Post on 05-Feb-2018
Who will take advantage of disruptive change? Consumer Products Trends September 2014
Page 2
Traditional capabilities and operating models are no longer sufficient for success
Profit or lose
Source: Disrupt or be disrupted, EY survey, 2012
68% under pressure to reappraise their operating model because of the volatile, uncertain, complex and ambiguous nature of the operating environment
Page 3
How is the sector performing?
Profit or lose
Page 4
The fundamentals of consumer products remain attractive
Consumer products will continue to grow Market size (USD$ billions) CAGR %
… driven by economic and population growth in emerging markets Global population (billions)
6,302
8,945
2013 2018
7.3%
Source: Euromonitor, United Nations Department of Economic and Social Affairs
1.2 1.2 1.3 1.3 1.3 1.3
4.9 5.8 6.4 7.0 7.6 8.0
2000 2012 2020 2030 2040 2050
Mature markets Emerging markets
7.1 6.1
7.7 8.3 8.9 9.3
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6 5 4 3 2 1 -1 -2 -3 -4 -5
5
-6
45
30
40
35
25
20
15
10
0 0
14 13 12 11 10 9 7
Adidas
J&J (Consumer)
Unilever (total)
Kellogg
Remy Cointreau
L’Oreal
Brown Forman
Pernod Ricard Coca-Cola
Diageo
ABI
Heineken
PMI
BAT
JT
LVMH
Nike
P&G
Kimberly Clark
Avon
Colgate
Henkel
Nestlé
Danone
Carlsberg
Mondelēz PepsiCo (total)
General Mills
Ajinomoto
Kraft
BRF JBS
Tyson Foods
SABMiller
But companies are struggling to grow organically
Q2 2014 Operating Margin (OM) %
Size of bubble represents total sales in Q2 2014 Underlying Sales Growth (USG) vs. Q2 2013, %
See notes for footnote data Source: Company data and EY analysis
Average growth: 3.1%
Average:18.6%
Page 6 Profit or lose
Building tomorrow’s supply chain
Disciplined capital allocation
Delivering consistent shareholder value
Challenge of change Efforts to innovate Containing costs
What truly differentiates the sector’s leading companies?
Consistent messages at CAGNY/CAGE investor conferences
Page 7
What’s shaping the sector?
Profit or lose
Page 8
Consumer products is being disrupted
Costs are hard to control
Consumer behaviour
is changing
Growth is challenging
Mondelēz - CP Trends Discussion (July 2014)
Page 9
Growth is challenging
Mondelēz - CP Trends Discussion (July 2014)
Page 10
“For the first time in our history, the majority of the increase in profitability has been coming from emerging markets.
“We have driven this by allocating more resources to these markets. We have also rebalanced the growth equation, looking for not only growth, but also by starting to be more demanding about productivity.” CP CFO, 2013
Emerging markets have reached the tipping point
Profit or lose
Page 11
The center of gravity has shifted
Share of world CP market growth 2014 to 2018
Source: Euromonitor
9% North America
9% Eastern Europe
7% Western Europe
12% Africa/ Middle East
1% Japan
1% Australasia
21% Latin America
40% Emerging Asia
Profit or lose
Page 12
And CP companies have invested significantly
Profit or lose
77% 73%
65% 57%
54% 54%
52% 50%
45% 45%
43% 43% 43%
BATSABMiller
PMIUnilever
ABICoca-Cola
ColgateCarlsbergHeineken
NestléImperialHenkelLVMH
42% 42% 41% 40% 39% 38% 38%
36% 35%
24% 14%
11% 3%
DiageoPernod Ricard
DanoneMondelēz
ReckittP&G
L'OréalKimberly-Clark
PepsiCoHeinz
KelloggGeneral Mills
Campbell Soup
Est. percentage of company revenues from emerging markets LFY%
Source: Company data, analyst reports and EY analysis; Profit or Lose, EY survey, 2013
69% believe emerging markets will be the main engine of both growth and profits
Page 13
Volatile demand Increasing competition Rising input costs
Currency risk War for talent Growing complexity
But more than two-thirds of high performers say emerging markets are increasingly challenging
