Bcg gaining a value advantage in volatile times

Gaining a Value Creation Advantage in Volatile Times

Report

The 2011 Consumer Value Creators Report

The Boston Consulting Group (BCG) is a global manage-ment consulting firm and the world’s leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep in sight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable compet-itive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 74 offices in 42 countries. For more infor-mation, please visit www.bcg.com.

Gaining a Value Creation Advantage in Volatile Times

The 2011 Consumer Value Creators Report

bcg.com

Marcus Bokkerink

Patrick Ducasse

Jeff Gell

Eric Olsen

Frank Plaschke

Daniel Stelter

Hady Farag

Mark Sciortino

November 2011

The financial analyses in this report are based on public data and forecasts that have not been verified by BCG and on assump-tions that are subject to uncertainty and change. The analyses are intended only for general comparisons across companies and industries and should not be used to support any individual investment decision.

© The Boston Consulting Group, Inc. 2011. All rights reserved.

For information or permission to reprint, please contact BCG at:E-mail: [email protected]: +1 617 850 3901, attention BCG/PermissionsMail: BCG/Permissions The Boston Consulting Group, Inc. One Beacon Street Boston, MA 02108 USA

Gaining a Value Creation Advantage in Volatile Times 3

Contents

Executive Summary 4

The 2011 Consumer-Company Value Creators 6

The Changing Dynamics of Value Creation 13The New Normal 13The Retreat from Risk 15The High Costs of Being Wrong 16

From Aspiration to Strategy 18Value Creation as an Investment Challenge 18What to Expect from “Business as Usual” 20Beyond “Business as Usual”: Determining Risk Exposure 21Implications for the Corporate Portfolio 23

Five Questions Every CEO Should Know How to Answer 25

For Further Reading 26

Note to the Reader 27

4 The Boston Consulting Group

Executive Summary

Gaining a Value Creation Advantage in Vola-tile Times has been adapted from the thir-teenth annual report in the Value Creators series published by The Boston Consulting Group. (See The 2011 Value Creators Report:

Value Creation in a Volatile Economy, September 2011.) Each year, we publish detailed empirical rankings of the stock market performance of the world’s top consumer- company value creators and distill managerial lessons from their success. We also highlight key trends in the global econ-omy and world capital markets and describe how these trends are likely to shape future priorities for value creation. Finally, we share our latest analytical tools and client expe-riences to help companies better manage value creation.

This year’s report addresses the advantages that consumer companies stand to gain and the challenges they may face in creating value in a volatile economy, with a special focus on how they can manage uncertainty and risk in their decisions about target-setting and capital deployment.

The further the world moves from the financial crisis of 2008, the clearer it becomes that the event marked a fundamental turning point in the global economy.

Although the economy has improved somewhat, many ◊ of the problems associated with the crisis and subse-quent Great Recession remain unresolved.

Growth remains sluggish; there are even increasing ◊ signs that the recovery may be faltering in the devel-oped world.

Combined public and private debt as a percentage of ◊ GDP has reached unsustainable levels in a number of developed countries.

Inflation is a significant medium-term risk.◊

Yet on most counts, consumer companies are in a good position to thrive in the difficult days ahead.

Consumer companies tend to be more profitable than ◊ companies in other industries.

Fast-moving consumer-goods (FMCG) companies, in ◊ particular, start with higher gross margins than most companies in other industries—largely because of brand loyalty. Therefore, even in a volatile environ-ment, they face less risk to overall profitability.

On average, consumer companies are not as highly lev-◊ eraged as other companies, and therefore they are less dependent on financial markets. Their strong cash flows put them in a better position to handle macro-economic challenges.

With lower leverage, on average, consumer companies ◊ are better able to service their debt. Cost inflation, however, remains a risk.

The top ten value creators in the four consumer- company sectors we sampled—FMCG, retail, travel and tourism (T&T), and durables and apparel—sub-stantially outpaced not only the weighted-average annual total shareholder return (TSR) of their respec-tive sectors but also that of the overall consumer-company sample.

The weighted-average annual TSR of the top ten ◊ FMCG companies (22.9 percent) was 13 percentage points higher than the FMCG sector’s average annual TSR; the average annual TSR of the top ten retail com-


panies (23.6 percent) was 17 percentage points higher than the retail sector’s average annual TSR; the average annual TSR of the top ten T&T companies (17.3 percent) was 14 percentage points higher than the T&T sector’s average annual TSR; and the average annual TSR of the top ten durables and apparel companies (22.6 percent) was 18 percentage points higher than the durables and apparel sector’s average annual TSR.

The weighted-average annual TSR of the top ten con-◊ sumer companies (across all four sectors analyzed) was about 34 percent, which was more than three times the average annual TSR of the overall consumer-company sample of 192 companies.

The ongoing economic slump—the “new normal”—has produced a corresponding sea change in investor sentiment and priorities.

Given the volatility and uncertainty of the current eco-◊ nomic environment, professional investors are becom-ing increasingly sensitive to risk.

These investors are looking for companies that can de-◊ liver low risk and consistent returns at or slightly above the market average.

They are clamoring for companies to start deploying ◊ the trillions of dollars they have accumulated on their balance sheets by increasing cash payouts to investors.

Navigating this new environment will require compa-nies to confront three basic challenges.

First, they need to understand how the new environ-◊ ment is likely to affect their aspirations and ambitions for delivering shareholder value—and reset their value-creation strategy appropriately.

Second, they need to translate the company’s revised ◊ value-creation strategy into a detailed plan for the company as a whole as well as for each part of the business.

Finally, and perhaps most important, they need to give ◊ even more attention than in past years to the effects of uncertainty and risk in their strategy development and planning processes, as well as in their approach to set-ting value creation targets.

This year’s report explores how consumer-company executives can meet these challenges.

We single out lessons from the top performers.◊

We detail the macroeconomic challenges.◊

We explain how companies can develop a value cre-◊ ation strategy.

We provide a list of five questions that every CEO ◊ should be able to answer.


We are pleased to announce the 2011 consumer-company Value Creators rankings for the five-year period from 2006 through 2010. Our sample encompasses 192 global companies

across four consumer-industry sectors: fast-moving con-sumer goods (FMCG); retail; travel and tourism (T&T); and durables and apparel. The rankings, which conclude this chapter, show the overall top-ten consumer-industry companies, the top ten within each of the four sectors that we analyzed, and how the performance of these top companies compares with that of the total industry or sector samples.

To arrive at this sample, we began with total shareholder return (TSR) data for more than 9,000 companies pro-vided by Thomson Reuters. We then refined the sample by taking the following three steps: We eliminated all companies that were not listed on a world stock ex-change for the full five years of our study or did not have at least 25 percent of their shares available on public capital markets. We also eliminated all companies that were not in the four sectors of the consumer industry we were tracking, to end up with about 1,000 companies. We then established an appropriate minimum market-valuation hurdle for each sector to eliminate the smallest companies.

This year’s sample includes the 46 largest FMCG compa-nies, the 52 largest retailers, the 44 largest T&T compa-nies, and the 50 largest durables and apparel companies. We defined the largest companies by using the following sector-specific market-value hurdles (in U.S. dollars): FMCG companies with a market valuation of at least $9 billion; retail companies with a market valuation of at least $8 billion; T&T companies with a market valuation

of at least $2.5 billion; and durables and apparel compa-nies with a market valuation of at least $3 billion.

The rankings are based on five-year TSR performance from 2006 through 2010.1 We also show TSR performance for 2011, through June 30. In addition, we break down TSR performance into six investor-oriented financial met-rics that BCG has identified in previous Value Creators reports as critical value drivers. (See, for example, The 2008 Value Creators Report: Focusing Corporate Strategy on Value Creation, September 2008.)

The weighted-average annual TSR for the full set of 192 global companies in our sample was 9.8 percent. This performance (slightly below the long-term historical aver-age of approximately 10 percent) incorporates the pre-cipitous decline in market values in late 2008 owing to the global financial crisis—a decline that the rebound in 2009 equity values only partly recovered. (See “Rebound but Not Yet Recovery,” BCG article, March 2010.)

