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Revenue Growth In Consumer Packaged Goods

Optimizing Revenue Growth In Consumer Packaged Goods

By Doug Newman, John Sturrock and Andy Aucoin
Competitive companies seek to optimize revenue growth that is, to grow revenues faster, more profitably, and more sustainably than their rivals. In Consumer Packaged Goods (CPG), this pursuit is marked by an intense focus on innovation.

Executive Summary

Differentiated, brand-worthy product ideas delivered with innovative packaging, marketing, and merchandizing, enable CPG companies to command greater market share, rapidly grow revenues, and remain profitable even in the face of rising costs. It is not surprising, then, that more than two-thirds (67%) of CPG companies in our research sample cited innovation as a key driver of their revenue growth. Of course, success in CPG has always required far more than innovation alone. Todays CPG marketplace - marked by fast followers, a proliferation of private label brands, and the growing power of very large retailers - increasingly challenges CPG companies to gain full value from their innovations.

Our research suggests that many CPG companies could grow faster and more profitably. The key is balance.

Our research suggests that many CPG companies could grow faster and more profitably. The key is balance. CPG companies that achieve above-average performance in both revenue growth and operating margin blend a disciplined pursuit of innovation with strong new product development processes, serious efforts to optimize their supply chains, disciplined management in all operations, great execution, thoughtfully prioritized and organized process improvement efforts, and sound strategic acquisitions. Most CPG leaders recognize the value of balance but face significant obstacles (logistical, structural, cultural and operational) when moving to balance revenue growth drivers in their own companies. This paper outlines a path forward for CPG leaders seeking to optimize their companys revenue growth. Optimizing revenue growth begins with a new perspective a more holistic perspective than is the norm in CPG today. While many CPG companies have pursued operational improvements primarily within functions, far more consequential business benefits may be achieved from cross functional breakthroughs. Cross functional improvement could be the next wave in CPG.

Research Highlights
CPG Cites a Distinct Set of Revenue Growth Drivers
Among the CPG companies in our research sample, the four most frequently cited drivers of revenue growth were Innovation, New Product Successes, Supply Chain Optimization and Strategic Acquisitions. CPG companies cited Innovation three times more frequently than did the Fortune 1000 sample overall.

67 %

CPG Growth and Margin Leaders

50.5 %

63%

75%

50%

50%

42.4% 35.2% 32.9% 37.1% 31.9% 21.8%

CPG Overall

67%

51%

35%

33%

Innovation Supply Chain Optimization

New Product Success Strategic Acquisitions

Balance Drives CPG Revenue Growth & Operating Margins

CPG
80% 70%

F100 Overall
80% 70%

67 %
60% 60%

50% 40% 30% 20% 10% 0%

50.5 %

50% 40% 30% 20% 10% 0%

42.4 % 37.1% 31.9% 21.8%

35.2%

32.9%

While Innovation was cited as a key growth driver by most CPG companies, those with both above-average revenue growth and operating margin more frequently cited execution-focused growth drivers, in addition to Innovation. The logical conclusion? A balance of drivers optimizes revenue growth in Consumer Packaged Goods.

% Companies

% Companies

Acquisition Strategic (new region)

Acquisition Adjacent (core o ering)

Optimized Supply Chain

Operational Improvements

New product success

Innovation

Celerants research focused on the 006 Fortune 1000, including 45 companies in Consumer Packaged Goods (CPG). The total number of Fortune 1000 companies studied was 743. To gain insights into what drives revenue growth, we interviewed company executives and industry experts and completed an extensive review of authoritative secondary sources such as annual reports to shareholders, analyst reports, and major business information sources including the Wall Street Journal, Hoovers, Bloomberg, Onesource and Yahoo!Finance. We excluded companies that did not show year-on-year revenue growth.

Innovation

Increase d Demand

*Gross margin is more commonly referenced in CPG, but operating margin offers a more complete picture of total supply chain performance, because it accounts for SG&A costs as well as the cost of raw materials.

The Case for Pursuing Balance

Operational balance is crucial. Great ideas on the front end wont matter if you dont have execution, states Dr. Paul Siracusa, Global SVP of R&D and Quality for Church & Dwight, which manufactures and markets personal care, household and specialty products under the Arm & Hammer brand name and other trademarks.

In the everyday rush to get things done, people forget that management discipline and process rigor accelerate work.

