Go-to-market strategies for emerging markets: How CPGs can better serve the so-called organized trade

The retail business in emerging markets is undergoing a shift from informal, traditional channels to modern, or “organized,” trade. To succeed in this environment, CPG sales organizations must understand the operational complexities and local realities in individual markets. Moreover, they need a go-to-market model that is tailored to a retailer’s unique requirements.

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Go-to-market strategies for emerging markets How CPGs can better serve the so-called organized trade

Contacts

About the authors

Beirut Gabriel Chahine Partner +961-1-985-655 gabriel.chahine @strategyand.pwc.com Karl Nader Principal +961-1-985-655 karl.nader @strategyand.pwc.com Delhi Raghav Gupta Principal +91-1244998704 raghav.gupta @strategyand.pwc.com London Richard Rawlinson Partner +44-20-7393-3415 richard.rawlinson @strategyand.pwc.com Dave Phillips Principal +44-20-7393-3715 dave.phillips @strategyand.pwc.com

Mexico City Carlos Navarro Partner +52-55-9178-4209 carlos.navarro @strategyand.pwc.com Juan Valero Partner +52-55-9178-4200 juan.valero @strategyand.pwc.com Heberto Molina Principal +52-55-9178-4224 heberto.molina @strategyand.pwc.com

Mumbai Abhishek Malhotra Partner +91-2261281104 abhishek.malhotra @strategyand.pwc.com Shanghai Sarah Butler Partner +86-2123279800 sarah.butler @strategyand.pwc.com Adam Xu International Director +86-2123279800 adam.xu @strategyand.pwc.com

Carlos Navarro is a partner with Stategy& based in Mexico City. He is the leader of the consumer and retail practice for north Latin America. Juan Valero is a partner with Stategy& based in Mexico City. He specializes in defining commercial and GTM strategies with predominant focus on CPG companies. Heberto Molina is a principal with Stategy& based in Mexico City. He specializes in value proposition design, consumer insight and experience, and GTM strategy. Jose L. Marzal was formerly a senior associate with Booz & Company.

This report was originally published by Booz & Company in 2013.

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Executive summary

The retail business in emerging markets is undergoing an inevitable shift from more informal and traditional retail channels to modern, or “organized,” trade, with significant implications for consumer packaged goods (CPG) companies. The range and relative sophistication of the modern trade players — some international and some homegrown — present unique operational complexities that CPG companies need to understand in order to create an effective go-to-market strategy, for all phases of the relationship. During negotiations regarding both new and ongoing business, CPGs must identify all key decision makers at their retail counterparts and have the right people in place who understand their key drivers and can speak their language. In the deployment of promotions, new product launches, and actual store assortment, CPGs must understand how the retailer puts those negotiated agreements into action at the store level, and whether regional and store managers have any formal or informal decision-making power to implement additional components beyond the overarching agreement. During the in-store execution phase, CPGs need to understand how retailers operate different store formats and, based on that, tailor effective service models. Overall, to succeed in this environment, CPG sales organizations must develop robust multifunctional skills, along with a deeper understanding of regional market realities and stronger operational talent. The right model will allow CPGs to pursue a more strategic approach to store-level development, facilitate product replenishment, and improve merchandising at the point of sale. By addressing all of these factors, CPG players can master the so-called organized trade environment in emerging economies, and gain a stronghold as these markets expand.

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An evolving marketplace

The retail landscape in emerging markets is still dominated by what is commonly called the traditional trade — usually independent, smallformat mom-and-pop stores. Today, 60 to 70 percent of the retail trade for some categories in most emerging markets takes place through traditional channels. However, in many developing countries, modern trade in the form of large chains of supermarkets, convenience stores, and pharmacies is muscling in, attracting more customers by offering a greater diversity of products and often very competitive pricing. Over the next several years, this shift to modern trade will continue, making it the dominant retail pathway for many retail categories. For consumer packaged goods (CPG) companies, the rise of modern trade in emerging markets offers enormous opportunities to grow, but only if they are able to meet the complexity of these increasingly sophisticated retail chains with a flexible go-to-market (GTM) operating model of their own. In an intensely competitive consumer goods sector, an optimized GTM model — defined as the sales positions and routines that companies use to sell and deliver their products and services to their trade accounts — is essential. It enables service excellence, consumer engagement at the point of sale, and, ultimately, profitable growth. To this end, CPG companies face some clear challenges. Modern trade — also known as “organized” trade — is often not as organized as the name suggests. The widely different sizes among retail companies, the variety of product offerings, and the range of customers all lead to complex retail operating models that can be difficult for manufacturers to comprehend as they try to implement effective GTM strategies. For example, point-of-sale (POS) formats can vary within a retailer. There are four primary formats: warehouse price clubs (Sam’s Club, Costco), hypermarkets (Food King, Walmart), supermarkets, and small formats and convenience stores (very small stores, with an assortment of products for people “on the go,” many co-located in a gas station). These formats may vary slightly from one country to another, but they are broadly applicable globally. The same chain may have large stores
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In an intensely competitive consumer goods sector, an optimized go-tomarket model is essential.

