Profitable growth during the European crisis: A call to action for consumer companies
The economic challenge for European consumer product and retail companies is more serious now than it has been since 2008. Strategies like cutting costs and seeking high-growth markets in Asia and Latin America will no longer be effective. The best way out is to grow at a minimum investment cost: Explore new uses for your existing products. Think like a challenger. Bring small innovations to large scale rapidly. And embrace digitization — strategically.
Profitable growth during the European crisis A call to action for consumer companies
About the author
Amsterdam Coen de Vuijst Partner +31-20-504-1941 coen.devuijst @strategyand.pwc.com Marco Kesteloo Partner +31-20-504-1942 marco.kesteloo @strategyand.pwc.com Behdad Shahsavari Partner +31-20-504-1944 behdad.shahsavari @strategyand.pwc.com Hein van Beuningen Partner +31-20-504-1917 hein.vanbeuningen @strategyand.pwc.com Beirut Gabriel Chahine Partner +961-1-985-655 gabriel.chahine @strategyand.pwc.com Cleveland Steffen Lauster Partner +1-216-902-4222 steffen.lauster @strategyand.pwc.com Copenhagen Per Hannover Senior Executive Advisor +45-3318-70-22 per.hannover @strategyand.pwc.com
Düsseldorf Peter Heckmann Partner +49-211-3890-122 peter.heckmann @strategyand.pwc.com London John Potter Partner +44-20-7393-3736 john.potter @strategyand.pwc.com Richard Rawlinson Partner +44-20-7393-3415 richard.rawlinson @strategyand.pwc.com Munich Thomas Ripsam Partner +49-89-54525-610 thomas.ripsam @strategyand.pwc.com Vienna Harald Dutzler Partner +43-1-518-22-904 harald.dutzler @strategyand.pwc.com
Richard Rawlinson is a partner with Strategy& based in London. He works with consumer-intensive businesses on strategy and organization.
This report was originally published by Booz & Company as “Profitable Growth Now: A Call to Action for Consumer Companies Facing the European Crisis,” in 2013.
This report is a call to action for consumer products and retail executives in Europe. The economic challenge for your companies is more serious now than it has been at any time since 2008, when the current financial and economic crisis began. The conventional strategies of the past few years — cutting costs and seeking business in the new high-growth markets of Asia and Latin America — will no longer be effective. The best way out is to grow at a minimum investment cost: specifically, to seek opportunities for growth that are closely related to the distinctive strengths and capabilities that you already have. The question is how, and from our perspective, there are four viable ways for consumer products and retail companies in Europe to proceed: 1. Explore new uses for your existing products. 2. Think like a challenger. 3. Bring small innovations to large scale rapidly. 4. Embrace digitization — but strategically. All of these approaches, conducted effectively, will help you drive growth in Europe’s mature consumer market, even in the face of further downturn and even with minimal investment budgets. You can accomplish this by improving your coherence — by raising the alignment among your strategy, your capabilities, and your line of products and services. In other words, you can build a viable future for your company in a cost-effective fashion by managing one of the few things you can control — the way in which everything you do fits together. Many large companies find it difficult to maintain this kind of focus. It feels unfamiliar to them, largely because their leaders take the norms of their businesses for granted. In consumer products and retail, this has often meant “letting a thousand flowers bloom,” and championing a large variety of projects and product extensions, only a few of which succeed. We will explore why it is so difficult for companies to switch to a more coherent strategy — and the added opportunities that await those that do.
A call to action
It is now more than five years since the global economic downturn began — and the world is going through the slowest recovery on record. If you are a consumer products or retail company executive in Europe, then you have experienced this firsthand. During the early years of the crisis, your company probably coped with shrinking demand like most of your peers, by cutting costs and lowering capacity. You reduced waste and inefficiency; you cut travel budgets and other staff amenities; you shifted much of your investment to places like China, Brazil, India, and other high-growth markets. Initially, these measures worked — at least for the short term. Between 2009 and 2012, even as revenues fell, many companies posted increased earnings and relatively strong stock market performance. But now cost cutting has run out of steam. You’ve already done most of what you can reasonably do to remove excess, reengineer, and reduce overhead.