What kind of TSR performance was necessary to achieve truly superior performance, given the sample average? The top ten performers achieved an average annual TSR of 29 to 54 percent. The weighted-average annual TSR of the top ten FMCG companies was 22.9 percent (13 per-centage points higher than the FMCG sector’s average an-nual TSR); the average annual TSR of the top ten retail companies was 23.6 percent (17 percentage points higher

The 2011 Consumer- Company Value Creators

1. TSR is a dynamic ratio that includes price gains and dividend payments for a specific stock during a given period. To measure performance from 2006 through 2010, 2005 end-of-year data must be used as a starting point in order to capture the change from 2005 to 2006, which drives 2006 TSR. For this reason, all exhibits in the report showing 2006–2010 performance begin with a 2005 data point.


than the retail sector’s average annual TSR); the average annual TSR of the top ten T&T companies was 17.3 per-cent (14 percentage points higher than the T&T sector’s average annual TSR); and the average annual TSR of the top ten durables and apparel companies was 22.6 percent (18 percentage points higher than the durables and ap-parel sector’s average annual TSR).

Unlike in 2010, when rapidly developing economies dominated the rankings, this year’s results are slightly more balanced. Six of the consumer industry top ten are located in rapidly developing economies this year, compared with nine last year. Similarly, six of the top ten companies in the FMCG sector and in the T&T sector are from rapidly developing economies this year. And three of this year’s top ten companies in the re-tail sector and in the durables and apparel sector are from rapidly developing economies.

No single driver of success stands out in this year’s sam-ple. Instead, among the top performers, we found a num-ber of factors that contributed to their success, ranging from growth to profit improvement. But that is good news, because it indicates that companies can create val-ue in a number of different ways.

In the FMCG sector, we found emerging-market compa-nies at the top of the list, with developed-market compa-nies nipping at their heels. The latter achieved their per-formance with a balanced delivery of shareholder returns—through growth, profitability, and cash deploy-ment. Two of the four developed-market companies were rewarded with an expanding valuation multiple.

The top three companies in the retail sector are from South Africa, Portugal, and Chile, respectively, and each grew at double-digit rates while expanding its valuation multiple. Amazon.com, at number four, grew rapidly but in line with expectations and, as a result, modestly ex-panded its valuation multiple. X5 Retail, which has emerged as a key player in the Russian Federation, achieved its number-five ranking thanks to high top-line

growth. AutoZone, a U.S.-based company at number six, generated a good deal of cash and used it to buy back a significant number of shares. McDonald’s, at number seven, grew in line with GDP, improved profitability, and gave cash back to its shareholders. At number eight, Walmart de México grew its top line into double digits, well above the level of consumer spending in Mexico.

Yum! Brands, at number nine, delivered a very balanced shareholder-value package, similar to McDonald’s.

Winning the top spot in the T&T sector, Turkish Airlines achieved more than 20 percent top-line growth and generated cash. Air China, the number-two company, accomplished a similar feat. U.S.-based WMS Industries, at number four, grew and

expanded margins, as did Wynn Resorts at number five. Companies in the sixth through ninth spots saw growth as the most critical contributor to TSR. At number ten, Singapore Airlines returned cash to shareholders in the form of dividends and debt paydown. That, combined with an expanding valuation multiple, drove shareholder returns, even as margins declined and the top line grew at only 1 percent per year.

In the durables and apparel sector, in which four of the top ten companies are based in the U.S., the overriding theme has been one of tremendous growth with some valuation increase. Indeed, it was through growth and multiple expansion that Deckers Outdoor, the number one company, “beat the fade.” That is to say, it grew fast-er than investors would expect a mature company to grow and, as a result, was rewarded with a higher valua-tion multiple. Fossil, an apparel and accessories company that ranked third, grew and improved margins while re-taining its multiple—essentially performing in line with investor expectations. Burberry, which came in fifth, grew in what was a challenging period for many luxury players and was rewarded with an expanding multiple. Cash de-ployment played a key role in the performance of the number-eight company, Hasbro. While it grew and ex-panded margins, it also increased its debt leverage, repur-chased shares, and, as a result, saw its multiple increase.

No single driver of

success stands out

for this year’s group

of top performers.


The 2011 Consumer-Company Value Creators RankingsThe Consumer Industry

The Consumer Industry Top Ten, 2006–2010

Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis.Note: n = 192 global consumer companies.1Contribution of each factor shown in percentage points of five-year average annual TSR; any apparent discrepancies in TSR totals are due to rounding.2Average annual TSR, 2006–2010.3As of December 31, 2010.4Change in EBITDA multiple.5“Share change” refers to the change in the number of shares outstanding, not to the change in share price.6As of June 30, 2011.

12.5

10.2

11.8

9.9

12.4

8.0

12.8

9.0

12.6

8.6

12.3

9.9

’05 ’06 ’07 ’08 ’09 ’10’05 ’06 ’07 ’08 ’09 ’10’05 ’06 ’07 ’08 ’09 ’10

’05 ’06 ’07 ’08 ’09 ’10 ’05 ’06 ’07 ’08 ’09 ’10Salesgrowth

Marginchange

Multiplechange

Dividendyield

00

10

20

30

600

0

400

200

15

10

5

0

2

4

6

–5

25 24

10

15

20

0

5

0

100

200

300

143

432

120

308

93

134

132

247

118

122 131

289

125

224

126

200

117

152

106

121

2.7

1.2

3.3

5.5

1.6

1.1

1.9

2.0

2.3

2.5

2.2

2.8

10.0

17.7

9.8

16.8

7.9

11.4

10.6

22.2

10.9

15.3

10.2

13.3

2 2

–1

5

0 1

6

ƒ

Total consumer industry sample, n = 192Consumer industry top ten

Total shareholder return

Simplified five-year TSR decomposition2

Sales growth1

EBITDA multiple1 Dividend yield3

EBITDA margin1

TSR index (2005 = 100) Sales index (2005 = 100) EBITDA/revenue (%)

TSR contribution (%) Enterprise value/EBITDA (x) Dividend/stock price (%)

Value Creation at the Consumer Industry Top Ten Versus Industry Sample, 2006–2010

Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis.1Industry calculation based on aggregate of entire sample.2Share change and net debt change not shown.3Industry calculation based on sample average.

TSR Decomposition1

# Company Location SectorTSR2 (%)

Market value3

($billions)

Sales growth

(%)

Margin change

(%)

Multiple change4

(%)

Dividend yield(%)

Share change5

(%)

Net debt change

(%)

2011TSR6

(%)

1 Deckers Outdoor United StatesDurables and apparel

54.0 3.1 30 6 18 0 –1 0 11

2 Hengan International Hong Kong FMCG 53.4 10.6 35 1 16 4 –2 1 5 3 Shoprite South Africa Retail 44.8 8.0 18 7 16 4 0 0 3 4 Tingyi Hong Kong FMCG 42.2 14.3 29 –2 10 4 0 1 23 5 Jerónimo Martins Portugal Retail 37.9 10.3 18 –2 14 3 0 6 17

6 Titan Industries IndiaDurables and apparel

35.1 3.5 34 –7 6 1 –1 2 19

7 Cencosud Chile Retail 31.3 17.9 20 1 9 2 –3 2 –8 8 Turkish Airlines Turkey T&T 31.3 3.4 23 8 –6 7 0 –1 –21 9 Amazon.com United States Retail 30.7 81.2 32 –3 2 0 –2 2 14 10 Air China China T&T 29.4 14.5 17 5 4 1 –6 9 –6


The FMCG Sector

The FMCG Top Ten, 2006–2010

Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis.Note: n = 46 global companies with a market valuation of at least $9 billion.1Contribution of each factor shown in percentage points of five-year average annual TSR; any apparent discrepancies in TSR totals are due to rounding.2Average annual TSR, 2006–2010.3As of December 31, 2010.4Change in EBITDA multiple.5“Share change” refers to the change in the number of shares outstanding, not to the change in share price.6As of June 30, 2011.