with lots of variety to serve middle-class neighborhoods and smaller stores with a more limited product assortment to serve lower-class neighborhoods. In addition, operating and deployment models change from one retailer to the next. Decisions about product promotions are sometimes made at headquarters and sometimes at the store level. And each retailer has in place different technology and procedural capabilities, such as replenishment models, inventory tracking software, and labor policies. Moreover, within the same retailer these differences exist between formats and geographies, and the retailer’s deployment of its own capabilities to execute its strategies varies as a result of the maturity and coherence of its operations.

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Modern trade in China and India

China and India are both good examples of the complex and dynamic emerging market environment in which CPGs now operate. Global leading retailers — such as Carrefour from Europe, Walmart from the U.S., and Lotte from South Korea — are aggressively expanding in China. These companies operate as they do in developed markets, and CPGs can deploy key account management approaches in dealing with them. At the same time, there are emerging Chinese players that operate on a national level, such as Sun Art Retail’s Auchun and China Resource Enterprise. These are equally important in terms of national scale and sales volume, but are less centralized in decision making, which requires different negotiation and in-store execution strategies. Then there are rapidly growing regional retailers, such as Ningzuo in Shandong (East China) and Ren Ren Le in Shenzhen (Southern China). Last are the tens of thousands of local modern-trade customers (some of which operate as chains within a city, others as independent large hypermarkets). Each type of chain requires a specific GTM model tailored to its unique requirements. (These categories are not exclusive — some retail customers operate multiple formats. For example, the Lianhua Group, a state-owned company, operates hypermarkets, supermarkets, and other store profiles.) India has a similar situation, though with some key differences. Food and grocery chains in India are mainly domestic companies, including multiformat national chains (Reliance, Aditya Birla, Future Group), single-format national chains (HyperCity, Spencer’s), and single-format regional chains (DMart, Nilgiris). Most have been around for only six to 10 years. CPGs, by comparison, are largely a mix of global and domestic firms with much longer track records of 20 to 70 years and far more sophisticated processes and capabilities. This can be a challenge — CPGs effectively have to play down to the level of the retailers they’re working with — but it can also be an opportunity. CPGs that can help the retailer better manage key categories or engage consumers more

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effectively can lay the foundation for a long-term relationship that grows in line with the retailer’s capabilities. In both China and India, the geographic spread and disparity among city sizes and levels of development, along with a rapidly evolving competitor landscape for modern retailing, result in a very complex environment for CPGs.

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A framework for addressing complexity

To operate in these environments, CPG companies need to understand “the devil in the details” and learn how each retail chain manages business decisions — product assortment, national and regional campaigns, shelf-space design, pricing, promotions — and then adapt their own GTM models accordingly. In essence, a CPG company needs to mold its GTM model around the existing operating models of the retailers. By identifying retail counterparts and understanding their formal and informal decision rights, incentives, and priorities, a company’s key account manager can sync up communications and ease coordination across all touch points in the relationship. To adapt its GTM model, the CPG company must study the retailer’s operations and organize around three processes (see Exhibit 1, next page). These processes are negotiation (agreements between the CPG and the retail chain), deployment (internal retailer processes to carry out those decisions at the regional and city levels and across store clusters), and in-store execution (activities inside the store that ultimately drive success). Negotiation To effectively negotiate with a retailer, CPG executives need to understand how retailers make decisions and who makes them, along with their priorities and incentives. Retail chains usually negotiate agreements such as product assortment, pricing, promotions, and product launches either at the corporate level for the entire chain or in a more fragmented manner at the individual business units (meaning the formats or store banners). In the former case — decisions made at the corporate level — all functional areas, such as procurement, supply chain, and marketing, are centrally housed at headquarters. By contrast, when decision making is organized by format or store banner, some of these functional areas are duplicated at each business unit.