The Wall Street Journal
Cost cutting has run out of steam.
“America’s Largest Corporations Emerge from Recession Leaner, Stronger…”
“BT reaps £2.5bn benefit of cost cutting”
“Daimler Sees Better Second-Quarter Earnings on Cost Cuts”
“European Companies Stockpile $475 Billion as Outlook Dims”
“US Companies Stashing More Cash Abroad As Stockpiles Hit $1.45T”
Are prospects in Europe as challenging as they seem to be? You already know the answer. The economic headwinds are more formidable than they have been at any time since 2008. In Western Europe, the social security safety net kicked in after the crisis and provided consumers with some relief. But the underlying challenges remained. Each year, the total aggregate of consumers’ personal disposable income has sunk further beneath its already historically low levels; for almost two years it has been contracting in real terms (see Exhibit 1).
Exhibit 1 Growth rates in disposable income for three major markets, 2002–12
Annual Year-over-Year Change in Personal Disposable Income 15% 10% 5% 0% -5% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
BRIC Countries North America Western Europe
Source: The Economist Intelligence Unit, 2013
In many countries, as governments are forced to address their fiscal problems, personal disposable income is being squeezed even more, through higher taxes and lower social security payments. In short, though it may vary by country, the decline of consumer spending power is likely to continue in Europe for some time.
The economic headwinds are more formidable than they have been at any time since 2008.
Many European consumer products companies had compensated by seeking markets in the BRIC countries (Brazil, Russia, India, and China), where disposable incomes were expanding by 10 percent per year. But this has, in the long run, compounded the problem. Starting in the mid2000s, disposable incomes in the BRICs leveled off to an aggregate rate of 6 percent per year. To be sure, this is still healthy relative to Europe, and it still deservedly commands investment attention. But the investment in the east and south has left managers in Europe constrained, with very little discretionary investment capital remaining for them. Meanwhile, North America’s personal income growth rate has rebounded to about 2 percent per year, thereby attracting investment as well. Thus, in most multinational companies, European growth investment will be starved for the foreseeable future — for at least as long as the numbers show higher growth elsewhere. The ongoing problems in Europe, which are coming to a head this year, cannot be ignored by global consumer products and retail companies. They have already contributed to an overall decline in earnings growth. Year-overyear earnings growth had rebounded after 2009, especially in S&P 500 companies, but it went back over the cliff in the fourth quarter of 2012, and it could continue to fall further (see Exhibit 2).
The decline of consumer spending power is likely to continue in Europe for some time.
Exhibit 2 Net income gains and losses since 2006 for the S&P 500
Quarterly Year-over-Year Change in Reported Net Income (S&P 500) 40%
Source: Bloomberg; CSI Market; Strategy&
Even in the toughest circumstances, you can find ways to grow by giving them what they need.
Four opportunities for growth
Looking at these trends clearly will probably lead you to one conclusion. Your strategy in Europe has to change.
Change does not mean further retrenchment or a monomaniacal focus on investment in higher growth markets. Those strategies won’t work. They are either played out or unsustainable. Instead, this is the moment to invest in growth, including in the established markets of Europe. However, because of all the constraints you face, you will have to find ways to deliver that growth without much of an investment budget. Fortunately for you, you are not the only company in this difficult position. Your way out is to challenge some of the prevailing attitudes held in your industry about growth, assets, and your market. If you can take the leap before your competitors do, you are much more likely to thrive. For starters, stop looking for growth where you have sought it in the past. Instead, seek out the opportunities that match your most distinctive capabilities. Double down your investments on those growth strategies — the ones that match the strengths that differentiate you from other companies. Double down on the growth strategies that work. Invest in these areas with the intent to win. Ruthlessly diminish or discard your investments in all other areas. They are extraneous; you can’t afford them now. We know this approach can work because we have seen it succeed before. Consumers may cut back, but they always need food, beverages, and personal care items. Even in the toughest circumstances, you can find ways to grow by giving them what they need.