Profit or lose
Source: Profit or lose, EY survey, 2013
Page 14
Emerging market volatility is not new… but is rarely forecast accurately
-15
-10
-5
0
5
10
15
GDP growth rate y-o-y (%), 1991–2020
Source: Global Insight
China India Brazil Russia Indonesia Turkey Thailand
Historical Forecasts
Profit or lose
Page 15
Emerging market expansion has exposed companies to currency volatility
Currency impact on reported sales (%), Q2 2014
Source: Company data and EY analysis
Nestlé*
Danone
Unilever*
Mondelēz
General Mills
Kellogg Kraft Foods
Diageo*
Carlsberg
Pernod Ricard
ABI Heineken*
PepsiCo
Coca-Cola
Brown Forman
Unilever (group)*
Henkel (group)
L'Oréal*
Colgate (group)
Kimberly Clark
P&G
J&J (group)
BAT
PMI
JT
Adidas
LVMH*
Nike
-15
-13
-11
-9
-7
-5
-3
-1
1
3Food Beverage HPC Tobacco Other
Note: Nestlé -1H14 currency impact; Unilever (food) - average impact for Unilever Food and Refreshments only; Heineken - 1H14 currency impact; Diageo- full year currency impact; L’Oreal- 1H14 currency impact; Unilever (HPC)- group level; 1H14 currency impact; BAT- half year; J&J- total; Unilever (HPC)- group level, H1 2014; L’Oreal- H114 currency impact; LVMH- 1H14 currency impact
Page 16
Is MINT ‘fresher’ than BRIC?
7.7
4.6
2.1 1.3
6.9
5.8
3.9
1.3
► MINT median age is under 30 years, lower than China, Russia and Brazil.
► MINT will surpass BRIC in the race for millionaires.
► By 2050, economies of Mexico and Indonesia will be bigger than UK, France and Germany; Nigeria and Turkey to surpass Canada and Italy.
Profit or lose
GDP growth rate y-o-y 2013, %
Source: Global Insight
Page 17
Just 20% of firms currently deliver both high growth and accretive margins in emerging markets
► Biggest external barriers to profitable growth in emerging Asia:
1= Labor and input cost inflation 1= Competitive pressure 3 Market fragmentation 4 Exchange rate fluctuation 5 Poor physical infrastructure 6 Inadequate marketing channels 7 Cost and availability of distribution
channels
► Percentage of respondents who believe their firm is very effective at:
Profit or lose
Source: Profit or Lose, EY survey, 2013
31%
26%
20%
18%
Addressing localconsumer needs
Tailoringoperating model
to needsAnticipating andresponding to
market volatility
Developing localtalent
High performers Low performers
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High performers balance a number of apparent contradictions
Profit or lose
AND
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How are companies responding?
► Reframe strategic choices and optimize the portfolio
► Be granular ► Flex business model to local
needs and empower local decisions
► Realign the value chain to maximize consumer immediacy
► Re-evaluate approach to risk
Profit or lose
Challenges Imperatives ► Enduring volatility, uncertainty,
complexity and ambiguity ► Continued volume declines and
overcapacity despite fragile recovery in mature markets
► Diverse emerging markets now have a significant impact on both top and bottom lines
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Costs are hard to control
Mondelēz - CP Trends Discussion (July 2014)
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What’s happened to margins over the last decade?
Profit or lose
Page 22
Despite cost saving efforts, CP margins have stagnated over the past decade
19.2% 18.2% 18.6% 18.6% 18.1% 18.3% 18.9% 19.3% 19.1% 19.2%
0%
5%
10%
15%
20%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Capital IQ. Chart shows weighted EBITDA margin performance of the top 50 CP (food, beverage, HPC and tobacco) companies as ranked by revenues in 2013; EY Margin Unlocked Survey, 2013.