110

281

121

161 144 139

123 135 161

208

’05 ’06 ’07 ’08 ’09 ’10’05 ’06 ’07 ’08 ’09 ’10’05 ’06 ’07 ’08 ’09 ’10

’05 ’06 ’07 ’08 ’09 ’10 ’05 ’06 ’07 ’08 ’09 ’10Salesgrowth

Marginchange

Multiplechange

Dividendyield

00

5

10

15

300

0

200

100

40

30

20

0

10

2

4

6

0

5

15

10

0

50

100

150

200

115

179

97

124 106

116

110

149

124

164

18.9

26.1

20.2 20.3 20.4 20.0

26.3 25.7 27.4 24.4

18.8

25.5

2.6 3.1

3.6

4.6

1.8

3.2

4.0

2.5 2.0 3.0 2.8

3.2

12.3

11.2

12.9

10.4

10.4 11.2

12.0 11.8

11.0 10.2

9.4

11.9

3 3

1

6

2 3

4

12

ƒ

Total FMCG sample, n = 46FMCG top ten



Sales growth1


EBITDA margin1



Value Creation at the FMCG Top Ten Versus Sector Sample, 2006–2010

Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis.1Sector calculation based on aggregate of entire FMCG sample.2Share change and net debt change not shown.3Sector calculation based on FMCG sample average.

TSR Decomposition1

# Company LocationTSR2 (%)

Market value3

($billions)

Sales growth

(%)

Margin change

(%)

Multiple change4

(%)

Dividend yield(%)

Share change5

(%)

Net debt change

(%)

2011TSR6

(%)

1 Hengan International Hong Kong 53.4 10.6 35 1 16 4 –2 1 5 2 Tingyi Hong Kong 42.2 14.3 29 –2 10 4 0 1 23 3 AmBev Brazil 27.7 99.0 10 3 7 5 1 2 3 4 Grupo Bimbo Mexico 24.2 10.7 15 1 9 1 0 –2 3 5 ITC Ltd. India 22.3 29.6 19 –2 3 3 –1 0 19 6 Brasil Foods Brazil 21.2 15.0 35 –5 9 2 –21 2 –2 7 Estée Lauder United States 20.8 16.0 4 0 12 2 2 0 30 8 SABMiller United Kingdom 19.1 61.4 6 7 12 3 –8 0 1

9 British American Tobacco United Kingdom 18.4 80.9 10 5 –2 5 1 1 15

10 Carlsberg Denmark 16.7 16.4 10 12 –4 2 –9 7 1


The Retail Sector

’05 ’06 ’07 ’08 ’09 ’10’05 ’06 ’07 ’08 ’09 ’10’05 ’06 ’07 ’08 ’09 ’10

’05 ’06 ’07 ’08 ’09 ’10 ’05 ’06 ’07 ’08 ’09 ’10Salesgrowth

Marginchange

Multiplechange

Dividendyield

00

5

10

15

300

0

200

100

20

15

10

5

1

2

3

–5

5

15

10

0

0

100

200

300

136

288

116

212

92

145

113

171

112

135

141

202

136

171

131

160

122

134

110

113

8.4

14.5

8.1

15.0

8.5

15.0

8.7

15.3

8.6

15.5

8.3

15.4

2.5

1.7

2.9

2.4

1.4

1.5

1.4

1.8

1.7

1.9

1.5

1.8

9.1

14.7

9.0

12.7

7.4

9.9

9.4

13.8

10.5

13.2

10.7

11.4

2 2

–4

5

0

–1

7

15

ƒ

Total retail sample, n = 52Retail top ten



Sales growth1


EBITDA margin1



The Retail Top Ten, 2006–2010


Value Creation at the Retail Top Ten Versus Sector Sample, 2006–2010

Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis.1Sector calculation based on aggregate of entire retail sample.2Share change and net debt change not shown.3Sector calculation based on retail sample average.

TSR Decomposition1


Market value3

($billions)

Sales growth

(%)

Margin change

(%)

Multiple change4

(%)

Dividend yield(%)

Share change5

(%)

Net debt change

(%)

2011TSR6

(%)

1 Shoprite South Africa 44.8 8.0 18 7 16 4 0 0 3 2 Jerónimo Martins Portugal 37.9 10.3 18 –2 14 3 0 6 17 3 Cencosud Chile 31.3 17.9 20 1 9 2 –3 2 –8 4 Amazon.com United States 30.7 81.2 32 –3 2 0 –2 2 14 5 X5 Retail Russian Federation 27.8 12.5 53 –14 18 0 –29 0 –15 6 AutoZone United States 24.3 12.3 5 1 6 0 11 0 8 7 McDonald’s United States 21.3 80.9 3 8 3 3 4 0 12 8 Walmart de México Mexico 20.7 54.4 14 2 5 2 –1 –1 –1 9 Yum! Brands United States 18.1 23.0 4 5 3 2 3 1 14 10 Inditex Spain 17.7 50.2 15 –1 1 2 0 1 13


The T&T Sector

’05 ’06 ’07 ’08 ’09 ’10’05 ’06 ’07 ’08 ’09 ’10’05 ’06 ’07 ’08 ’09 ’10

’05 ’06 ’07 ’08 ’09 ’10 ’05 ’06 ’07 ’08 ’09 ’10Salesgrowth

Marginchange

Multiplechange

Dividendyield

00

5

10

15

300

0

200

100

30

10

20

0

2

4

6

–5

0

15

10

5

0

50

100

150

200

118

222

84

161

63

91 133

220

128

153 133

173

123

145

132

156

122

136

111

116

14.8

19.4

12.5

15.1 14.3

13.3 16.2

17.4

16.1

16.4

16.2

17.7

2.7

2.8 3.2

5.2

1.5

0.9

2.1

2.9

2.6

3.8

2.0

1.6

9.7

8.9 10.0

10.9

6.7

7.9 10.0

11.6

10.7

10.8 9.9

7.8 2 3

0 2

–2

2

6

12

ƒ

Total T&T sample, n = 44T&T top ten



Sales growth1


EBITDA margin1



The T&T Top Ten, 2006–2010

Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis.Note: n = 44 global companies with a market valuation of at least $2.5 billion.1Contribution of each factor shown in percentage points of five-year average annual TSR; any apparent discrepancies in TSR totals are due to rounding.2Average annual TSR, 2006–2010.3As of December 31, 2010.4Change in EBITDA multiple.5“Share change” refers to the change in the number of shares outstanding, not to the change in share price.6As of June 30, 2011.

Value Creation at the T&T Top Ten Versus Sector Sample, 2006–2010

Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis.1Sector calculation based on aggregate of entire T&T sample.2Share change and net debt change not shown.3Sector calculation based on T&T sample average.

TSR Decomposition1


Market value3

($billions)

Sales growth

(%)

Margin change

(%)

Multiple change4

(%)

Dividend yield(%)

Share change5

(%)

Net debt change

(%)

2011TSR6

(%)

1 Turkish Airlines Turkey 31.3 3.4 23 8 –6 7 0 –1 –21 2 Air China China 29.4 14.5 17 5 4 1 –6 9 –6 3 Flight Centre Australia 23.7 2.6 15 –3 5 5 –1 3 –11 4 WMS Industries United States 22.0 2.7 15 15 –6 0 –4 3 –32 5 Wynn Resorts United States 19.4 12.9 42 19 –48 8 –4 2 39 6 Korean Air Lines South Korea 17.5 4.4 9 2 8 1 0 –2 0 7 Aeroflot Russian Federation 16.2 2.9 10 4 3 1 1 –3 –12 8 Cathay Pacific Airways Hong Kong 12.8 10.8 12 3 –5 3 –3 2 –13 9 Shangri-La Asia Hong Kong 11.7 7.8 13 –3 4 2 –3 –1 –9 10 Singapore Airlines Singapore 11.4 14.8 1 –2 6 4 –1 3 –7


The Durables and Apparel Sector

The Durables and Apparel Top Ten, 2006–2010


18.3

13.3 12.0 11.0

18.2

11.7 12.7

18.3 19.5 18.5 19.7

12.0

2.3

2.2

3.1

3.2

1.9 1.7

1.6

2.3 1.9

1.4

2.0

2.1 9.8

9.3

9.4

13.0

6.1 8.2

9.8

9.1

4.7

10.7 10.6

9.6

’05 ’06 ’07 ’08 ’09 ’10’05 ’06 ’07 ’08 ’09 ’10’05 ’06 ’07 ’08 ’09 ’10

’05 ’06 ’07 ’08 ’09 ’10 ’05 ’06 ’07 ’08 ’09 ’10Salesgrowth

Marginchange

Multiplechange

Dividendyield

00

5

10

15

300

0

200

100

30

20

0

10

2

4

–5

10

5

0

0

50

100

150

200

72

277

119 128 139

100

128 96

153 171

144

113 116

127

155

107

111

112 123

140

2 2

–1

7

0

2 3

9

ƒ

Total durables and apparel sample, n = 50Durables and apparel top ten



Sales growth1


EBITDA margin1



Value Creation at the Durables and Apparel Top Ten Versus Sector Sample, 2006–2010

Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis.1Sector calculation based on aggregate of entire durables and apparel sample.2Share change and net debt change not shown.3Sector calculation based on durables and apparel sample average.