Most CPG executives would share that view, but how many put balancing our revenue growth drivers near the top of their to do list? In truth, many CPG organizations are preoccupied with what seem to be more pressing challenges: Launching a major promotion... Responding to the demands of a powerful customer... Countering a fresh competitive threat... CPG leaders understand that disciplined process is important. In the everyday rush to get things done, though, people sometimes forget that management discipline and process rigor accelerate work. Some CPG companies do excel at execution. At least as many, though, routinely rely on brute force, emotion, instinct, or the brilliance of a few individuals to get things done. Across CPG, youll find very smart people, working very hard, who are thwarted by a lack of rigor and integration in the value chain. This fact of CPG life undermines revenue growth. When a terrific new product is sloppily introduced or poorly merchandized, for example, or when product supply is disrupted by problems in production or distribution, the revenues realized may be far less than expected. Most CPG executives can cite their own examples of poor execution sapping revenue growth.

CPG Culture vs Optimizing Revenue Growth

Characteristics of CPG that can work against balanced rigor: Many CPG companies grow through acquisition. Poor integration of acquired businesses or brands can create disconnected, incoherent structures and foster resistance to coordination across the supply chain. CPG legend often centers on great product ideas, and nothing compensates for rising costs or operational inefficiencies like a powerhouse brand. Some CPG companies are therefore tempted into the risky course of simply throwing money at innovation, betting that the business will be carried by a home run idea. Innovation-oriented CPG cultures often mistrust discipline and procedures as negative or counter-productive. In such companies, the best-case scenario may be a great stream of products, but limited ability to carry those products to the marketplace.

Lack of balanced operating rigor also causes many CPG companies to bleed off money. This is cause for growing concern. Margins in CPG, already thin compared to some other industries, are subject to mounting pressures. Costs for energy and many raw materials are reaching historic highs, and promotional spending is up. At the same time, it has become much more difficult for a CPG business to recover costs through higher prices. Todays mega-retailers have the power to resist many price increases. Consumers have more choices and are less loyal. The proliferation of fast followers and private label brands also diminish the earning power of once bankable brands. In the increasingly commoditized world of CPG, price increases can trigger immediate declines in revenues and market share. Many in CPG seem fixed on one apparent alternative: Innovating to command a brand premium that insulates the business against negative forces in the marketplace. We contend, however, that even this hallowed goal is most successfully pursued within the context of a balanced growth engine that yields competitive advantage across Customer Management, Sales Systems & Practices, Portfolio Management, New Product Development, and Mergers & Acquisitions.

In the increasingly commoditized world of CPG, price increases can trigger immediate declines in revenues and market share.

Building Your Balanced Growth Engine

The critical question is how? How do you transform an uneven (and thus vulnerable) CPG business into a more broadly capable performer that can grow faster and more profitably, now and over the long term? Optimizing revenue growth begins with a new perspective a more holistic perspective than is the norm in CPG today. Holism means seeing fully and clearly that each key element of your business is highly dependent on its relations to all the other elements. It also means running your business to be more than the sum of its parts. Major disconnects stemming from piecemeal thinking are remarkably common in CPG A cosmetics companys new product team, excited about its chic bottle design, makes choices without considering the cost of manufacturing, sourcing issues, and transportation problems that may arise down the line. A production schedule, altered without consulting Sales, proves unacceptable to a major customer In countless ways, functional areas often fail to work in concert, causing CPG companies to miss out on growth opportunities, incur unnecessary costs, and fall behind schedule. Lack of cross-functional integration is a major issue across the CPG value chain.

Cross-functional improvement could be the next wave in CPG and it is likely to find plenty of low-hanging fruit.

Improvements in many CPG companies have been pursued primarily within functions, although more consequential business benefits can generally be achieved from cross functional breakthroughs. Cross functional improvement could be the next wave in CPG and it is likely to find plenty of low-hanging fruit.

Business Impact

Organic Growth

Inorganic Growth

Operations Impact

Increased Increased More winning Better Ideas retention, pro t, productivity products/brands higher fruition growth across across sales base with reduced time rates, faster time customer base to market to market

faster/fuller synergy realization and return on assets

Holistic Change Process

Value rank customer Prioritize selling Build more cross Map shared Implement more base; implement KPI opportunities; functional processes & disciplined proactive perspective and measurement/shor t systematically & selectiv e interval control; reinforce productive rigor into Innovation structures; reinforce integrating portfolio reinforce key sales behaviors & New Product behaviors management system behaviors (not just results) Development

Revenue Growth Drivers

Customer Management

Sales Systems & Practices

Portfolio Management

Innovation & Product Development

Mergers & Acquisitions

When you apply a holistic lens to your business, you gain fresh insight into the true potential of your operations. You can then thoughtfully prioritize and pursue a cross-functional change process - one that builds the discipline and rigor of each growth driver while aligning all growth drivers into a fully integrated execution of your strategic direction. This is the essence of balance. It is how you optimize your revenue growth.