Operating margin performance of the top 50 CP companies over 10 years
75% say that it has become harder to sustain or grow operating margins
Page 23
Significant cost pressure is likely to continue
Primary commodity prices: 1993-2013 Index, 2005 = 100
Profit or lose
Source: IMF
0
50
100
150
200
250
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Food/beverage +90%
Metal +193%
Fuel +242%
“We need to adapt to a new reality where demand on commodities will increase in emerging markets but at the same time their availability will decrease.” – CP CFO
Page 24
How much water do you consume each day? Resource scarcity is seen as the #1 risk
► 1 kilo of rice = 3,500 litres ► 1 kilo of beef = 15,000 litres ► By 2030, food demand will rise by
50% (70% by 2050) ► ~ 30% of food is lost or wasted ► 25% of world food production may
become “lost” in the 21st century
We drink 2-4 liters per day but it takes 2,000 to 5,000 liters to produce our daily food.
Profit or lose
Source: Disrupt or be disrupted, EY survey, 2012
Page 25
But have companies really done all they can to boost the bottom line?
Profit or lose
20%22%24%26%28%30%32%34%36%38%40%
Global brewer
Premium spiritsplayer
Standardized EBITDA margin FY2003-12
Source: Capital IQ: Disrupt or be Disrupted, EY survey, 2012
74% say they need to make a significant change to maintain margins
Page 26
How are companies responding?
► Drive operational efficiency with an integrated approach that puts margin at the core of the op. model
► Analyze the true drivers of margin across the value chain
► Simplify organization, processes, suppliers and SKUs
► Tackle infrastructure and mature market operating model sacred cows
Profit or lose
Challenges Imperatives ► Impact of negative volumes on
fixed costs in mature markets ► Escalating but volatile input and
energy costs ► Volatile currencies ► Increasing cost of compliance
and regulation ► Rising cost of talent
Page 27
Consumer behaviour
is changing
Mondelēz - CP Trends Discussion (July 2014)
Page 28
Which businesses risk disintermediation in the digital age?
Profit or lose
Technology and demographic changes
… are impacting consumer expectations …
… compelling enterprises to adapt
Greater transparency
Choice and control
Improved and personalized experiences
24/7 access
Advocacy and social sharing
Anywhere, anytime
Social
Big data
Mobile and
digital
Innovation New business models Content creation Omnichannel
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What does this mean for the future of shopping?
Profit or lose
Page 30
Reports of the death of the store are premature
Profit or lose
of revenues are via bricks and mortar stores today
93% In five years
80%
Percentage of global sales (US$) generated from bricks and mortar stores Source : EY Omni-channel supply chain survey preliminary results
Page 31
Omni-channel is where the growth is
Profit or lose
World USA China UK Germany Nigeria
5% 3%
11%
2% 2%
16%
29% 29%
14% 16% 16%
2013-2018 retail sales by channel CAGR %
7%
Store-based
Internet
Source: Euromonitor
Page 32
Logistics rather than location is the new differentiator
► DHL becoming a pharmacy supplier ► UK grocers opening click-and-collect
facilities at Underground stations ► Asos offers 15-minute delivery slots
and real-time delivery tracking ► Google testing same-day delivery
► Amazon testing unmanned drones to deliver within half-hour.
► Amazon’s ‘anticipatory shipping’ system will predict items customers will want, delivering to local hubs, where they can be quickly dispatched once ordered.
► Amazon’s “vendor flex” initiative ships orders directly to the customer from supplier’s warehouses.
Profit or lose
The traditional advantage in retail was location – the ability to place goods on the consumer’s journey. The new frontier is the know-how to bring goods to people – as quickly and conveniently as possible.