Double down on the growth strategies that work. Ruthlessly diminish or discard your investments in all other areas.
You might think the answer is to offer cheaper product lines for consumers caught with lower incomes. That is, indeed, a viable strategy — but only if you have the capabilities to pull it off. Primark (the apparel retailer owned by Associated British Foods), for instance, has successfully offered low-priced clothing by making the most of its refined capabilities in sourcing wares from countries such as Bangladesh, along with maintaining a simple clothing line for a highly targeted customer segment. It has achieved a compound annual growth rate (CAGR) of more than 20 percent during the past six years. But Primark’s strategy might not work for your company. If you have built up an established business, with brands and supply systems oriented toward your current product lines, you probably don’t have the capabilities you need to suddenly succeed as a value or niche player. Nor can you afford to invest in building new capabilities, in the context of a long-term recession. To achieve profitable growth, it is better to look for opportunities that will allow you to use the capabilities you already have. There are four ways to start looking. The right sources of opportunity, chosen from these four, could lead you to the kind of value proposition that would grow steadily, even in the current very tough environment: Explore new uses for your existing products Companies regularly miss growth opportunities because they’re “hidden in plain sight.” You can find many ways to sell your existing products, or relatively easy-todevelop variants of your existing products, by looking more closely at the changing trends or customer needs in your markets. Procter & Gamble found such an opportunity when it learned that people were using its cold medicine NyQuil as a sleep aid, since one of the side effects is drowsiness. To fulfill that demand, P&G started marketing ZzzQuil, a product with the same active ingredient. Taking advantage of its R&D and distribution capabilities, P&G created a whole new growth segment. Reckitt Benckiser is another example of a company that excels at making product variants that succeed in the market. It does this by paying close attention to consumer interests and closely connecting its R&D staff withits consumer insight–gathering capabilities. Consider one of its core brands: Nurofen. The basic formulation is ibuprofen, one of the most commoditized painkillers on a drugstore shelf. But RB has developed a wide range of variants, each oriented toward a particular need — migraines, long-lasting muscle pain, colds — and forms such as gels and liquids for people who have difficulty swallowing pills. Each variant sells at a premium over the same basic ingredient. By addressing its customers’ needs this way, RB has become one of the most consistently profitable and growing consumer products companies.
You can find many ways to sell your existing products, or relatively easy-to-develop variants of your existing products by looking more closely at the changing trends or customer needs in your markets.
Think like a challenger Large companies can learn a lot from their upstart competitors. Smaller players tend to be more adept at finding specific market needs and building a coherent set of capabilities to serve those needs. In early 2013, Strategy& looked at the top 25 food and beverage categories in the U.S. and found that smaller companies — those with less than US$1 billion in sales — were prospering and growing their market share more rapidly than their larger competitors in 18 of those categories. While larger companies are concerned with consolidation and scale to match the demands of large and increasingly international retailers, smaller players are outsmarting them by building a loyal customer base. A good example can be found in Scotland, where Irn-Bru (“Iron Brew”), a carbonated soft drink owned by British manufacturer A.G. Barr, is outselling Coca-Cola. A.G. Barr has managed to achieve a strong CAGR of 9 percent in the Scottish market for the past six years. How do the smaller players do it? They have learned that coherence beats scale. Some, like A.G. Barr, limit themselves to niche markets; all of them focus on a relatively narrow product lineup where they excel in quality and consumer preference. They can invest in just a few capabilities where they are world-class, and which they apply to everything they do. They thus outperform competitors that divide their attention and investment among a large portfolio of diverse products, which require diverse forms of innovation, marketing, and distribution. Some recent market developments have also favored these smaller players. One key trend is the fragmentation of consumer preference: “Selectionists” prefer brands that match their own needs, wants, and sensibilities. Another is the falling of fixed costs; with extensive outsourcing of administrative and support functions, smaller players can compete more easily. Marketing has also become more accessible to smaller players with the increased use of digital media, a more scalable solution than traditional TV-based campaigns. Finally, big retailers are giving smaller consumer products brands more shelf space in their stores, to provoke consumer interest and to reduce their dependence on larger suppliers. But some large companies have built market share by treating their brands with the same verve and originality. They know how to think like a challenger while still leveraging their remaining scale advantages. They are also disciplined enough to focus on the things they do well, and to sell off ventures that don’t fit their capabilities system. Heineken markets dozens of beer brands, many of which succeed by emulating their microbrewery competitors — and all of which benefit from the company’s proficiency in innovation, marketing, and distribution.
