Outlook 2021: Revenue Management in UK Consumer Goods

www.simon-kucher.com

Outlook 2021:Revenue Management in UK Consumer Goods

24th November 2020

James Brown

London office1 Plough PlaceLondon EC4A 1DE, UKTel. +44 20 7832 6700 [email protected]

iStock/PeopleImages

We have prepared this opinion piece to stimulate discussion and it has not been developed for any specific client or situation and therefore cannot be relied upon as direction or advice; Retail pricing is at the sole discretion of the retailer

Key agenda topics for today

What is the right revenue growth action plan for recovery after the COVID-19 crisis?

How have UK Consumer Goods companies responded to the crisis?

What can we do now to be more proactive for the recovery?

What areas should Revenue Management teams focus on to be ready for 2021

Simon-Kucher | Outlook 2021 | Revenue Management in UK Consumer Goods 2

Simon-Kucher | Outlook 2021 | Revenue Management in UK Consumer Goods

Focus for today’s session

iStock/cnythzlCOLOURBOX/ -

UK Food & Bev

Household + Consumer Health

Your views

+ our experience

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At Simon-Kucher we advise clients from all sectors, and have seen the full range of impacts of the crisis

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Pharma and life sciences

Telecommunications

Industrial goods and services

Consumer and retailAutomotive

Financial services

Software, technology, and internet

Media and entertainmentLeisure, Travel & Transportation

Chemicals

4

iStock/Farknot_ArchitectiStock/FredFroeseiStock/fiphoto

Source: Simon-Kucher & Partners

What we saw: In this space COVID-19 crisis dramatically changed the

market, but boosting overall consumption

Rapid changes in the marketSudden shift in consumer demand profile

Temporary increase in cash flow


Sudden increase in at-home consumption, benefiting household & food categories

“Pandemic-conscious” consumers causing stock-outs of essential items (on-shelf and online)

Declining categories made a resurgence

Rapid growth in “essential” FMCG categories provided many brands with short-term cash infusion

Increase in overall consumption may be side effect of shifting purchase frequency vs increase in total volume

Consumers began to “act” more price sensitive, willing to trade down to basic items and private label

Shopping missions shifting toward more pantry-stocking occasions and less for on-the-go or immediate consumption

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Invested in new data sources and tools to better react to shifting customer demand

Increased factory operations, improved sourcing, secured labor force, shifted production from foodservice to retail

Source: Simon-Kucher research and experience; FoodDive published on April 2, 2020 and March 26, 2020; USA Today published March 9, 2020; Consumer Goods Technology published April 2, 2020; P&G Facebook post; Unilever Instagram post

How have brands responded:Many CPG companies made positive and proactive adjustments (1/2)


iStock/Minerva-Studio iStock/Natali_Mis

Adjusted operations to meet increased demand

iStock/Natali_Mis

Introduced or repurposed larger packs

Rationalized shelf offerings

Improved understanding of consumer behavior

iStock/marchmeena29

Removed artificial channel distinctions and rolled out larger packs to wider base

Limited the number of items available, focusing on high traffic or high margin items

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Shifted field sales teams away from traditional territory to deploy to high demand channels

Taking steps to prevent steep discounting or price gouging

Shifted or cancelled planned price promotions to re-distribute funds elsewhere in the business

Seized opportunities to get product to customers using unconventional channel mix

Source: Simon-Kucher research and experience; FoodDive published on April 2, 2020 and March 26, 2020; USA Today published March 9, 2020; Consumer Goods Technology published April 2, 2020; P&G Facebook post; Unilever Instagram post

How have brands responded:Many CPG companies made making positive and proactive adjustments (1/2)


COLOURBOX/iStock/bernardbodoiStock/23d7d4d_101 iStock/Natali_MisiStock/Natali_Mis

Resisted sharp price adjustments

Rolled back planned price promotions

Looked at underpenetrated channels

Rapidly redeployed sales teams

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GettyImages/erhui1979

What we believed when the pandemic first started

Volume

Days to departure

Old target (= history +)

Price

Forecast

Booking curve

Actual

Lockdown Restart 0180

Demand patterns1

W

U

L

V Pastepidemics

Double-dipbefore recovery

Prolonged recession

Lost decade recoveries

SARS

H3N2

H3N2

USA 1980s

Euro zone 2010s

Oil shock 1970s

Japan 1990s

Greece 2000s

Alphabet recovery2 Time periods3



What we learned: Consumer behavior tends to shift during market downturns and throughout various stages

What happened during the last financial crisis?


What happened during the last financial crisis?

Market Downturn Market Bottom Market Recovery

Purchase habits change rapidly due to necessity and access.

Consumers begin to “act” more like a price sensitive shopper, looking for the

lowest price or best value for certain categories…..