Page 33
Although omni-channel is expected to increase sales, it risks being a drag on corporate profits
Key benefits of operating an omni-channel strategy
Source : EY Omni-channel supply chain survey preliminary results
Chart shows % of respondents citing
Few companies are making money
Increased sales Increased profit
78 37
36% 29%
35%
Impact on margins of respondents’ omni-channel* initiatives
*Excludes store sales
Accretive
Neutral
Dilutive
Page 34
To succeed companies must improve their execution against three key enablers
Omni-channel is embedded in the overall company strategy
Having a responsive combined omni and traditional supply chain infrastructure
IT Systems and capabilities to enable seamless visibility and fulfilment to end consumers
Top 3 enablers of a successful omni-channel supply chain strategy
Shows percentage of respondents rating their performance as effective
C.
B.
A.
30%
33%
25% 0 100 50 25 75
Source : EY Omni-channel supply chain survey preliminary results
Page 35
How are companies responding?
► Consumer power is shifting CP from B2C to C2B
► Hard for companies to keep up with rapid pace of change
► Difficulty in measuring the cost and effectiveness of consumer engagement
► Transparency a must
► Adopt and deliver consumer-centric omnichannel strategy
► Build step change in “big data” capabilities
► Develop a new innovation playbook and ecosystem of entrepreneurial partners
► Demonstrate positive impact on society
Profit or lose
Challenges Imperatives
Page 36 Profit or lose
It is important not to underestimate how hard it is to turn what is an enormous opportunity into profitable growth. You need to be very, very focused about where you’re investing and what you expect from those investments and monitor in real detail the execution of steps that are required in order to deliver that.”
A leading consumer products company, 2013
“
Page 37
Questions, comments, concerns?
► Do you have a suitable governance structure to enable local markets whilst protecting the global business?
► Is your decision-making fast enough to take advantage of market change?
► Are you leveraging market similarities, rather than just allowing for differences?
► Do you have the right metrics in place to track and measure execution performance, and are they sufficiently granular?
Profit or lose
Thank you Thank you
Page 39
Appendix 1: Single frame summary
Profit or Lose
Page 40
Who can take advantage of disruptive change? G
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Internal cost structures challenged by market changes
Challenges Drivers
External cost pressures growing
► Excess capacity in mature markets ► Impact of omnichannel on supply chain ► Impact of digital on SG&A
Imperatives
► Rising & volatile input costs ► Increasing cost of compliance
& regulation ► Rising cost of talent
Large but challenging opportunities in emerging markets
Limited volume growth in mature markets
► Diverse, volatile markets ► Undeveloped categories ► Intense competition
► Value seeking consumers ► Polarizing preferences ► Populations demographics
Increasingly complex routes to market
Digital is shifting control to the consumer
► Consumers utilizing multiple channels with limited loyalty
► Direct to consumer ► Increasing retailer pressure
► Rapid pace of technology change ► Declining traditional marketing effectiveness ► Transparency is compulsory
► Transforming operating model for agility & efficiency
► Flexing governance, product portfolio and supply chain to the needs of individual markets
► Establishing ubiquity and consistency across channels & touch points
► Simplifying organization, processes, suppliers & SKU’s
► Innovating to remain relevant to the consumer
► Focusing market spend & optimising brand/product portfolio
Page 41
Appendix 2: State of play
Profit or Lose
Page 42
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
Food Beverage HPC Tobacco
Companies continue to optimise portfolios in search of volume growth
Best –in–Class Nestlé
Henkel BAT
Heineken, SABM
Worst BRF Avon
JT
Remy Cointreau
PMI
Underlying volume growth Q2 2014
ABI, Brown Forman, PepsiCo (total)
Diageo*
Kimberly Clark
Avon
JT*
Danone
Carlsberg, Pernod Ricard*
Unilever
Note: Rankings subject to availability of data Remy Cointreau - volumes growth for the Cognac segments only; Diageo- full year volumes growth; Pernod Ricard - full year volumes growth for top 14 brands only, Heineken- half year volumes growth; JT- calculated from volume growth per JTI and JT, BAT- half year, based on sum of revenue changes from cigarette volume changes per region; L'Oreal-1H 14 figures, refers to Cosmetics Divisions only Source: Company data and EY analysis
Best-in-class
Others
Worst
Kellogg
General Mills
Kraft Foods
Henkel Nestlé
BRF
Unilever Coca-Cola
Heineken*, SABMiller
Mondelēz
BAT*
Remy Cointreau*
P&G
L’Oreal*
Colgate
Page 43
-13
-8
-3
2
7
12
17
Food Beverage HPC Tobacco
Best –in–Class BRF
Avon, Unilever JT
Carlsberg
Worst Kraft Foods Henkel
BAT
Pernod Ricard
PMI
ABI
Kimberly Clark, P&G
JT*
Best-in-class
Others
Worst
Pernod Ricard* Henkel
Colgate
Avon, Unilever
Heineken*
Kraft Foods
BRF
Mondelēz
Unilever
Danone
General Mills, Kellogg
How sustainable is higher pricing?