TSR Decomposition1


Market value3

($billions)

Sales growth

(%)

Margin change

(%)

Multiple change4

(%)

Dividend yield(%)

Share change5

(%)

Net debt change

(%)

2011TSR6

(%)

1 Deckers Outdoor United States 54.0 3.1 30 6 18 0 –1 0 11 2 Titan Industries India 35.1 3.5 34 –7 6 1 –1 2 19 3 Fossil United States 26.8 4.6 14 11 –1 0 1 1 67

4 Far Eastern New Century Taiwan 25.7 8.2 8 –7 11 5 0 9 –9

5 Burberry United Kingdom 24.1 8.0 11 –3 11 3 2 –1 29 6 Groupe SEB France 23.5 5.4 8 4 4 3 0 4 –6 7 NCsoft South Korea 23.0 3.8 14 8 0 1 0 –1 40 8 Hasbro United States 21.4 6.5 5 3 9 3 5 –5 –6 9 Tupperware United States 20.2 3.0 12 5 –6 4 –1 5 43 10 Richemont Switzerland 19.4 35.7 7 7 2 2 0 1 0


The further the world moves from the finan-cial crisis of 2008, the clearer it becomes that the event marked a fundamental turn-ing point in the global economy. Although the economy has improved somewhat,

many of the problems associated with the crisis and subsequent Great Recession—too much debt, sluggish growth, a fundamentally weakened financial sector—remain unresolved. As a result, the evolution of the mac-roeconomic environment remains uncertain, equity markets are highly volatile, and the dynamics of value creation are shifting.

To navigate the turbulence, executives will need to un-learn many of the lessons of the past quarter century. Companies will need to revisit their strategies for value creation, rethink their targets for TSR, and revise their strategy and planning process to manage uncertainty and risk. This year’s Value Creators report for consumer com-panies is designed to help them get started on these three essential tasks.

The New Normal

From about 1982 until the downturn of 2008, the world economy enjoyed an unprecedented period of economic expansion with low and stable rates of inflation. Known as the Great Moderation, it was characterized by a credit boom fueled by low interest rates and the easy availabil-ity of debt, high rates of economic growth both in the developed world and in emerging markets, and above- average TSR, largely in the form of capital appreciation.

Since the downturn, however, signs have been accumulat-ing that the era of the Great Moderation is over. The new

normal will be characterized by below-average economic growth, painful deleveraging, and potential stagflation. The impacts of these changes on how consumer compa-nies create value and how much value they create will be profound.

Below-Average Economic Growth in a Two-Speed World. In last year’s Value Creators report for consumer companies, we predicted that even with recovery from the Great Recession, the world is entering an extended period of below-average economic growth. (See The 2010 Value Creators Report for Consumer Companies: Finding the Sweet Spot, October 2010.) Nothing has happened in the time since to cause us to revise that prediction. True, ac-cording to the International Monetary Fund, global GDP grew by a healthy 5 percent in 2010 and is expected to increase by an additional 4 percent in 2011. But these av-erages disguise broad disparities between strong growth in emerging markets and weak growth in most developed economies.

What’s more, signs of a recovery are mixed. Early third-quarter reports indicate positive growth in GDP in 2011, but the second quarter was anemic, and challenges with the debt in Greece and other markets still remain. The J.P. Morgan Global Manufacturing Purchasing Manager In-dex, a key leading indicator of economic recovery, fell in September for the seventh consecutive month this year to its lowest level since July 2009. Economist Lawrence Summers, former chief economic advisor to U.S. Presi-dent Barack Obama, has even warned that the U.S. was halfway through a “lost decade” similar to Japan’s in the 1990s.2 To the degree that companies are overexposed to

The Changing Dynamics of Value Creation

2. See “Running Out of Road,” The Economist, June 18, 2011, pp. 77–78; http://www.economist.com/node/18834323.


developed markets and underexposed to emerging mar-kets, they will be facing a growth crisis.

Investors seem to share this perspective. In BCG’s most recent annual investor survey, the majority of respon-dents estimated that GDP growth in Europe and the U.S. this year would be a relatively modest 2 to 3 percent, with earnings per share (EPS) growing only 3 to 4 percent. (See “All That Cash: The BCG 2011 Investor Survey,” BCG ar-ticle, May 2011.) So, too, their estimates for TSR: nearly half of respondents (46 per-cent) estimated that TSR would be in the neighborhood of 6 to 8 percent—well be-low the long-term historical average of 9.5 percent. Although nearly a third of respon-dents (31 percent) said that they thought that TSR would be higher, a significant portion (22 percent) thought that it would be even lower.

Unsustainable Debt. One of the side effects of the Great Moderation was an unprecedented build-up of private-sector debt, on the part of both households and compa-nies. Now, that debt has been joined by the nearly $6 tril-lion in fiscal stimulus spent worldwide by governments in response to the global financial crisis and subsequent recession. In many developed economies, the result has been a situation in which combined public and private debt as a percentage of GDP has reached unsustainable levels. (See The Debt Monster, BCG Focus, May 2011.) Clearly, these high levels of debt will need to be reduced, but that is much more easily said than done. If govern-ments and central banks embrace austerity policies, as many are now doing in order to cut their debt-to-GDP ra-tios, they run the risk of stalling GDP growth still further, which could end up making things worse, not better.

Increased Risk of Inflation. The more likely option is that governments and central banks will keep interest rates low in order to further stimulate the economy and minimize their interest burden—but at the risk of setting off an inflationary spiral. To be sure, inflation in devel-oped economies is currently low, but there are clear indi-cations that inflation is a serious medium-term risk. On the one hand, rapid growth in emerging markets is push-ing commodity prices higher, and inflationary pressures in emerging markets (which produced more than four-fifths of global real GDP growth over the past five years) are beginning to push the cost of inputs upward for many

companies in the developed world. Inflation in emerging markets averaged 6.7 percent in May 2011.3 On the other hand, quantitative easing programs established by central banks around the world to boost growth have strongly in-flated the monetary base, creating a perfect breeding ground for future inflation. The longer the developed economies suffer from slow growth, the more money the

central banks will need to print to stimu-late the economy and, therefore, the big-ger the risk that inflation will get out of control.

The Impact on Value Creation. All these trends will have a major impact on value creation, and companies need to start pre-paring for the consequences.

Lower GDP growth will put pressure on corporate rev-◊ enues and profits. For many companies, maintaining historical levels of revenue growth will only come by winning market share. Competitive intensity will in-crease, and real winners (and losers) will emerge.

After a period in which valuation multiples have been ◊ above the long-term historical average, lower growth is also likely to mean lower multiples as investors factor lower growth expectations into a company’s stock price.

Inflation also will have a negative impact on equity ◊ values. History shows that stocks underperform during inflationary periods. (See “Time to Get Ready for Infla-tion,” BCG article, March 2011.) Companies with both high debt and significant capital-expenditure programs are hit especially hard.

Yet on most counts, consumer companies are in a better position to thrive in the difficult days ahead than are companies in other industries. For one thing, consumer companies tend to be more profitable than other compa-nies. With lower leverage, on average, than other compa-nies, they are better able to service debt. However, this does not mean that consumer companies face no risks. Rising and volatile commodity costs represent a real risk to profitability, and weak consumer confidence could low-er demand.

3. See “Economics Focus: Some Like It Hot,” The Economist, July 2, 2011, p. 65; http://www.economist.com/node/18895150.

Consumer companies

are better positioned

to thrive in the

difficult days ahead.


The Retreat from Risk

The recent developments in the macroeconomic environ-ment have produced a corresponding sea change in in-vestor sentiment and priorities. Investors have become more conservative. Compared with the past two decades, there has been a wholesale retreat from risk.

