Consumer Products Companies Face Declining Margins

June 21, 2012 /

In an unprecedented business environment of accelerating pace of change and spiraling complexity, almost three quarters of consumer products (CP) companies say they need to make significant changes to their business in order to sustain historic margins according to Disrupt or be disrupted, according to a report released by Ernst & Young.

In an unprecedented business environment of accelerating pace of change and spiraling complexity, almost three quarters of consumer products (CP) companies say they need to make significant changes to their business in order to sustain historic margins according to Disrupt or be disrupted, according to a report released by Ernst & Young.

Commenting on the report findings, Howard Martin, Global Consumer Products Leader at Ernst & Young says, “We believe CP companies are facing a dramatic pace of change in which tried and tested ways of creating value are no longer fit for purpose. This highly disruptive environment, that we call the “brand new order” presents companies with huge opportunity, but also heightened risks.”

The report, which canvasses the opinion of 285 senior global executives including the CEOs and CFOs of leading CP companies and industry investment analysts, identified that companies face a brand new order, where the traditional ways of creating value are no longer valid and execution is critical. Over two thirds of CP leaders are feeling under pressure to reappraise their operating model.

To address the brand new order, companies need to disrupt current and traditional ways of thinking, established business models and the old approaches to value creation. To win in the brand new order, companies need to focus on three imperatives.

Reframing strategic choices

Seventy-four percent of companies agreed significant changes are needed if they are to sustain the predictable margins that analysts and investors have come to expect from the sector. Strategies that worked consistently in the past are no longer reliable. Markets that have shown growth for decades are under threat. And consumers and customers who have always been dependable are evolving beyond recognition. Managing in this environment requires companies to shed legacy ways of thinking and embrace disruptive solutions.

However, few are confident in this uncertain environment at making the right decisions against a backdrop of continuous change. When deciding where to compete, less than a third of respondents globally believed their company was very good and this opinion varied considerably by market. Thirty-seven percent of North American respondents report strong confidence compared with 31% in Asia Pacific and 20% in Europe. Meanwhile, just 16% reported being very good at balancing global control with local entrepreneurialism.

Patricia Novosel, Ernst & Young Deputy Global Consumer Products Leader, comments, “With finite resources to allocate, companies must make difficult choices and trade-offs over where they should focus their attention and capital. These decisions are extremely complex, and business leaders must increasingly rely on data and analytics to give them the support they need and the confidence to make choices under extreme uncertainty.”

Realigning the value chain

Increasing complexity and costs are pressuring CP companies to seek new methods of producing, marketing and selling products. The growing global demand for raw materials is driving up input costs whilst catering to the needs of empowered consumers in increasing numbers of diverse and volatile markets through increasing numbers of retail channels including online and direct to consumer is dramatically escalating both complexity and cost across the value chain.

Companies must create and manage a value chain that is fit for purpose in this environment. The supply chain must be resilient enough to withstand shocks, agile enough to respond quickly to sudden or unexpected change, flexible enough to customize products and efficient enough to protect margins. However, just 26% of respondents rated their company as very good at creating a lean and agile supply chain and the increased cost and scarcity of resources was the most frequently mentioned risk by business leaders. Sixty percent noted that it will become ever more necessary to secure long-term supply of critical resources and commodities to avoid a tighter squeeze on margins and pressure on operating models.

On the demand side, companies recognize they need to change the way they engage with consumers and although over half the companies identified that social media has transformed relationships over a quarter (28%) rated themselves as poor at creating brand engagement and reaching consumers.

On the importance of multi-channel communication Emmanuelle Roman, Ernst & Young Global Consumer Products Markets Leader, adds, “Traditional marketing channels are still important, but they are losing their potency, and CP companies need to reframe their thinking and their resistance towards embracing social media highlights the importance of tools that can track the performance of social media and determine return on investment.”

Ruthless executing to capture value

It’s not enough to have a great strategy, companies must be able to action it consistently in the marketplace. However, only 30% say that they are very good at creating a clear strategy and aligning resources behind it.

The most important driver for successful execution is the empowerment of talent, wherever they are located, to make the right decisions in a data-rich world inside the right values driven framework. When looking at the challenges impeding implementation, 36% of respondents point to talent and capabilities as the most critical barrier to executing strategy. Yet despite the importance of talent to successful execution, just 20% of respondents identified their company as very good at attracting and optimizing talent and resources.

Many companies are experiencing skill shortages in the areas where they need them most, the rapid-growth markets, and the need to generate value and prioritize innovation requires companies to adopt a highly open approach to how and where they source talent. Internal development and training can help to create the capabilities of the future, but it needs to be supplemented with a focus on external recruitment to increase the diversity of thinking.

Another area of challenge identified by the research included pricing. Surprisingly only 7% of leaders cited price optimization as one of the top three activities expected to deliver margin mix improvement. Faced with value conscious consumers and retailers reluctant to raise prices, just 16% of companies feel confident in their ability to increase the pricing power of brands and 37% rate their performance as poor. This makes it critical for companies to extract maximum value from current price levels.