Underlying growth from price-mix Q2 2014
Nestle
Carlsberg
Diageo*
Note: Rankings subject to availability of data Remy Cointreau- price-mix growth for Cognac segment only, Pernod Ricard- full year price-mix for top 14 brands only, Heineken- half year price-mix growth, Diageo- full year price-mix growth, BAT- half year price-mix growth, JT- calculated from price growth per JTI and JT; L'Oreal-1H 14 data, refers to Cosmetics Divisions only Source: Company data and EY analysis
Pepsi (total), SABMiller
Brown Forman,Coca-Cola BAT*
Remy Cointreau*
L’Oreal
Page 44
Pricing gains undermined by FX led cost pressures and commodities
Gross margin Q2 2014
05
101520253035404550556065707580
Food Beverage HPC Tobacco Other
Kellogg
Coca-Cola
Carlsberg
L’Oreal*
P&G
Kimberly Clark
Best-in-class
Others
Worst
Mondelēz
Unilever*
ABI
General Mills Heineken*
Henkel (total)
Best –in–Class
Worst
Kraft Foods
J&J (Consumer)
PMI
BAT
Nestlé L’Oreal BAT
Brown Forman
Tyson Foods Kimberly Clark
PMI
Heineken
Adidas
Note: Unilever (food) - half-year margin ; Danone- half-year margin; Nestlé - half-year margin; Heineken- half year margin; Diageo- full year margin, based on operating profit before exceptional items; Pernod Ricard - full year margin, based on gross margin after logistics costs; Unilever (HPC)- half-year margin; L'Oréal- half year margin Source: Company data and EY analysis
Nike
BRF
Adidas
Nike
JBS
Nestlé* PepsiCo (total)
Pernod Ricard*
Diageo*
Brown Forman
Tyson Foods
Danone*
Ajinomoto
Avon
Colgate (total)
Unilever (total)*
Page 45
Cost management still a priority as companies seek to meet investor expectations
Operating margin Q2 2014
0
5
10
15
20
25
30
35
40
45
Food Beverage HPC Tobacco Other
Kellogg
Coca-Cola
Carlsberg
Colgate
P&G Kimberly Clark
LVMH
JT*
Best-in-class
Others
Worst
Danone*, Mondelēz
Unilever
Avon
ABI
General Mills Heineken* Henkel
Best –in–Class
Worst
Kraft Foods J&J (Consumer)
PMI
BAT*
Kraft Foods Colgate PMI
ABI
JBS Avon
JT
Heineken
LVMH
Note: Danone- half-year margin; Unilever (food)- half-year margins, core operating margin (adjusted) for Unilever Food; Nestlé - half-year margin; Kraft Foods- 2Q13 operating margin excludes a $604m benefit from market-based impacts to post-employment; Heineken – half year margin; Pernod Ricard- full year margin, based on profit from recurring operations; Diageo- full year margin; JT- Japanese domestic & International tobacco as reported (International = prior quarter); BAT- half year margin; Unilever (HPC)-half year margin; L'Oréal- half-year margin Source: Company data and EY analysis
Adidas
BRF
Adidas
Nike
JBS
Nestlé PepsiCo (total)
Pernod Ricard*
Diageo* Brown Forman
Tyson Foods
Ajinomoto
Unilever*
L’Oreal*