While straightforward in concept, executing such a transformation is complex. Keys to success include

Urgency. Organizational transformation is hard work. Dont

undertake a major change process until you sincerely believe it is required to raise your business to the next level. Then, actively communicate to ensure that the rest of your organization shares your sense of urgency. That is by no means easy. In a study commissioned by Celerant, The Economist Intelligence Unit found that only 54% of senior executives believe their company is successful or very successful at communicating strategic initiatives to frontline employees. In CPG, the facts strongly support the idea that balanced growth drivers deliver more profitable, sustainable growth. So, your case for change starts there. 6

We suggest, though, that you also articulate the personal benefits of your targeted transformation. Stress that your intent is to remove obstacles that your people say frustrate their performance. Note that the changes you envision will give them substantially more power to make things better. Just as important, demonstrate that you have a sound strategy for transformation and a thoughtfully crafted plan of action. That is the only way to credibly convey that you are serious about seeing it through. Last but far from least, work from the outset to build bottom-up as well as top-down channels of communication. Recognize and acknowledge that your companys leaders must tap insights and perspectives from the people on the front lines.

Demonstrating that you have a sound strategy for transformation credibly conveys that you are serious about seeing it through.

Objectivity.

Long-standing perceptions can paint a distorted picture of what is truly going on inside a business. Objective truth is best gained by getting close to the people who do the work by talking with them and through direct observation of their actions. As often as not, the reality of everyday work turns out to be quite different from managements assumptions. Direct observation also pinpoints the obstacles well-intentioned people face each day when trying to do their jobs. For these reasons and more, we strongly advocate objective, up close analysis from the outset. Dont rely solely on your own perceptions to shape your change process. Seek objective truth where the work actually gets done. In CPG, where mergers and acquisitions are commonplace and where many workers operate in silos, core truths to examine upfront include: Are you operating as one company, or more like multiple entities under one business name? To what extent does silo mentality inhibit your revenue growth? What realities (i.e., structural, cultural, motivational) reinforce growth-killing practices? What quantified business benefit can realistically be attained by your change efforts? How much time/how many resources will your company have to invest to realize that benefit? 7

Behavior change. The really difficult part of organizational

change is making new, more effective behaviors stick. This may be especially true in Consumer Packaged Goods because much of what you must do to optimize revenue growth cuts against the grain of CPG culture. Perhaps thats why many CPG executives who intellectually grasp the importance of balance have yet to build balanced strength across their own companies revenue growth drivers. Behaviors (and thus organizations) will change when you systematically blend urgency with objectivity... when you tap peoples innate desire to make a difference while providing clear opportunities for them to do so. But while many companies proudly point to their Key Performance Indicators (KPIs), balanced scorecards and other operational metrics, upon closer examination, measurement is present in name only. Measurement matters when it drives the right behaviors at all levels of the organization. For example, many KPIs drive behaviors within isolated operations, but there are few , if any, cross-functional metrics in place. Such measurement schemes actually tend to reinforce competing goals between functions - such as low-cost for the Procurement function versus high quality for Quality Assurance or timely delivery for Manufacturing - and thus drive your functions to work at cross purposes. Our advice? Dont be defensive about your current approach to measurement. Be ambitious. Assume you can do better. Seek metrics that provide clearer, more timely, more holistic views of everyday reality. Specifically, we suggest you craft an overall approach one that is informed by your KPIs or other critical measures to ensure employee actions at all levels are more purposeful, visible, integrated, and effective. Begin by taking a fresh look at your companys current measurement and management practices with these objectives in mind:

Systematically link top line strategy with operations throughout the organization Ensure people throughout your business use current, relevant, valid data to identify and impact the root causes of overall performance Empower the right people at the right levels to consistently make the right decisions that is, decisions that improve cross-functional as well as functional performance 