Smaller companies have learned that coherence beats scale.
HSBC, one of the biggest banks in the world, maintains a separate, successful, online and telephone based bank called First Direct in the United Kingdom. Even though First Direct does not have any physical branches, it enjoys strong consumer equity among its target market of affluent and self-confident customers, regularly topping all the polls for consumer satisfaction. It takes advantage of the corporate, financial, and IT capabilities that HSBC already has in place. Bring small innovations to large scale rapidly You can also use smaller players as testing grounds for innovation, and then — by acquiring or partnering with them — bring those innovations to scale. By becoming, in effect, a “publisher of innovations,” a larger company can beat the odds of coming up with innovative products by itself, and make the most of the marketing, sales, and manufacturing capabilities that it is good at in the first place. Avis has done just that with its purchase of the upstart company Zipcar. The acquired company had reframed the urban car rental market by allowing customers to subscribe to its service with hour-byhour pricing. This allows people who don’t ordinarily need a car (or the expense of parking and upkeep) to rent one when needed, with unprecedented convenience, ease, and flexibility. To make this acquisition work, Avis must integrate Zipcar’s operations — not by changing the service, which will still use the Zipcar brand and marketing style, but by making the most of its own huge economies of scale at the back end, in car purchasing, fleet management, and information technology. The company that pioneered the slogan “Avis is only number two, we try harder” is now applying new thinking to its existing set of back-end capabilities. Coca-Cola has become particularly adept at scaling up innovation from smaller players. Again and again, it has acquired relatively small but clearly successful brands such as Odwalla and Innocent in the fruit juice and smoothies market, Honest in the tea segment, and Zico in the coconut water market. Coca-Cola’s strategy is to wait until winners emerge from the hundreds of beverage products launched every year and then use its capabilities and investment to scale and develop the acquired products. Some large companies have used open innovation practices — connecting directly with outside researchers and innovators — to outsource the generation of ideas. One reason for the popularity of this approach is the dramatic decline in the productivity of innovation at many incumbent companies. Even Procter & Gamble,
long known for the quality of its generation of new consumer products, experienced a marked decline in the success of new brands over the years — from 14 in the 1960s to eight in the 1970s, only two in the 1980s, and one in the1990s. Starting around 1999, with a new emphasis on open innovation (later to be called “connect and develop”), the number of successful new brands launched by P&G moved back up to the high single digits. Embrace digitization — but strategically Digital technologies hold immense promise for revitalizing the consumer products and retail industries. Designed well, they can bring you closer to your customers, reduce costs, and enable you to provide a variety of lucrative new services. But to take advantage of digitization as a vehicle for profitable growth in hard times, you must have a clear strategy — not only for capturing market share, but for making money with new technologies. The supermarket industry in the U.K. provides an example of the distraction and incoherence that can result when you don’t engage well. In Britain, every major supermarket operator has committed to make huge investments and develop its digital business, including the market leaders Tesco, Sainsbury’s, Asda, and Morrison. But their plans, almost universally, call for entering the digital market by adding a host of new activities through incremental investment. It’s as if they’re all looking over one another’s shoulders and keeping up — with advanced websites, pickup centers, and delivery fleets to bring groceries to people’s homes. All these ventures require different capabilities. They all add operating costs without necessarily building customer loyalty or paying for themselves. More important, they all work against the basic advantage of both digital media and supermarkets: reducing costs by having customers take on more of the task of serving themselves. To make digitization work, you have to start by looking closely at the relationship you have with your most important customers. This may mean rethinking many of the assumptions on which your business is based. Look for ways to complement your existing current asset base and capabilities system, bringing the maximum benefits to your consumers with the minimum investment on your part. Burberry provides a good example of how to do this. By investing in social media, it transformed its stores into digital hubs to increase the brand impact and extend its reach. It streams its fashion shows to millions of people
Digital technologies hold immense promise for revitalizing the consumer products and retail industries.