… temporary normal develops as purchase criteria now change

There is heavy trade down within the portfolio, to a cheaper

competitor/substitute, or consumers stop purchasing altogether…

… it takes time to revert back to old habits and

some never will.

Consumers are slow to adapt and a certain share of your customers permanently stay as a price

sensitive shopper

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Source: Simon-Kucher UK CG 2021 outlook survey fielded November 2020, N = 48

Back in April we asked you how long it would be until we settled into a

steady state period…

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1-3 months 4-6 months 7-12 months 1-2 years

Apr-20

% of respondents who indicated they expected settling within time period

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… And when we asked again last week (7 months later), the answers were almost the same

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1-3 months 4-6 months 7-12 months 1-2 years

Nov-20 Apr-20

% of respondents who indicated they expected settling within time period

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Back in April, we made some predictions…

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Looking back: What we said & how things stand today…

Retailer price war & conflicting pressure

Permanent shift in channel dynamics

Significant changes in consumption occasions

A rethink of promotional strategy needed

Intense discussion on how to “share the pie”

Increased demands on RM teams

iStock/JohnnyGreig

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iStock/dinkaspell


The return of inflation?

Massive state money injection without production…

Reduced incomes / Price sensitivity / Retail price war…

iStock/Bliznetsov

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85

90

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105

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115

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CPI all items Food and non-alcoholic beverages


Source: ONS CPI dataset, Simon-Kucher Analysis

At a macro level, a big question for UK CG is whether we will return to price growth?

Cost of basket of goods indexed to January 2014

Supermarketprice war

Cost shock(Brexit vote)

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Price war or “sustained skirmish?”

iStock/RichVintage

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View on price and cost development are polarised, but the more price sensitive shopper is expected

-40% -20% 0% 20% 40% 60% 80% 100%

Strongly Disagree Disagree Agree Strongly Agree

Retail prices will go up and we will see a return to high inflation

Shoppers will have become more price sensitive

We will see a new price war between retailers, bringing prices down

We will be able to execute planned cost price increases with our customers

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iStock/Kwangmoozaa


Retailer responses

Cuts to “essentials”

“EDLP” Price Match

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Source: Assosia data / The Grocer

Overall activity on promotions is slightly down (7%) but skewed by Tesco’s shift to loyalty activity

1% 1%

-22%

10%

-40%

5%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%% change in promotional activity since start of March

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-80% -60% -40% -20% 0% 20% 40% 60%



Little optimism that promotional activity will decrease in the mid term


Promotions will become deeper and more aggressive

Promotional activity will reduce as we have broken the cycle

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iStock/zoranm iStock/zhaojiankang GettyImages/ sergeyryzhov


PRESSURE

Shoppers Retailers Suppliers

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Even amidst the COVID uncertainty, current threats loom larger

0

10

20

30

40

50

60

70

Brexit outcome Covidrestrictions

Outlookuncertainty

Consumerconfidence

Supply chainviability

Lack ofdistribution

points

Lack ofmanagement

time

Cash flow Irrelevance ofour product

1st 2nd 3rd

The top 3 biggest concerns right now for your business?

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GRAPHICS – Brexit picture… we’ve used one in conferences which looks like a uk/EU flag being

torn/cut? Otherwise something else to represent Brexit (full slide)

iStock/Elena Schweitzer

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The industry is voicing major concerns about the UK not reaching a Brexit trade deal

GRAPHICS – column chart, possible values 0 – 10. I will fill in data later.

On axis, 0 = Not at all concerned; 5 = moderately concerned, 10= extremely concerned

0%

5%

10%

15%

20%

25%

Not at all concerned Moderately concerned Extremley concerned

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iStock/chombosan

COLOURBOX/-

iStock/gopixa

iStock/Foryou13

Brexit cost impact

Reduced incomes

Supply chainDuties & Tariffs

Currency shock

25

-20% 0% 20% 40% 60% 80% 100%

Disagree Strongly disagree Agree Strongly agree

If no trade deal is reached and this results in increased costsfor my company

Regardless of the deal reached, I expect increased costs for my company

I expect we will attempt to pass on cost increase through higher pricing to customers



The industry expects higher costs, and expects to try to pass these on

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Retailers are positioning for suppliers to take a disproportional share of the cost impacts

…in the event of a hard Brexit, we want to make our position

clear to you: Spar will not accept any cost price increases

without a robust valid justification to support

…For uncertain cost factors such as tariffs and currency,

your business will have built stocks to provide a consistent

and uninterrupted supply for well into 2021

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-20% 0% 20% 40% 60% 80%



At the same time, whilst discussions have been tough relationships are being strengthened