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Exhibit 1 A GTM framework for organized trade

Negotiation

Supply chain

Commercial/ merchandising

Operations

Finance/ administration

Corporate (decisions made at headquarters)

Deployment

Regionalized (regional team adjusts decisions) Store level (store manager adjusts decisions)

In-store execution

In-store business development

Order entry

Delivery

In-store inventory management

Merchandising

Source: Stategy&

In some cases, there are very specific local considerations. For example, in India, many retailers still have low profit margins, and as a result they are trying to reduce their working capital. Given this requirement, during the negotiation phase, some chains are asking CPGs for longer payment cycles — 60 to 75 days instead of the usual 30 days. This issue can often become a key success factor in negotiations, and once it is resolved, CPGs can reach agreement on the other items much faster. (Obviously, this has financial implications for CPGs, which must adapt their GTM model accordingly.) During the negotiation phase — both for new business and for ongoing business within existing relationships — the CPG needs to identify all critical stakeholders and speak their language. If the retailer includes a supply chain manager as a key player in the negotiations, the CPG needs someone who can interact with that person, understand his or her priorities, and make sure they are addressed during the negotiations.

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A CPG doesn’t need to mirror the retail team person for person, but it does need the ability to hold a multidisciplinary dialogue based on the retailer roles involved in the negotiations, such as procurement, finance, trade marketing, and supply chain, among others. Given that retail customers have different degrees of decision authority at different levels, the planning/decision-making process for trade spending and promotions will need to be customized to reflect this. For example, in China, Carrefour’s regional offices have significant power, and as a result, the company plans a significant amount of trade spend at the regional or city level, in addition to the national level. Deployment The next step is to understand how these key decisions negotiated at the top of the organizations are deployed down to the store level, particularly for product assortment, updates to the planogram, store promotions, and other consumer-facing changes. Are corporate decisions strictly enforced, or can they be second-guessed or overridden? Many retailers struggle with this internal process on their own. If a CPG doesn’t understand the deployment model at a company and how consistently it gets applied, its representatives may visit a store after what seemed like a successful negotiation only to find that their products are not in the right place — or not on the shelves at all. There are three possible deployment models that CPGs must consider when tailoring their GTM strategy. • Corporate: In this model, decisions are made at headquarters, and the regional and store managers have no decision-making power, either formal or informal. For example, a retailer might strictly implement a large national campaign throughout its store network by permitting zero deviations from the communications, materials, prices, and launch timing. This structure is usually ideal for a CPG, since the campaign is efficiently rolled out and there are few surprises later on. At the same time, however, this model is relatively inflexible, which makes it difficult for tailoring communications or SKU selections for regional or format-driven consumer tastes and preferences. • Regionalized: In this model, retailers have regional organizations that can make adjustments to decisions made at headquarters. For example, because convenience store chains can have thousands of stores across wide geographies, middle managers often coordinate activities at the regional level, such as modifying pricing to respond to a regional competitor, deploying promotional materials to certain
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stores and not others, or making adjustments to delivery schedules to ensure that promotional supplies reach all stores on time. In this context, a CPG needs to have the capabilities and resources to interact and collaborate closely with these regional managers. • Store level: In this model, regional managers have wide latitude to adjust or tailor the decisions made at headquarters. What’s more, store managers have formal and/or informal decision-making power to implement these decisions partially or in full. For example, some companies might give store managers the power to make shelf placement decisions to support a promotional campaign negotiated at the corporate level. In this case, CPGs need to give greater decision rights to their own store-level sales staff in order to capitalize on highly localized assortment and exhibition opportunities. The more decentralized a retailer, the more sophisticated a CPG’s understanding must be of the company’s deployment process. This includes recognizing the difference between the way things are supposed to work and the way they actually work. Some retailers might “say” they are centralized (via corporate channels), but in reality deployment is decentralized (store-level). If a CPG company is to manage the client effectively, it must understand these nuances and tailor its GTM model to better anticipate problems and intervene when necessary. In-store execution Even if the first two elements — negotiation and deployment — go well, the CPG company will still struggle if the retailer’s day-to-day in-store execution fails. In India, for example, retailers still do not have strong execution capabilities, and agreements made at the headquarters or regional level may not be executed at the store. More important, the point of sale is a key “moment of truth” for shoppers, especially in low- to middle-income brackets, who are still new to branded products in some categories. As a result, they need clear and detailed product information, incentives like trial offers, and interactions with in-store promoters to understand the product. In a market like this, CPGs may need to give greater weight to in-store execution compared to negotiation and deployment. To support a retailer’s in-store execution, CPG companies should begin by conducting a store-level segmentation by format to understand commercial and operational complexity. The purpose of segmenting by format is to determine the right service model for each format, including product mix, delivery, merchandising — essentially whatever the CPG needs to do to get its products onto store shelves and avoid
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stockouts. For instance, because convenience stores have limited shelf and warehouse space, they need more frequent deliveries, which in turn drives up costs for a CPG that does direct-to-store delivery (DSD). That’s a very different dynamic from price clubs, where space is less of an issue and deliveries can be larger and less frequent. Service models can be divided into five key activities — in-store business development, order entry, delivery, in-store inventory management, and merchandising. Each of these encompasses a range of activities that can be conducted in a variety of ways (see Exhibit 2). • In-store business development: Ultimately, the store aisle is where the rubber meets the road for product promotions, planogram implementation, and inventory availability. CPG companies need people who can develop relationships with individual store managers and interact in ways that support both the store manager and the manufacturer’s commercial strategy. Optimally, this becomes a true partnership with a strategic approach to selling that includes joint