 Ensure that information technology is effectively applied to drive fact-based action Sequence and synchronize peoples actions to maximize the cumulative performance benefit That last point, synchronization of action, is obviously crucial in building a balanced, integrated CPG company capable of optimizing revenue growth. It is difficult for participants in any part of a large or growing business to conceive of the operation as a whole. If you do not proactively provide them a cross-functional perspective, most will focus on their own silos and will view the performance of other elements as out of their control, and therefore not really their concern. You can overcome silo mentality with cross-functional KPIs, a cross-functional planning process, and cross-functional reviews at the operational level. Cross-functional reviews compel all the players to test their view of reality against others and to make their function-specific goals tangibly subject to the overarching goal of optimizing revenue growth. Over time, such interactions will ensure a shared perception of reality and create a growing commitment to your companys higher purpose. Keep in mind, though, that you cannot simply invite different functions of your business into a meeting and expect that it will be productive. Rigorously pre-structuring cross-functional reviews provides a shared working context for people who do not customarily meet and ensures disciplined decision-making. Youll first want to specify each meetings purpose, appropriate meeting participants, meeting frequency, schedule and agenda. Make sure all participants know in advance what reports are needed and which KPIs will be addressed. We also emphasize timely training, development and coaching of people at all levels to build permanent capability to pounce on improvement opportunities. As your organization gains more holistic and objective insights into the current reality of your operations, you will feel increasingly confident about investing in employee development. Skill building and coaching can be focused on ensuring that new ways of working are rapidly adopted and normalized across your operations.

If you do not proactively cultivate cross-functional perspective, most people will focus on their own silos and will view the performance of other elements as not really their concern.

As your organization gains more holistic and objective insights, you will feel more confident investing in employee development.

Conclusion

While balance is not as inherently enticing as innovation is to most leaders in CPG, it probably should be. When CPG companies achieve balance across their key growth drivers, they are rewarded with faster, more profitable, more sustainable revenue growth. As a CPG leader, your mandate is to optimize growth. You do that by building a cohesive and capable business, operating with a sense of shared purpose and urgency, and making disciplined, integrated decisions based on objective cross-functional data. Creating such balance in your CPG company can be your legacy, but only if you make it a priority.

About Celerant Consulting

Celerant Consulting, Inc.
Principal office: 45 Hayden Avenue Lexington, MA 02421 United States of America 781-674-0400 www.celerantconsulting.com
Celerant is a global management consultancy specializing in operational improvement. We help leading companies worldwide achieve and sustain real gains in bottom-line performance. The essence of our approach is Closework. Celerant consultants immerse themselves in client operations, working side-by-side with people on the front lines of the business to connect their everyday actions with the companys aspirations. Through Closework, we transfer our expertise to our clients, foster ownership for ongoing improvement, and build a fundamentally more capable organization. Celerant works with many of the top 1000 companies in the world across a range of industries including Aerospace, Automotive, Chemicals, Energy, CPG, Financial Services, Government, Life Sciences & Healthcare, Manufacturing, Metals & Mining, Pulp & Paper, Retail, Telecommunications and Utilities. In 006, Celerant helped its clients realize over $1 billion in sustainable business benefits. Celerant was founded in 17. Today, Celerant has some 600 employees and is the largest independent player in the operations segment of the global consulting market. Celerant has headquarters in London and offices in Belgium, Denmark, Finland, France, Germany, the Netherlands, Norway, Sweden, Switzerland and the USA.

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About the Authors

Doug Newman is the Vice President of Business Development
for the Consumer Packaged Goods sector at Celerant Consulting.

John Sturrock is the Director of Special Projects and is

responsible for the Revenue Growth service offering at Celerant Consulting.

Andy Aucoin is a Senior Research Analyst specializing in growth

strategy, business transformation and change management at Celerant Consulting.

We have offices in 11 different countries and we will always go where our clients need us to be.
If you are interested in having a conversation about the ways we can help your business achieve results, every time, you can call us at: Americas Europe: Belgium Denmark Finland France Germany The Netherlands Norway Sweden Switzerland United Kingdom + 3 (0)  76 5 3 + 45 35 45 0 01 + 35 10 36 00 + 33 (0) 1 56 6 53 00 + 4 (0) 11 5 33 00 33 + 31 (0) 0 570 5400 + 47  43  3 + 46 (0)  670 657 + 41 (0) 43 4 76 0 + 44 (0) 0 33 5000 + 1 71 674 0400

Celerant Consulting, Inc. Principal office: 45 Hayden Avenue, Lexington, MA 041, United States of America

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