on Facebook and YouTube; in partnership with Twitter, it created a “tweetwalk” that engages people and lets them see new designs before they hit the runway. Over time, it has turned its digital portal into a center for cost-efficient customization; customers know that they can get personalized, fashion-forward apparel with an ever more appealing and increasingly seamless customer experience. You can emulate Burberry by thinking of digital technology as an enabler of the capabilities you need most, rather than as an end in itself. By using data about your customers in a cost-effective way, you can become the kind of company that offers the products your customers want most at the time they want them, extending your brand identity and providing cost-effective growth in your existing market.
To take advantage of digitization as a vehicle for profitable growth in hard times, you must have a clear strategy.
Getting from here to there
The key to growth for companies is the development of a strategy that is simultaneously market-back and capabilities-forward, defined by both the needs of the customer and the proficiency of the company. This means thinking about two things at once, in an integrated way: • Your strategic value proposition: What is your considered approach for creating and capturing value in your particular market — in a different way than anyone else uses? • Your distinctive capabilities system: What are the few things you do extremely well that allow you to fulfill your value proposition?
Defining capabilities Interconnected people, knowledge, systems, tools, processes and assets that allow companies to consistently out-execute the competition.
Market — Back
Capabilities — Forward
A capability is a combination of interconnected people, knowledge, systems, tools, processes, and assets that allows companies to consistently out-execute the competition. To make the most of your investment, you need to be able to focus on just a few capabilities — all of them reinforcing one another; tied to a single, coherent strategic value proposition; and applied to all your products and services. If some part of your portfolio doesn’t fit this capabilities system, even if it is profitable in the short run, you will find it draining, distracting, and unaffordable before long. Especially at times like this, you will discover that you can’t afford it. Growth, in this context, will come not from adding scale indiscriminately, or from adding share in classically defined categories, but from providing the kinds of products that attract more discretionary spending. For example, consumers have spent more on high-quality coffee in many markets, spending less on other products to compensate. Your effectiveness as a marketer will also reflect your willingness to decrease spending in some traditional forms of leverage (advertising, SG&A) and move that investment to capabilities aligned more closely with your growth strategy. You undoubtedly understand the gravity of the situation. But if someone were to look at your strategy from the outside, would they see you adopting this kind of focus? If you are typical of many company leaders, an observer would come to the conclusion that you are not yet making the moves necessary to survive and grow in the next three or four years. In short, this is the time to make hard choices — to settle on those products, services, capabilities, and assets that fit together, and focus your investment on them. Most consumer products companies won’t take this kind of step. They will want to avoid the discomfort, and that’s where you can distinguish yourself. You undoubtedly understand the gravity of the situation. But if someone were to look at your strategy from the outside, would they see you adopting this kind of focus? If you are typical of many company leaders, an observer would come to the conclusion that you are not yet making the moves necessary to survive and grow in the next three or four years. Psychiatrist C.G. Jung, who founded analytical psychology, once said: “I am not what happened to me, I am what I choose to become.” Even though Jung was referring to the process of individual personality development, his words also apply well to companies. As you maximize your coherence — the extent to which everything fits together, moving in a well-considered direction — you base your strategy on one of the few things you can control. You can follow Jung’s advice, and choose what you want to become.
The key to growth is a strategy that is simultaneously market-back and capabilitiesforward.
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This report was originally published by Booz & Company as “Profitable Growth Now: A Call to Action for Consumer Companies Facing the European Crisis,” in 2013.
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