aspiring players face a number of challenges. Multinationals are trying to penetrate tier 3 and 4 cities, where local players compete at lower price points. In megacities, higher rental and labor costs are squeezing retailers’ margins and making it more difficult for low-performing brands to survive. The rapidly expanding fast-fashion segment has not only piqued consumer interest in affordable, edgily fashionable clothes but is also compelling mass-brand players to reconsider how they do business. This paper charts the main issues confronting the apparel industry in China today, discusses the strategies leaders are employing to capture growth opportunities, and outlines three key prerequisites for a successful brand launch.Close
- The 2013 Achieving Excellence in Retail Operations study
The retail market is changing, but the priorities remain the same.
As we developed A.T. Kearney's 2013 Achieving Excellence in Retail Operations (AERO) study, we were aware of the huge changes that had occurred just since our previous study in 2010. Three years ago, we did not ask retailers anything about social networking. We covered far fewer options for deploying technologies to customers—and for getting information back from them. And although we asked about multiple channels, the notion of integrated channel retailing was at best a distant mirage. But look what happened with our results in 2013: Despite the changes, the AERO study demonstrates the importance of many traditional core principles of retailing. It confirms that running a successful retail operation is all about people: employees, customers, and the interactions between them. One of the biggest secrets to success is the simple notion of engagement: listening to your staff and your customers. Another is cutting back on administrative burdens to get managers out in the field. And although the new wealth of technologies and available data is a great boon, often the most productive uses of it are in addressing familiar challenges such as managing shrink and out-of-stocks.
Sure, it is both fun and important to look at new technologies and the insights you can gain from them. Yes, there is some value in the gee-whiz imaginings of a Jetsons-like retail future. But when you dig deep into what actually generates profits for today’s most successful retail companies, it turns out that they’re simply good at what great retailers have always been good at: the nuts and bolts of operations. They identify the right metrics, analyze them appropriately, and act intelligently. They support field leadership with tools and processes to improve their decision making. They rely on, and seek insights from, front-line staff. And they view technology as neither a threat nor a toy, but as a tool that better enables them to achieve ancient ambitions such as customer insight, operations efficiency, and customer service.
In a sense, then, the more things change, the more they stay the same. In an information-soaked environment, amid the emergence of multiple retail channels, it’s important to understand how to take advantage of the changes. But it’s equally important to keep a hand on the pulse of core principles: people, customers, and physical store layouts. This report examines the insights from our 2013 AERO Study to show how retailers are turning great operations into profits.Close
How global food companies capture diverse opportunities.
Global food companies, from seed producers to quick service restaurant (QSR) operators, from agrochemical enterprises to branded food manufacturers, have built business empires in the developed world. For the largest among them, developed markets typically account for as much as two-thirds of their business turnover. But as growth slows across much of Europe and North America, attention has turned to emerging markets.
The record is clear. We know that replicating business models, products, management systems, and processes used in developed economies does not work in emerging countries and that success belongs to those that identify the singularities of each market and adapt accordingly. Our client experience, coupled with our examination of many of the best-known cases of profitable internationalization among food manufacturers and QSR operators, has led us to develop a six-point framework to assess different food markets and their specific needs. The paper discusses these points in more depth:
- Know and address consumers’ health and nutrition needs.
- Cater to shoppers’ tastes and preferences.
- Remember that volume trumps margin.
- Drive the trend in packaged food consumption.
- Innovate, adapt, and (re)configure to solve supply chain issues.
- Understand and comply with regulations.
Palm oil has become a crucial ingredient in a wide range of products. But the future lies in new oils.
A major global commodity, palm oil has found its way into a staggering array of snacks, confectionery goods, moisturizers, shampoos, margarine, and even biofuels.
Palm oil's rapid rise has come at a cost. The most hospitable climates are situated within 20 degrees of the equator, the same region where tropical rain forests flourish and carbon-rich peatlands abound. Indonesia and Malaysia alone comprise more than 10 percent of the world's remaining tropical rain forests, yet some predict that if current trends continue, Indonesia's surviving rain forests will almost entirely disappear by 2022. Deforestation is especially noticeable on Borneo, an island more than twice the size of Germany.
Some users of palm oil have partially shifted their demand to other available oils, but the impact of these oils is limited due to their higher cost, lower efficiency, poorer health profile in some applications, and lower versatility compared to palm oil.
New oils, then, must be a part of the solution. They can change the game by revolutionizing the way we address sustainability challenges, but the question of which new oil will prevail and what benefits can be realized remains unknown.
We therefore call upon three stakeholders that could provide a step change in advancing new oils:
- Create a forum that commits to enabling technical feasibility and successful commercialization of new oils.
- Issue regulations and provide incentives to promote the development and use of new oils.
- Create awareness and promote demand for new oils from buyers and end consumers.
- CPG matters, March 2013
Learn how to better evaluate and prioritize value chain improvement in corporate decision-making and unlock benefits that support both growth and cost reduction.