Increased Sensitivity to Risk. Given the volatility and uncertainty of the current environment, professional investors are becoming increasingly sensitive to risk. In order to keep their assets under manage-ment (AuM) constant or growing (remem-ber, fund managers make their money from the fees that their AuM generates), they are looking for companies that deliver low risk and consistent returns at or slightly above the market aver-age. Of course, there will always be some investors with a greater appetite for risk. But even those who are pre-pared to invest in riskier opportunities in order to gain outsized returns will be on the lookout for companies that have a deep understanding of the risks involved and that know how to manage them.

Emphasis on Value. As investors become more conser-vative, there are fewer genuine “growth” funds in the market. A fund may use the word growth in its name or list itself as a growth fund. But upon close analysis of their investment criteria, such funds are not so different from traditional “growth at reasonable price” (GARP) funds or even “alpha value” funds. In effect, we are wit-nessing an overall shift to more of a value orientation.

Focus on “Stock Picking” over Broad Market Trends. A more “value-based” investment strategy requires pick-ing individual stocks, sector by sector. This has created a strong focus on individual company performance, eco-nomic fundamentals, the nuts and bolts of competitive strategy and financial structure, and the quality of the management team. When we asked respondents to our investor survey to rate the criteria that would lead them to invest in a company, the top three choices were a com-pany’s “management credibility,” its prospects for “three-to-five-year revenue growth,” and its “ROIC (return on invested capital) improvement potential.” In short, these investors were looking for companies with strong man-agement teams, solid sources of competitive advantage, and good prospects for future growth.

Increased Importance of Dividends. Another major shift from trends during the era of the Great Moderation is that stock price appreciation is becoming relatively less important as a component of TSR, while dividends and other direct distributions to investors are becoming rela-tively more important. During the past 25 years, dividend yield at S&P 500 companies accounted for only 2.5 per-

centage points out of an average annual return of 9.9 percent. But a higher reliance on dividends happens to be a reversion to a longer-term historical trend. An analysis of the composition of TSR of the compa-nies making up the S&P 500 from 1900 through 2010 shows that dividend yield accounted for nearly half of total TSR—4.6 percentage points out of an average

annual return of 9.5 percent.

Direct distributions of cash to shareholders will become a bigger part of TSR, in part because capital appreciation will be down, a function of lower growth and lower valu-ation multiples. But they are also likely to rise for the sim-ple reason that companies have accumulated so much cash on their balance sheets that investors are clamoring for a share of it. One beneficial effect of the Great Reces-sion was to push companies to cut costs in order to im-prove profitability in an extremely difficult economic environment. As a result, companies worldwide are show-ing trillions of dollars of cash on their balance sheets. And despite improvements in the economy, many com-panies have yet to start deploying their cash to create shareholder value.

The Coming Impact of Baby-Boom Retirement. All these trends will be exacerbated by the investment deci-sions of millions of baby-boom retirees. The coming re-tirement of the baby-boom generation is usually dis-cussed in terms of the eventual withdrawal of massive amounts of cash from the equity markets. But for the next five to ten years, the impact is likely to be rather dif-ferent. The baby-boom generation has accumulated a great deal of wealth and, as it ages, it will be looking for places to invest that wealth in order to preserve capital. The priorities are likely to be income, preservation of cap-ital, low risk, and tax avoidance (which means fewer bonds and more income-producing equities). These goals will reinforce the market for companies that deliver low risk and attractive capital gains or high dividends or both.

Professional investors

are becoming

increasingly

sensitive to risk.


As we noted above, consumer companies have a number of advantages in light of these fundamentals. FMCG com-panies, in particular, generally start with higher gross margins than most companies in other industries, be-cause the branded products they sell give them pricing power in a challenging environment. Therefore, cost shocks have a smaller impact on overall profitability than they would for other companies. In addition, consumer companies generate more cash than most companies, on average. And with lower amounts of financial leverage than other companies, consumer companies face fewer claims on the cash they generate and are better able to withstand economic shocks without risking default. (See Exhibit 1.) As a result, they are able to offer investors a package that includes cash returns as a key component. Investors tend to see such cash returns as “safe.” As a re-sult, consumer companies appear to be relatively attrac-tive investments in markets in which professional inves-tors have greater sensitivity to risk.

The High Costs of Being Wrong

In one respect, however, all companies face the new nor-mal from a position of strength. Cash on the balance sheet is at record highs. So is profitability. Margins and ROIC are strong after all the downturn cost-cutting. But without consciously planning how to navigate the new

environment, a company could easily squander these ad-vantages—for example, by chasing unprofitable growth, by engaging in share wars that erode margins and profit-ability, or by agreeing to mergers and acquisitions that may improve EPS but do not increase TSR.

Navigating the new environment requires confronting three key challenges: resetting value creation strategy, translating the strategy into realistic TSR targets and plans, and managing uncertainty and minimizing risk.

Resetting Value Creation Strategy. The first challenge exists at the level of value creation strategy. Senior execu-tives need to understand how the new environment is likely to affect their aspirations and ambitions for deliver-ing shareholder value. Consumer companies need to ad-dress questions such as: What level of TSR would consti-tute a “win” in today’s environment, given our starting point and our peer set? What TSR can we deliver with confidence over the next three to five years? How should we deploy our capital against the various drivers of value creation—investing in organic growth, improving mar-gins, repaying debt, or returning cash to shareholders in the form of dividends or buybacks?

Translating Strategy into Realistic TSR Targets and Plans. The second challenge is to translate a company’s high-level aspirations for value creation into a detailed

FMCG companies have ~1,500 basis pointshigher average gross margins

FMCG companies have ~400 basis pointslower average net debt/enterprise value

60

2005

20

0

40

2010 2009 2008 2007 2006 2008 2007 2005 2006 2009

10

30

0 2010

40

20

All other companies in our sample

Gross margin (%) Net debt/enterprise value (%)

FMCG companies

Exhibit 1. FMCG Companies Generally Have Higher Gross Margins and Lower Leverage

Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis.Note: We analyzed the weighted-average gross margin and the net debt/enterprise value of 46 FMCG companies and 749 nonconsumer companies.


plan for the company as a whole and for each part of the business, including clearly defined TSR targets. Companies need to answer questions such as: What will be the role of each part of the company in meeting our TSR target? What are the capital and resource require-ments for each to fulfill that role? And what are the im-plications of those requirements for the company’s finan-cial policies?

Managing Uncertainty and Minimizing Risk. The third challenge exists at the level of both strategy and plan-ning: to incorporate in-depth considerations of uncertain-ty and risk into the target-setting process, while simulta-neously taking a more agile and flexible approach to planning in order to adapt quickly to unanticipated cir-cumstances. (See The Art of Planning, BCG Focus, April 2011.) The key questions include: What will be the im-pact of broad macroeconomic trends on our ability to de-liver on our TSR target? Do we know how increased infla-tion, for instance, will affect our cash flows and enterprise value? In a volatile environment, how do we get our en-tire organization to maximize the predictability of our TSR and minimize the risks?

Consumer companies, especially, need to be clear about their optimal rate of growth, because in most cases it will be different from what they have become accustomed to. In the past, consumer companies were able to rely on market growth alone in order to deliver the top-line expectations of investors. Now, they need to be much

more conscious of the portfolio choices they make and their implications for growth. The following questions are among those that consumer companies should seriously consider.

How big a footprint should the company have in ◊ emerging markets, and how much will its presence in those markets contribute to the company?

Are there pockets of growth in the developed world ◊ that the company can exploit?

In a portfolio of category and brand positions, what is ◊ the short list of positions in which the company should invest in order to grow share? Will the impact be suf-ficient to achieve the target corporate growth rate?

Is there an opportunity to acquire a direct competitor? ◊ Even if the deal does not fundamentally change the company’s growth rate, would the cost synergies and potential profits be sufficiently substantial, and the di-rect impact to top-line growth suitably attractive, to make this option worth pursuing?

For most consumer companies today, managing their portfolios as they have in the past (investing everywhere to leverage strong profitability and market growth) will no longer suffice to meet investors’ growth aspirations.


The senior executives running a public con-sumer company face a challenge that is not so different from that of the fund manager of a major investment fund. They have an aspiration for the kind of shareholder re-

turns that they hope to deliver. They have a certain amount of capital to “invest” (defined by the company’s cash flows, cash on hand, and access to debt) to generate those returns. They have a variety of business units, func-tions, or other operating units in which they can invest this capital in order to grow the economic value of the business. They also have to evaluate the returns on these internal investments against the value generated by other uses of that capital—for example, returning the cash to shareholders in the form of dividends or share buybacks or to debt holders in the form of paying down the company’s debt. In this respect, a company, like an investor, creates value by the judicious deployment of capital.