When looking at the future for CP companies, Martin summarizes, “The macroeconomic environment is tough and isn’t about to change and winning in the “brand new order” requires companies to take action on many fronts. CP companies need to challenge accepted ways of thinking and adopt a highly disruptive approach to managing almost every aspect of their business and above all, they must execute flawlessly.”

Commenting on the report findings, Howard Martin, Global Consumer Products Leader at Ernst & Young says, “We believe CP companies are facing a dramatic pace of change in which tried and tested ways of creating value are no longer fit for purpose. This highly disruptive environment, that we call the “brand new order” presents companies with huge opportunity, but also heightened risks.”

The report, which canvasses the opinion of 285 senior global executives including the CEOs and CFOs of leading CP companies and industry investment analysts, identified that companies face a brand new order, where the traditional ways of creating value are no longer valid and execution is critical. Over two thirds of CP leaders are feeling under pressure to reappraise their operating model.

To address the brand new order, companies need to disrupt current and traditional ways of thinking, established business models and the old approaches to value creation. To win in the brand new order, companies need to focus on three imperatives.

Reframing strategic choices

Seventy-four percent of companies agreed significant changes are needed if they are to sustain the predictable margins that analysts and investors have come to expect from the sector. Strategies that worked consistently in the past are no longer reliable. Markets that have shown growth for decades are under threat. And consumers and customers who have always been dependable are evolving beyond recognition. Managing in this environment requires companies to shed legacy ways of thinking and embrace disruptive solutions.

However, few are confident in this uncertain environment at making the right decisions against a backdrop of continuous change. When deciding where to compete, less than a third of respondents globally believed their company was very good and this opinion varied considerably by market. Thirty-seven percent of North American respondents report strong confidence compared with 31% in Asia Pacific and 20% in Europe. Meanwhile, just 16% reported being very good at balancing global control with local entrepreneurialism.

Patricia Novosel, Ernst & Young Deputy Global Consumer Products Leader, comments, “With finite resources to allocate, companies must make difficult choices and trade-offs over where they should focus their attention and capital. These decisions are extremely complex, and business leaders must increasingly rely on data and analytics to give them the support they need and the confidence to make choices under extreme uncertainty.”

Realigning the value chain

Increasing complexity and costs are pressuring CP companies to seek new methods of producing, marketing and selling products. The growing global demand for raw materials is driving up input costs whilst catering to the needs of empowered consumers in increasing numbers of diverse and volatile markets through increasing numbers of retail channels including online and direct to consumer is dramatically escalating both complexity and cost across the value chain.

Companies must create and manage a value chain that is fit for purpose in this environment. The supply chain must be resilient enough to withstand shocks, agile enough to respond quickly to sudden or unexpected change, flexible enough to customize products and efficient enough to protect margins. However, just 26% of respondents rated their company as very good at creating a lean and agile supply chain and the increased cost and scarcity of resources was the most frequently mentioned risk by business leaders. Sixty percent noted that it will become ever more necessary to secure long-term supply of critical resources and commodities to avoid a tighter squeeze on margins and pressure on operating models.

On the demand side, companies recognize they need to change the way they engage with consumers and although over half the companies identified that social media has transformed relationships over a quarter (28%) rated themselves as poor at creating brand engagement and reaching consumers.

On the importance of multi-channel communication Emmanuelle Roman, Ernst & Young Global Consumer Products Markets Leader, adds, “Traditional marketing channels are still important, but they are losing their potency, and CP companies need to reframe their thinking and their resistance towards embracing social media highlights the importance of tools that can track the performance of social media and determine return on investment.”

Ruthless executing to capture value

It’s not enough to have a great strategy, companies must be able to action it consistently in the marketplace. However, only 30% say that they are very good at creating a clear strategy and aligning resources behind it.

The most important driver for successful execution is the empowerment of talent, wherever they are located, to make the right decisions in a data-rich world inside the right values driven framework. When looking at the challenges impeding implementation, 36% of respondents point to talent and capabilities as the most critical barrier to executing strategy. Yet despite the importance of talent to successful execution, just 20% of respondents identified their company as very good at attracting and optimizing talent and resources.

Many companies are experiencing skill shortages in the areas where they need them most, the rapid-growth markets, and the need to generate value and prioritize innovation requires companies to adopt a highly open approach to how and where they source talent. Internal development and training can help to create the capabilities of the future, but it needs to be supplemented with a focus on external recruitment to increase the diversity of thinking.

Another area of challenge identified by the research included pricing. Surprisingly only 7% of leaders cited price optimization as one of the top three activities expected to deliver margin mix improvement. Faced with value conscious consumers and retailers reluctant to raise prices, just 16% of companies feel confident in their ability to increase the pricing power of brands and 37% rate their performance as poor. This makes it critical for companies to extract maximum value from current price levels.

When looking at the future for CP companies, Martin summarizes, “The macroeconomic environment is tough and isn’t about to change and winning in the “brand new order” requires companies to take action on many fronts. CP companies need to challenge accepted ways of thinking and adopt a highly disruptive approach to managing almost every aspect of their business and above all, they must execute flawlessly.”

 

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