Part 2 of 4: Emerging from the Storm: How Leading Customer Organizations Reignite Growth. Findings from the 2010 Customer and Channel Management Survey
About the Survey: The 2010 Customer and Channel Management (CCM) Survey provides an up-to-date perspective on the practices of top-performing CPG companies across the following dimensions: sales strategy, pricing and trade investment, strategic customer collaboration, and complexity management. This year’s survey was conducted in spring 2010 and is produced in collaboration with the Grocery Manufacturers Association (GMA), McKinsey & Company, and The Nielsen Company. Approximately 220 CPG executives from more than 50 companies with close to $160 billion in U.S. manufacturer sales—in the food, beverage, personal care, and home care categories—participated.
From 2008 to 2010, CPG manufacturers faced significant challenges in managing pricing and trade investments. At the start of this period, late 2007 and early 2008, many CPG companies experienced significant increases in commodity input costs, a situation that caused many players to implement price increases that were significantly larger and more frequent than the industry has seen in the past. Then, as the United States economy fell into a deep recession and core commodity prices declined, CPG players encountered considerable downward pressure as volumes declined and consumers, focused on value, began trading down and switching to more value-oriented formats. In order to maintain their competitiveness, retailers responded by pushing for lower prices and greater investments from CPG companies to deliver lower prices and more value to consumers.
However, despite these challenges, the 2010 survey revealed that pricing and trade winners were still able to deliver strong results and outperform their categories. While these winners relied on many traditional industry leading practices, they achieved winning performance in this volatile time period by adapting to the rapidly changing and complex market environment of the past few years more quickly and strategically than their peers.
Pricing. Pricing winners were able to increase prices above those of their categories while increasing category share by developing a deep understanding of the consumer, carefully weighing the effects of market forces, and making organizational investments to deliver strong results.
Integrate a comprehensive view of market dynamics in pricing strategies. Pricing winners are more likely to focus on external influences when setting prices. For example, they examine shifts in competitor pricing and the ability of retailers to meet their target margins or price points. In addition, recognizing the growth in private labels, winning companies report that private-label prices have become a more important consideration in the development of pricing strategy. Yet, with only 57% of winners and 35% of other CPG companies tracking and managing their price gap relative to private-label products, there is room for improvement in this area for many companies.
Take a broad yet deep view of price elasticity to ensure pricing performance. Winners have a clearer view of overall consumer price sensitivity than do others, and they more often set prices by considering consumer price elasticity at national and regional levels, as well as at the detailed category or brand level. Top-performing CPG players are also more likely to use a “menu” approach to pricing, varying prices depending on the service level requested by a retailer for warehousing, logistics, and back-office services.
Ensure regular and frequent pricing discussions with retailers. Winners continue to engage retailers in pricing discussions at regular intervals (at least once a year), framing these discussions in ways that are relevant to retailers and taking into consideration the market environment and pace of inflation. Winners are also more likely to take a multidimensional approach in pricing discussions, emphasizing retailer profits and product or category investment—not just commodity costs.
Invest in dedicated resources devoted to pricing and integrate pricing and promotion teams. Winning CPG companies invest nearly 50% more, normalized based on sales, in resources devoted to pricing across functions. In addition, winners are two times more likely to have a dedicated revenue-management group to ensure that pricing receives the appropriate level of attention and analytics support.
Winners are also twice as likely to integrate everyday pricing and promotion roles in a team that resides either in an existing centralized function (for example, marketing or finance) or in a revenue-management group at the center. This approach provides multiple benefits to the CPG manufacturer, including alignment of pricing and promotion strategies and the establishment of a single source of accountability for all pricing activities.
In response to the challenges noted above, trade spend as a percentage of adjusted gross sales increased significantly from 2008 to 2009 for all companies. Trade-investment winners, however, were able to differentiate their performance and capture more incremental sales from promotions than others.
The majority of these winners chose to use increases in trade investment to offset price increases and captured more market share and gross-margin gains from these increased investments.
Conduct rigorous and frequent performance reviews of trade investments. Winning companies make it a priority to evaluate the performance of their trade investments at frequent intervals. Approximately two-thirds of winners conduct such promotional performance reviews at least quarterly. Winners use more metrics on average—specifically, volume and trade investment trends, overall account return on investment (ROI) versus plan, as well as account profitability and growth. By contrast, less than 50% of other players assess their trade investments at least quarterly. A third of other CPG manufacturers have no formal post-promotional review process. Because winning organizations consider these assessments a priority, they more often allocate resources within corporate headquarters to complete these post-promotional analytics, instead of assigning this task to a field analyst or account representative.
A majority of all survey respondents use three sources of data to understand trade promotional performance: syndicated scan data, loyalty- or shopper-card data, and retailer POS data. Winners are using the insights from this analysis to improve chain-level performance and to deepen their understanding of consumer and category dynamics. In the future, winning companies are looking to continue improving these analytics in order to better understand issues such as the incremental value of promotions and the promotions that best drive their brands and expand the category.
Differentiate investments based on past and potential future performance. Top-performing CPG players use both activity- and outcome-based criteria to set trade investments across channels and accounts, and they are more likely to consider projected financial outcomes such as ROI and sales growth at a given retailer in their rate-setting exercise. In addition, these players evaluate the type of activity that their investments will fund.
Work effectively with Walmart. While most CPG companies are increasing their trade investments at Walmart, winning companies are allocating more of their trade spend to non-promotional activities requested by Walmart (for example, sustainable packaging) than others. In return for these investments, winners are able to secure greater cooperation from Walmart in the form of increased distribution, more promotional support, additional secondary placement in stores, and better shelf placement.
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