Value Creation as an Investment Challenge

Decisions about how best to invest a company’s capital are always difficult. Uncertainty, however, makes them especially challenging. Will the company end up making more aggressive bets than it can afford? How can the or-ganization preserve enough flexibility to take advantage of unforeseen opportunities that a volatile environment makes possible? How much capital will be necessary to preserve the core business in the face of intensified com-petition or unanticipated macroeconomic trends? How can senior management best respond to investors’ grow-ing desire for safety, consistency, and higher payouts of cash? Developing a consensus about the best way to de-

ploy capital in the face of such uncertainties is a critical first step facing a company’s senior executive team and board.

In our experience, the way most senior teams approach this issue results in suboptimal compromises rather than a strategically sound consensus. Most companies are jug-gling multiple goals when it comes to deploying their capital, and the way senior executives prioritize these goals can differ depending on their position and role in the company.

The CEO may be focused on allocating capital to deliver on the company’s long-term vision; members of the board may be pushing for higher cash payouts to inves-tors; the CFO may be concentrating on delivering against the company’s target financial performance (defined in terms of quarterly targets for EPS growth or returns on invested capital); other members of the finance organi-zation may be hoping to preserve the company’s finan-cial flexibility in the face of an uncertain environment; and business unit leaders may be preoccupied with en-suring the competitive advantage of their business or funding aggressive growth opportunities. Often, the fi-nancial policies that are forged from these clashing per-spectives end up being a poor compromise among con-flicting tradeoffs and goals—an outcome that will only be exacerbated in today’s uncertain environment.

Consumer companies, for the most part, are cash genera-tors. Their primary focus should be on how to use that cash to achieve the highest returns: should they reinvest it in the business (organically or through M&A) or return it to investors? To answer this question, they need to iden-tify the full range of potential investments and the risks and returns of each. Then, companies must compare

From Aspiration to Strategy


these potential returns with the returns from giving cash back to investors—in the form of debt paydown, divi-dends, or share repurchases. In earlier Value Creators reports, we have shown that investors often value cash returned as dividends above the actual dollar amount; therefore, a company’s best move (for highest returns) may be to increase its dividend rather than to reinvest in the business. Dividends signal to inves-tors that management has confidence in the business’s long-term ability to gener-ate cash.

Recently, we helped a T&T company pri-oritize its agenda by assessing the poten-tial returns from different ways of using cash—reinvesting it in the business or re-turning it to shareholders. The company was significantly overcapitalized, but it was unlikely that the usual incre-mental reinvestment opportunities could deliver suffi-ciently high returns. However, we determined that invest-ments focused on increasing profitability would generate high returns. In fact, such investments were likely to gen-erate more cash than the company could find profitable opportunities in which to reinvest it.

So the next question focused on what form of cash payout to investors would produce the highest return—and the answer was to increase the dividend. (See

Exhibit 2.) Of course, the best value-creation strategy will differ according to a company’s circumstances. At another company, the answer might have been to put mon-ey back into the business, or to find an M&A opportunity, or to take a balanced approach that would mix dividend increases, share buybacks, and reinvestment in the business.

We believe that now is a good time for consumer companies’ senior-management teams to step back and reset their value-creation strategies by systematically re-viewing their high-level priorities for capi-tal deployment. The best approach for doing so is to ground the senior-manage-ment debate in an explicit consideration

of how different choices will affect a company’s short- and long-term TSR. That’s not to say that TSR perfor-mance should be the only factor that drives a company’s capital-deployment choices. Nor is it an argument neces-sarily for maximizing shareholder returns in the short term. (See “Why Shareholder Value Still Matters,” BCG article, September 2010.) Rather, using TSR as a frame-work to test the impact of various choices for capital de-ployment will ensure that the senior team considers the full range of options in an unbiased way and that alterna-tive choices will be raised and available for discussion and debate.

Net present valueto equity investorof $1 cash flow ($)

2

1

0 Dividend

at 50 percenthigher payout

>2.0

Dividendat current

payout

1.5

Efficiency-oriented

investments

1.2

Share buybacks(assuming TSR

is above theS&P average)

1.1

1.0

Debt paydownat currentleverage

1.0

Average value of a dollarinvested

0.8

Share buybacks(assuming TSRis on a par withS&P average)

Exhibit 2. Dividends Are Worth More to Investors Than Other Uses of Cash

Sources: Compustat; BCG ValueScience Center analysis.

Investors often value

cash returned as

dividends above the

actual dollar amount.


What to Expect from “Business as Usual”

BCG’s model for quantifying the relative contribution of the various sources of TSR uses the combination of rev-enue (that is, sales) growth and change in margins as an indicator of improvement in value. (See Exhibit 3.)

The model then uses the change in the company’s valua-tion multiple to determine the impact of investor expec-tations on TSR.4 Together, these two factors determine the change in a company’s market capitalization. Finally, the model also tracks the distribution of free cash flow to investors and debt holders in the form of dividends, share repurchases, or repayments of debt in order to determine the contribution of free-cash-flow payouts to a company’s TSR. Using this model, executives can analyze the sources of TSR for their company, its business units, a peer group of companies, an industry, or an entire market index over a given period.

Executives can also use this framework to develop an in-ternal model of how their choices about capital deploy-ment create value. Start by assuming “business as usual”—that the way the company has been creating value in the past will continue into the future. Later, the task will be to challenge those assumptions, but it is help-

ful to start with the company’s existing policies and plans.

Also assume that the valuation multiple stays constant and that revenue will grow at recent historical levels or at the projected growth of served markets. Based on these momentum assumptions, a company can calculate its expected TSR and compare it to the expected market av-erage.

Although these numbers will still need rigorous testing, even arriving at this initial view of the company’s pros-pects will be revealing. If the projected TSR turns out to be less than the expected market average, the senior team will know that it needs to become more aggressive either by investing in new opportunities for growth (by gaining share or moving into adjacent market segments) or by paying out more of its cash to investors. What will be the implications of such moves? Will share gains come at the expense of margins? Will bigger cash payouts con-

Capital gain

Revenue growth

Margin change

TSR

Valuation multiple change

Dividend yield

Cash flowcontribution

Net debt change

Profit growth

Share change

x

x

ƒ

Exhibit 3. BCG’s Model Allows a Company to Identify the Sources of Its TSR

Source: BCG analysis.Note: “Share change” refers to the change in the number of shares outstanding, not to the change in share price.

4. There are many ways to measure a company’s valuation multiple, and different metrics are appropriate for different industries and different company situations. In the Value Creators rankings, we use the EBITDA multiple—the ratio of enterprise value (the market value of equity plus the market value of debt) to EBITDA—in order to have a single measure with which to compare performance across our global sample.


strain the company’s financial flexibility? What is the ap-petite of the team, the board, and the company’s main investors for taking on more risk? Is the company a can-didate for takeover?

Alternatively, if the initial modeling suggests that the company will beat the market average, can it stretch still further? Should the company be content with generating TSR that is a modest 1 percent or 2 percent above average? Or should it be more ambitious, striving to at-tain, say, top-quartile performance?

Precisely how ambitious a target a compa-ny chooses will depend on its situation. That said, we would offer two general “rules of thumb.” First, a company should always commit to ambitious stretch goals, but only if there is a realistic probability of achieving them. At the same time, execu-tives should realize that consistently delivering modestly above-average TSR, year in and year out, is not necessar-ily a bad result. Indeed, over the long term, being consis-tently a bit above average eventually adds up to top-quartile performance for the simple reason that it is extremely difficult for any company to beat the market average year after year.

Second, because the risk of being wrong is so high, it makes more sense in today’s environment for companies to focus on the minimum spread above expected average TSR that they are sure they can deliver consistently rath-er than on the maximum they could achieve if everything goes right, particularly if that maximum entails a lot more risk. A company should make sure it can locate the floor under its value-creation performance before it starts envisioning the upper stories.