Exhibit 2 CPG activities for the in-store execution phase

In-store business development
Integral development (sales, ROI) Push development (space, volume) Basic development (guidelines)

Order entry

Delivery

In-store inventory management
Retailer’s logistics and store personnel Supplier at store for inventory management support Periodic inventory and shelf audits

Merchandising

CPFR with vendormanaged inventory CPFR with automatic reorder Presales with supplier algorithm Experience-based presales

Specialized DSD

Retailer’s merchandising personnel Supplier’s dynamic merchandising routes Supplier’s fixed merchandising routes Supplier’s task force (special events)

Cross-dock to retailer’s warehouse Central warehouse delivery

Factory-to-store delivery

Less-than-truckload third-party delivery

Source: Stategy&

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planning, anticipating trends and shopper opportunities, measuring trade activation success, and adjustments when warranted. To be effective, the supplier needs to learn the retailer’s operational priorities: whether the focus is revenue, gross margin return on investment, or product rotation. • Order entry: The means by which products get ordered will vary depending on the format, available information, technology, and the retailer’s ability and willingness to share product demand and inventory information. Most CPG companies use either a presale or an automatic reorder (AR) model to meet product demand, maintain target inventory levels, and secure product supply during promotions and launches. The accuracy of the presale approach can vary widely depending on the technology and algorithms employed to determine the right quantity to order. Some suppliers still rely on their sales force’s experience to determine the right order quantity, while others are adopting simple algorithms that help increase the order accuracy. The use of handheld devices for sales force automation (SFA) including order entry and management of business development — already common in mature markets — is becoming more common in developing markets as well. For example, in African countries where mobile phone penetration is high and network coverage good, we see an increasing use of smartphones with custom apps as the primary tool for SFA. More frequently, we see retailers adopting AR systems that automatically generate an order according to a defined algorithm. This is an opportunity for CPG companies, as the AR model allows a more collaborative relationship between retailer and manufacturer. By applying collaborative planning, forecasting, and replenishment (CPFR) practices, CPGs can increase their visibility into the supply chain, share financial metrics, and thus fulfill product demand more efficiently. • Delivery: The main decision regarding delivery is whether the supplier is going to deliver at the retailer’s warehouse or to each store (DSD). The principal considerations to determine the best model include the dynamics of the product category (size, speed of sales, shelf life), geographic dispersion of stores, the retailer’s supply chain capability, and whether the volume per outlet allows an economically viable option. The decision of the delivery model will have different challenges and benefits for both the supplier and retailer (see “Choosing a Delivery Model,” next page).

The supplier needs to learn the retailer’s operational priorities: Whether the focus is revenue, gross margin ROI, or product rotation.