Relationships with customers will be stronger than pre-crisis

Trade terms and JBPs will be opened up for re-negotiation given the disruption/new baselines

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Source: Simon-Kucher experience and anlysis

RM teams need to be proactive in identifying, defining and supporting action to target revenue pools

Identification and support in creation of consumption moments and shopping missions

With right product

In right format

In right pack size

At right price point

With right promotions

Through right channel

At right time

Revenue Pools

Shopper ConsumerManufacturer


To ensure net revenue growth we need to manage customer pricing and terms – after we maximise total value

Manufacturer Distributor Shopper ConsumerRetailer


Identification and support in creation of consumption moments and shopping missions

With right product

In right format

In right pack size

At right price point

With right promotions

Through right channel

At right time

With fair share of the benefits for all parties in the chain

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Source: Covid Recovery Survey ran April 2020

These have to be supported by a strong approach to Revenue Management - and there is a lot of room for improvement

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Price Strategy

Price Pack Architecture

Trade Terms / Trade Investments

Mix Management

Promotion Management

Integrated Business Planning

Very weak - major underperformance / barely exists Poor - significant room for improvement

OK - we cover the basics but could do a lot more Good - this is a strength for us

Excellent / world class - we are really strong here, best in class

% ranked as first or second focus for recovery

28%

38%

26%

65%

40%


iStock/ SherryVSmith Images


Five steps for Revenue Management teams to be ready for 2021

1

2

3

4

5

Brace for the impact of cost inflation

Scenario planning – hard for COVID, a must for Brexit

Prepare the basics – what are our PPA and Promo options for short to mid term changes?

Ensure JBPs and terms are fully mapped and baseline is ready for negotiations

Adopt an OBPPC approach for comprehensive portfolio development

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Customer pricing

Consumer pricing*

Price-pack architecture

Trade-promo effectiveness

Retailer specific RSPs and Promo calendars

Brand/Pack level commercial goals

Portfolio pricing strategy

Pricing strategy

Design and management of primary price research

Market research and analytics

Development of performance tracking, data capture and gaps

Data and reporting

Design of RM organisation set-up, governance and processes

RM Org and Process

Development of price and promo guidelines comprehensive review or tackling specific challenges

Ensuring pricing strategies align with overall corporate goals – at all levels

Transparency of achieved price

Trade terms assessment and benchmarking

Cross-channel price management

Design and implementation of complete customer pricing and trade terms frameworks


* Retail price setting is at the sole discretion of the retailer

We support our Consumer Goods across all areas of Revenue Management

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James Brown is Managing Partner for Simon-Kucher & Partners in the UK and had over

10 years experience in industry roles prior to joining Simon-Kucher in 2009.

James leads the Consumer & Retail practice in the UK. Covering all Consumer Goods categories including extensive experience in Grocery, advising both UK based clients and acting as UK market expert on global engagements.

He specializes in commercial strategy both in the Consumer Goods & Retail sector and the B2B services environment. He advises leading FMCG businesses and a number of Private Equity firms where he works across their portfolios.

James is a regular media commentator on pricing topics (Sky News, BBC, Channel 4, ITN, Guardian, FT, plus others), having been called on extensively in the last 2-3 years to cover retail price wars, deflation, and the spiraling of promotions. In addition he is a frequent speaker at conferences and events (including Professional Pricing Society, Revenue Management & Pricing International and several in house events for global Food & Beverage companies).


Source: Simon-Kucher

Your UK contacts at Simon-Kucher & Partners for Revenue Management in Consumer Goods

James Brown

Managing Partner, UK1 Plough Place, London EC4A 1DE

phone: +44 7545 208959

e-mail: [email protected]

Drop me a note at [email protected] or call on me on 07545 208 959 to discuss opportunities or challenges in Revenue Management or your planning for 2021 (including Brexit…)

Greg Harwood is a Partner with Simon-Kucher & Partners in London.

Since joining Simon-Kucher & Partners in early 2012, Greg has worked for both the London

and Boston offices, and has conducted more than 50 projects across the UK, Europe, The

Middle East and the USA. Greg's clients include consumer subscriptions, consumer internet,

content businesses, traditional media players and consumer product companies.

Greg’s consulting activities primarily focus on pricing and sales optimisation, customer

segmentation, promotional effectiveness, revenue model re-design, portfolio optimisation and

the development of actionable and implementable strategic solutions for market leading

organizations.

Greg is a regular conference speaker, and commentator on pricing, sales and commercial

strategy topics. As well as, a guest lecturer on pricing and behavioral economics at

numerous business schools around the UK.

Greg Harwood

Partner, London1 Plough Place, London EC4A 1DE

phone: +44 77 11317060

e-mail: [email protected]

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Outlook 2021: Revenue Management in UK Consumer Goods

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