Beyond “Business as Usual”: Determining Risk Exposure

So far, thinking about how to deploy capital across the main drivers of TSR has been assuming a “business as usual” environment. But as we have argued in the previ-ous section, today’s macroeconomic and capital-markets environments are anything but usual. Rather, both repre-sent a sharp transition from the recent past. What will be the impacts of these changes on how the company gener-ates TSR?

This is the moment for the senior team to consider the company’s exposure to the full range of macroeconomic and industry trends that will shape business performance. While there are many different kinds of risk that compa-nies should consider (see Exhibit 4 for a comprehensive typology), four overarching themes are especially impor-tant today.

Macroeconomic Risk. Some risks have to do with the uncertainty of the current macroeconomic environment. What would happen if a major growth market—say, China—enters a period of extended infla-tion or even stagflation? What if a compa-ny’s local currency weakens (or strength-ens) significantly relative to the currencies

of served markets or key sourcing regions? What would be the impact on revenue growth and profitability if GDP growth over the next five years averages 50 to 150 basis points below forecasts? What would be the impact on the business and its ability to create value?

It will be critical to explore the implications of such sce-narios not only for the company but also for its competi-tors and major customers. Which competitors are partic-ularly vulnerable to or protected from an economic scenario of, say, increased inflation? How vulnerable is a major customer to margin erosion and what will be the impact on the company’s own margins? (For an example of one such scenario analysis, see the discussion of iden-tifying exposure to macroeconomic risk in BCG’s “Risk Management Tool Kit,” September 2011.)

Market Risk—Particularly from New Competitors. There is also the risk of new competition—for instance, an advantaged format encroaching on a retailer’s stores, a new business model entering the travel market, an emerging-market “tiger” invading a consumer product’s territory, or a retailer’s private label threatening a manu-facturer. Companies need to carefully evaluate these risks, identify a full range of responses, and assess the cost of each response.

Financial Risk. Other risks are associated with the cur-rent state of the capital markets. For example, many com-panies today are trading at high valuation multiples be-cause, although their postdownturn profits remain abnormally low, investors have already priced economic recovery into their stock price. It is highly unlikely that

What happens if a

major growth market

enters a period

of stagflation?


those high multiples are sustainable. So now may be the time to challenge the assumption in the value creation model of an unchanging multiple. But remember: the event to worry about is not some marketwide trend that causes everyone’s multiples to change. If that happens, the only effect will be to change the level of market-aver-age TSR. The truly damaging scenario to watch out for is one in which a company’s multiple relative to its peers starts to decline, because that will put it at a disadvantage vis-à-vis its competitors. Indeed, managing the transition downward can be a critical issue for companies currently enjoying strong growth.

Government Intervention. Another feature of the post-downturn environment is the growing role of government in business. What is the possibility that new, more strin-gent government regulations will constrain the compa-ny’s ability to create value? Will new regulations or high-er taxes seriously erode the company’s ability to fund growth or continue its current level of payouts to inves-

tors? If so, does the company have the cash reserves or debt capacity necessary to fill the gap?

There are a variety of tools that companies can use to ad-dress such questions—tracking leading indicators, doing sensitivity analyses on key value drivers, developing sim-ple scenario plans, doing more complex modeling and simulation exercises, or even introducing highly sophisti-cated risk-management techniques and metrics. But what-ever approach a senior team decides to take, it needs to explicitly quantify a wide range of uncertainties as it de-velops its internal TSR model.

Once a company has identified the relevant uncertainties and quantified the potential risks and their impact on the various components of TSR, it will be able to refine its TSR model. Adding the likely impact of a “downside” sce-nario and an “upside” scenario allows a company to put boundaries to the range of its expected TSR perfor-mance.

Business and strategic riskProject risk

Commercial risk Operational risk

Commodity price(liquid) Customer default Valuation multiple Daily asset operations Business continuity;

management quality Health Ethics andgovernance

Sales contracting Interest rate Disclosure Safety

Tax Transparency Supplier management

Customerrelationships

Crisis management

Contractor

Commodity price(illiquid) Counterparty default Rating Confidentiality Safety Service and

maintenance IT

Exchange rate Conflict of interest HR

Market elasticity/placement Internal fraud Facility Liabilities and

obligations

Volume forecast Process discipline Environment Security Singular failure Cash flow

Quality Fundamental marketfigures

Patents andcopyrights

Market amendmentsand regulation

Ecology/environment

Business plan Design errors

Technologydevelopment Reputation and brand Government

intervention Resources Contractor Legal

Long-term marketforecast (price) Espionage Environmental

regulation Schedule feasibility

Partner failure

Permits; licenses Delays and costoverruns

Competitor reactionand structure

Integration intocurrent operation Communication Regime change Transaction

Sociopolitical

Planning Market andtechnology

External singularevents

Intellectual propertyand reputation

Country andregulation

Viability andrealization Implementation

ComplianceHealth, safety,and environmentAsset operations Operational

excellenceMarket price Credit default Financial

Macroeconomic

Corruption; bribery

Legal (such as lawsuits)

Exhibit 4. There Are Many Types of Risk for Companies to Consider

Source: BCG analysis.


Implications for the Corporate Portfolio

One of the major tasks in capital deployment is deciding how to allocate the company’s investment capital among the businesses in its corporate portfolio. So, one final step in resetting value creation strategy is to think through the high-level implications of the company’s TSR aspirations for each part of the business. The compa-ny will need to explore these implications in more detail later in its planning process, when it will finalize its TSR targets. But before determining final targets for each part of the business, the senior team needs to develop a preliminary sense of what role each part plays in its TSR model, how much value it can deliver, and at what lev-el of risk.

This exercise involves supplementing the traditional view of the portfolio—typically framed in terms of mar-ket share, competitive advantage, and corporate fit—with a map of how the company is allocating capital and resources, whether the investments are delivering re-turns above the cost of capital, and how much each in-vestment is contributing to overall corporate TSR.

Historically, many consumer companies have shied away from classic portfolio analysis. Because their balance sheets often integrate multiple brands and categories into a single business, it is difficult to assess the return on cap-ital of any specific investment—whether it is adding val-ue or not. And returns are often well above the cost of capital. Even when parts of businesses are identified as falling short in terms of earning the cost of capital, they may nonetheless be delivering very positive contribution margins. If investment is withdrawn from them, these parts of the business would make less money and return less to the whole company.

So how can a consumer company develop the right port-folio strategy to meet its TSR aspirations in light of the current volatile environment? A good place to start is portfolio resource allocation. Where should the company put its advertising dollars? Where should it invest in new products? Where should it allocate more sales-force time and attention?

It is critical for consumer goods companies to address these issues at the country, category, and brand levels,

and for retailers to do so at the local market or store lev-el. The following four questions are among those that a company can ask itself to think through potential risk.

What is my global competitive position?◊

What is my local competitive position relative to ◊ my global position?

What is the cost to compete locally? ◊ What is the minimum amount neces-sary to spend on advertising to com-pete successfully?

What is the relative return on an incre-◊ mental dollar of discretionary spend-ing, compared with the alternatives?

This process can lead to robust insights. In some cases, it can reveal “classic” portfolio opportunities—businesses that would benefit from a different owner and that should be divested, or acquisition opportunities to strengthen performance. In addition, it can identify new, more focused ways to allocate discretionary spending in order to achieve higher levels of growth and profitability.

Consider how one consumer-products company with many country, category, and brand positions approached this challenge. It wanted to make sure it could deliver on its top- and bottom-line aspirations, and growing as it had in the past was not sufficient. First, it gathered some basic facts about the business at the country, category, and brand levels—such as its size, its market share, and the market share of its key competitors. Second, it gathered data on its market growth, contribution margin, current advertising levels, cost to advertise at threshold levels, and macroeconomic risk.

Third, it looked for “discrepancies,” such as instances in which more advertising dollars were being spent than justified by the relative cost-to-compete and marketplace prospects. It identified opportunities to reduce spending in noncore areas and to increase spending (in order to reach thresholds) in some of the most critical battlefields and in selected high-return areas (even if they weren’t ar-eas with the highest potential absolute dollars).

It is always difficult to tell brand managers that their budgets are being cut, but this company handled the

A major challenge for

a company is how to

allocate capital

among its businesses.


transition effectively. And it is growing faster, reaching higher levels of profitability, and coming closer to its value-creation aspirations with a more balanced mix of investments in a volatile economy. (For examples from other industries, see “Implications for the Corporate Portfolio” in The 2011 Value Creators Report: Value Cre-ation in a Volatile Economy, September 2011.)