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Choosing a delivery model
When it comes to product delivery, suppliers usually opt for either a directto-store delivery (DSD) model, factoryto-store model, or central warehouse delivery model. All three have pros and cons: • The DSD option is commonly used by fast-moving consumer goods (FMCG) companies, including food categories, which often have coldchain requirements and short shelf lives. The DSD model moves goods from a CPG’s distribution center to the stores, giving the supplier excellent visibility into individual store demand and the ability to meet that demand in a timely fashion. However, the model comes with significant costs and operational challenges, such as assembling small orders at the warehouse and timeconsuming deliveries to each store. • The factory-to-store model is used principally to serve price club stores with significant inventory capacity. This is a very efficient model since it skips the intermediate step of routing through a distribution center. • The central warehouse delivery model is more common in nonfood categories and when a retailer’s stores are geographically dispersed. The model is operationally efficient, since it entails fewer, larger deliveries, often to the retailer’s own warehouses. On the downside, the supplier has less visibility into which specific stores are generating demand. It must rely on the retailer to distribute the goods from its warehouses to its stores, giving the manufacturer less control over product availability and less influence over store display.

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• In-store inventory management: Ensuring product availability for the shopper is crucial. The challenges of in-store inventory management vary widely among formats and chains because of differences in back-room capacity, shelf capacity, ordering and delivery frequency, and store policies. Accurately tracking in-store inventory is a good first step, as it will facilitate more accurate order taking. However, in many cases, these systems indicate only whether a product is on the premises, not if it’s actually on store shelves. Discrepancies lead to differences between system inventory and physical inventory, which can result in potential stockouts that are not reflected in the retailer’s inventory system. To avoid this, some retailers have in-store logistics staff or merchandisers that are continuously restocking products to make them available at the shelf. However, when the retailer does not have good control of inventories, suppliers may opt to send personnel to the stores to verify inventory or to support the retailers in their inventory management processes. This step guarantees that the inventory kept at the store is in line with the target and is reflected accurately in the retailer’s system. • Merchandising: To ensure that products get appropriate shelf space and promotional/marketing support, CPGs need to understand individual store layouts, shelf-space exhibits, and planogram policies. For example, in larger formats, a product may be displayed in several places. That’s to the manufacturer’s advantage, but it also demands more attention from the retailer, since high-traffic locations may need to be restocked more frequently. Being attuned to a retailer’s in-store policies can also improve POS execution. Some retailers will let a supplier fill empty shelf space when available. Those with strict planogram policies may prefer to leave an empty space on the shelves if the assigned SKU is not available. To better track the effectiveness of their GTM strategies, some manufacturers have created POS execution indexes that track product availability, product visibility, promotions implementation, and product launch support. The most cutting-edge CPGs utilize product recognition technologies that link a shelf picture with inventory, POS information, and trade marketing activity databases to score an index. Alternatively, manufacturers can send auditor teams to the stores to evaluate each criterion in the POS execution index and score the results. The relative emphasis of these five elements — in-store business development, order entry, delivery, in-store inventory management, and merchandising — varies by store format, even for stores within a single retailer (see Exhibit 3, next page).

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Exhibit 3 Store service models vary by store format (example)

In-store business development
Integral development (sales, ROI) Push development (space, volume) Basic development (guidelines)

Order entry

Delivery

In-store inventory management
Retailer’s logistics and store personnel Supplier at store for inventory management support Periodic inventory and shelf audits

Merchandising

CPFR with vendormanaged inventory CPFR with automatic reorder Presales with supplier algorithm Experience-based presales

Specialized DSD

Retailer’s merchandising personnel Supplier’s dynamic merchandising routes Supplier’s fixed merchandising routes Supplier’s task force (special events)

Cross-dock to retailer’s warehouse Central warehouse delivery

Factory-to-store delivery

Less-than-truckload third-party delivery Price club Convenience store

Source: Stategy&

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Case study

Emerging markets are difficult for CPG players because they entail so many varieties of retail players, even within a single country (see Exhibit 4, next page). For example, in one large developing market in Latin America, a large grocery chain has four different store formats: club stores, hypermarkets, supermarkets, and convenience stores. That requires CPGs to deal with four separate supply chains, four merchandisers, and six purchasing functions (because some formats have more than one). Marketing decisions are centralized, but deployment is highly decentralized, with store managers wielding significant authority to give manufacturers extra floor or shelf space for exhibitions, additional products, and promotions. That enables manufacturers to influence decisions at the store level, but doing so requires multiple points of contact for each store format. Within that same market, a large chain of convenience stores is far more centralized, with 10,000 stores across the country under a single banner. Marketing, purchasing, supply chain, and merchandising are all handled at headquarters, with decisions flowing down to regional organizations as guidelines (which can then be tailored by regional managers). Because of the physical constraints of the convenience store format, CPGs have the opportunity to influence order entry and delivery, but nothing else in the in-store execution phase. Overall, the service model for this chain is far less complex. Finally, a regional chain of 50 stores — which expanded from a nearby developed market — is perhaps the most straightforward. One purchasing agent makes decisions for the entire chain, not just across purchasing but also marketing, supply chain, and merchandising. With decisions so highly centralized, CPGs can only influence the delivery component of in-store execution. In all three cases, the point is not for a CPG player to completely revamp its operating model according to the needs of the retailer. Rather, CPGs should be flexible enough to adapt their model to fit, and to understand those changes in a structured way. Worth noting is that

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in some cases, a very complex and diffuse retailer model offers a kind of competitive advantage for the CPGs once they have successfully adapted to it. That kind of complexity can scare off new entrants, allowing flexible CPGs to own a bigger share of that business.

Exhibit 4 Retailers in a single emerging market require three GTM models

Supermarket chain with four different formats Negotiation

Convenience stores

Supermarket chain

Supply chain

Commercial/ merchandising

Operations

Finance/ administration

Supply chain

Commercial/ merchandising

Operations

Finance/ administration

Supply chain

Commercial/ merchandising

Operations

Finance/ administration

(4x)

(6x)

Deployment

Corporate

Corporate

Corporate

Regionalized

Regionalized

Regionalized

Store level

Store level

Store level

In-store inventory management

In-store inventory management

In-store inventory management

In-store business development

In-store business development

In-store business development

Merchandising

Merchandising

General overview

Individual business unit organization structured by format that requires interaction with multiple points of contact for each format Stores empowered to make decisions, enabling suppliers to influence decisions at the store level

Organization structured in line with an entire chain model that requires interaction with several functional areas Centralized decisions flow into the regional organizations as guidelines Given the large number of stores and the robust regional organization, most decisions are driven by regional personnel

Organization structured to negotiate with a single point of contact—typically the category buyer Decisions are made at the corporate level and enforced at every store Model enables supplier to influence decisions at the corporate level and limits what can be achieved at the store level

Retailer area or store-level functions that are relevant for the CPG’s GTM model Retailer area or store-level functions that are not relevant for the CPG’s GTM model

Source: Stategy&

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Merchandising

In-store execution

Order entry

Order entry

Order entry

Delivery

Delivery

Delivery

Conclusion

Given the increasing operational complexity of evolving modern retail chains in emerging markets, CPG companies need to mold their GTM models around each retailer’s existing operating model. This will allow them to effectively interact and ease coordination across all touch points in the relationship. Only then can the manufacturer reliably meet the customer’s needs and expectations while optimizing its commercial interests, whether they involve filling product orders more accurately and on time, capturing more shelf space, or conducting successful promotional campaigns. Besides the immediate financial benefits of a tailored GTM model, there are also more long-term strategic benefits, such as generating better insights into how clients operate. Such insights allow the supplier to identify market opportunities — perhaps mined from its own consumer intelligence — that will interest the retailer and give the supplier guidance as to how best to negotiate, deploy, and execute the new market opportunity. Given the pace of change at retailers, suppliers can’t expect a particular GTM strategy to be permanent. They should review resource allocations for different retail accounts on an annual basis and reprioritize as needed (for example, if a regional retailer has grown to become a national presence). Every two to three years, the CPG should conduct a more in-depth reexamination of its GTM strategy. The growth opportunity for CPG companies to serve multinational and domestic chains in emerging markets is enormous. To take advantage of it, however, they will need to abandon a one-size-fits-all GTM strategy. Success will depend on a flexible operating model that can tailor GTM models to the way the “organized” retail customers truly organize themselves.

In emerging markets, CPG companies need to mold their GTM models around each retailer’s existing operating model.

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