The kind of portfolio analysis described above would be suitable for almost any consumer company, whether a

consumer goods company using a matrix approach for a line of products and categories or a retailer with a single kind of business. By assessing its resource allocations according to growth and margin potential, or the returns on individual stores, a fleet of stores, or cities, a consumer company can prioritize brands and markets for higher returns and higher growth, thereby creating more value for the company and for today’s shareholders and investors.


In this report, we have described the challenges that consumer companies face today, presented a case for rethinking value creation strategies in light of the risks of conducting “business as usual,” and provided a process for reallocating

cash that addresses the special circumstances of con-sumer portfolios. In conclusion, we offer five questions for CEOs of consumer companies in order to help posi-tion them to benefit from their advantages and over-come the challenges of creating value in volatile times. These questions, which highlight the basic arguments and recommendations made in this year’s report, are ones that every CEO should be able to answer.

Do we understand how we will create value in a world that 1. looks different from the one we had grown accustomed to? What is the level of market growth we can expect? What is the relative contribution of growth, margin im-provement, and cash flow to value creation? How can we adjust for the reality of a two-speed world in which there is weak growth in the developed economies and strong growth in emerging markets?

What are the biggest risks to achieving our goals, and how 2. will we reduce their threat? Do we have a plan for deal-ing with rising inflation? Have we considered how we will counter competition from a new format or emerg-ing-market competitor? Do we know the minimum val-ue creation our plans are likely to deliver? Could we become a takeover candidate?

When it comes to capital investment and discretionary 3. spending, are we optimizing our portfolio in line with how the world is evolving? Do we know the underlying prof-itability of our products, categories, and competitive positions? Do we know where we are likely to grow and the cost of that growth? Do we know where we should spend money and where we should reduce costs in order to capture higher levels of growth and higher levels of profitability at lower risk?

Do we know how we will balance investment in the 4. business with cash contributions to shareholders? Are there good opportunities for M&A? Do we know which of our investment plans will deliver the highest returns for the company and how the benefits of those returns compare with the benefits of giving cash back to shareholders? How much of a “floor” should we put under our stock through committed cash returns to in-vestors?

Do we know how to make our company and our company’s 5. story compelling to today’s investors, who are increasingly conscious of risk? Can our company offer shareholders a reliable source of returns? Can we explain why our company and its strategy are a good bet in uncertain times? Can we communicate a credible story about our brand premium, high gross margins, low leverage, and consistent cash contributions?

Five Questions Every CEO Should Know How to Answer


The Boston Consulting Group pub-lishes many reports and articles on corporate development and value creation that may be of interest to senior executives. Recent examples are listed here.

Risky Business: Value Creation in a Volatile Economy The 2011 Value Creators Report, September 2011

Navigating the New Consumer RealitiesA report by The Boston Consulting Group, June 2011

Riding the Next Wave in M&A: Where Are the Opportunities to Create Value?A report by The Boston Consulting Group, June 2011

The Debt MonsterA Focus by The Boston Consulting Group, May 2011

The Art of PlanningA Focus by The Boston Consulting Group, April 2011

Does Practice Make Perfect? How the Top Serial Acquirers Create ValueA Focus by The Boston Consulting Group, April 2011

Making Your Company Inflation ReadyA Focus by The Boston Consulting Group, March 2011

New Realities for Consumer Goods and Retail in 2011An article by The Boston Consulting Group, March 2011

Best of Times or Worst of Times?A joint White Paper by The Boston Consulting Group and the Royal Bank of Scotland, January 2011

Big Prizes in Small Places: China’s Rapidly Multiplying Pockets of GrowthA report by The Boston Consulting Group, November 2010

Finding the Sweet Spot: Value Creation for Consumer Companies in a Lower-Growth Economy The 2010 Value Creators Report for Consumer Companies, October 2010

Threading the Needle: Value Creation in a Low-Growth Economy The 2010 Value Creators Report, September 2010

Winning in Emerging-Market Cities: A Guide to the World’s Largest Growth OpportunityA report by The Boston Consulting Group, September 2010

Investors’ Priorities in the Postdownturn EconomyAn article by The Boston Consulting Group, July 2010

Accelerating Out of the Great Recession: Seize the Opportunities in M&AA report by The Boston Consulting Group, June 2010

Cross-Border PMI: Understanding and Overcoming the ChallengesA Focus by The Boston Consulting Group, May 2010

Megatrends: Tailwinds for Growth in a Low-Growth Environment A Focus by The Boston Consulting Group, May 2010

Rebound but Not Yet RecoveryAn article by The Boston Consulting Group, March 2010

After the StormThe 2010 Creating Value in Banking Report, February 2010

For Further Reading


Note to the Reader

About the AuthorsMarcus Bokkerink is a senior part-ner and managing director in the London office of The Boston Consult-ing Group and the leader of the Con-sumer Goods practice in the United Kingdom. Patrick Ducasse is a senior partner and managing direc-tor in the firm’s Paris office and the global leader of the Consumer and Retail practice. Jeff Gell is a partner and managing director in BCG’s Chicago office, a core member of the Consumer and Corporate Develop-ment practices, and the leader of the consumer products sector in the Americas. Eric Olsen is a senior ad-visor to the firm’s Corporate Devel-opment practice. Frank Plaschke is a partner and managing director in BCG’s Munich office and the leader for value creation strategy in Europe. Daniel Stelter is a senior partner and managing director in the firm’s Berlin office. Hady Farag is a principal in BCG’s Frankfurt office and manager of the Munich-based Value Creators research team. Mark Sciortino is a principal in the firm’s Chicago office.

AcknowledgmentsThis report is a product of BCG’s Consumer and Corporate Develop-ment practices. The authors would like to acknowledge the contribu-tions of the following global experts in corporate development: Danny Friedman, a senior partner and man-aging director in the firm’s Los Ange-les office and the leader of the Cor-porate Development practice in the Americas; Jérôme Hervé, a senior partner and managing director in the firm’s Paris office and the leader of the Corporate Development practice in Europe; Dinesh Khanna, a partner and managing director in the firm’s Singapore office and the leader of the Corporate Development practice in the Asia-Pacific region; Jeff Kotzen, a senior partner and managing direc-tor in the firm’s New York office and the global leader for value creation strategy; Lars-Uwe Luther, a partner and managing director in the firm’s Berlin office and the global head of marketing for the Corporate Devel-opment practice; and Brett Schieder-mayer, managing director of the BCG ValueScience Center in South San Francisco, California, a research cen-ter that develops leading-edge valua-tion tools and techniques for M&A and corporate-strategy applications.

The authors would also like to thank Robert Howard and Sally Seymour for their contributions to the writing of the report; Kerstin Hobelsberger, Martin Link, and Dirk Schilder of the Value Creators research team for

their contributions to the research; Maria Morita and Meghan Perez for their help in finalizing the report; and Simon Targett, Katherine Andrews, Gary Callahan, Angela DiBattista, Kim Friedman, Pamela Gilfond, Sara Strassenreiter, and Janice Willett for their contributions to the editing, design, and produc-tion of the report.

For Further ContactFor further information about the report or to learn more about BCG’s capabilities in corporate develop-ment and value management, you may contact the authors.

Marcus BokkerinkSenior Partner and Managing DirectorBCG London+44 207 753 [email protected]

Patrick DucasseSenior Partner and Managing DirectorBCG Paris+33 1 40 17 10 [email protected]

Jeff GellPartner and Managing DirectorBCG Chicago+1 312 993 [email protected]

Eric OlsenSenior AdvisorBCG Chicago+1 312 993 [email protected]


Frank PlaschkePartner and Managing DirectorBCG Munich+49 89 23 17 [email protected]

Daniel StelterSenior Partner and Managing DirectorBCG Berlin+49 30 28 87 [email protected]

Hady FaragPrincipalBCG Frankfurt+49 69 91 50 [email protected]

Mark SciortinoPrincipalBCG Chicago+1 312 993 [email protected]

To search for the latest BCG content, please visit one of our websites at www.bcgperspectives.com or www.bcg.com/publications.

To receive e-alerts, including the latest content on this topic or others, please register at www.bcgperspectives.com.

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Bcg gaining a value advantage in volatile times

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