In mature markets like North America and western Europe, packaged food manufacturers have in recent years found top-line growth hard to come by. Some have turned to revenue growth management – moves to optimise their prices, promotions and product range – to try to revitalise sales. Simon Creasey analyses the benefits and challenges of implementing the practices.
Kraft Heinz and Mondelez International have used it. As have a host of other global food manufacturers. If done correctly, it can provide a boost to a company’s top line – and retailers also stand to profit from it. As a result, it is a tool expected to become increasingly commonplace among food manufacturers over the next few years.
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By GlobalDataBut what is revenue growth management? What does it entail, how does it work and why has it started to enter the lexicon of food manufacturers over the last few years?
Why are companies using revenue growth management?
According to food manufacturing analysts, revenue growth management has gained currency among large food groups for a number of different factors.
For starters, the majority of manufacturers are operating in a low-growth environment across mature markets like North America and Europe. Consumer spend is simply tracking population growth – in some western European markets there is negative growth – and grocery expenditure in real terms per capita has largely been flat since the 1970s.
“The upshot of that has been year-on-year EBIT growth across top 100 FMCG brand owners across the world has been declining since 2010, went into negative growth in 2014 and then flattened out a little bit again in 2015 onwards,” says Andre Medeiros, a retail and consumer focused partner within Strategy&, the globally integrated strategy consulting practice of business services giant PwC.
To offset this sluggish performance, many manufacturers relied on rapidly-expanding emerging markets like the BRICs and South Africa but, in recent years, growth in these markets has been uneven, with some of these nations experiencing inflation without economic growth.
The consolidation of retailers – even in markets like the UK that are already heavily consolidated – and the continued rise in the sophistication of retailers’ private-label products have also made it harder for FMCG brand owners to drive growth through pricing.
As a consumer business, you still need to think about how you are going to drive the top line, you can’t focus solely on the bottom
“Some players are responding to this through mergers and acquisitions, some are responding through aggressive cost focus – and you can see that in the rise of zero-based budgeting’, which is the other buzz word on the cost side – but that only gets you so far,” says Medeiros. “You still fundamentally as a consumer business need to think about how you are going to drive the top line, you can’t focus solely on the bottom. And so this concept of revenue growth management comes into play.”
Put in the most simplistic terms, revenue growth management is all about “linking price strategy to a brand strategy”, says James Brown, a partner with management consultants Simon-Kucher & Partners, which specialises in commercial strategy, with a particular focus on pricing, both in the consumer goods and the retail sector. By taking this integrated approach you can “reduce the number of mistakes you might make with promotions and you will probably have a smarter view on the overall category which means you can create better products and you can price those products better”, he explains.
The pillars of revenue growth management
Brown says different companies approach revenue growth management in different ways. For global consulting behemoths like PwC, revenue growth management is effectively structured around five key pillars. One is portfolio brand strategy. What is the optimal brand and product portfolio you need to be deploying across different types of markets? A second is price/pack architecture. How do you meet the need of a consumer across every occasion across every channel in the way you present your price and pack structures?
A third, customer management, focuses on how to best interact with the channel and provide things like merchandising guidelines. A fourth strand is investment architecture, or how the funding of trade investment is structured. For example, what are your contract terms and conditions with customers? And, fifth, there is the issue of promotions management: how do you use much more sophisticated data analytics to give clearer direction on how to optimise trade promotions.
One of the early adopters and leading exponents of this approach is Kraft Heinz, according to Alexia Howard, an equity analyst covering US packaged food manufacturers at investment bank Sanford Bernstein.
Kraft Heinz CEO Bernardo Hees announced in late 2015 that the company intended to expand its use of revenue management and since then although – like may rival FMCG companies – the group has struggled to grow revenue, it returned to modest positive organic top-line growth in 2016
“Historically the suppliers and manufacturers have been very loathe to mess around with pricing for fear there would be some sort of retailer retaliation if they did, so generally there was not much price variation going on and you get the same old promotions being trotted out every year,” Howard says. “I think Kraft Heinz broke that mould because what we began to see in the Nielsen data shortly after 3G [Capital] took over at Kraft was a lot more experimentation around price movements – up, down, sideways – than I’ve ever seen before.
“I think that’s kind of smart because it’s effectively learning by doing and trying to get a good data set together on which of its brands can take pricing and/or which brands might you get a better volume response if you take pricing down to optimise your profitability. I don’t think that had really been done before, but now obviously everybody is jumping on board.”
The benefits of implementing revenue growth management
Not that you will find many food manufacturers willing to openly talk in any great detail about their use of revenue growth management. Although the likes of Kraft Heinz and Mondelez have discussed their use of the strategy on earnings calls with analysts, just-food approached a number of large global food groups about this subject and they all declined to comment.
Barney Mauleverer, founding partner at up-and-coming UK food brand owner, distributor and exporter Fresh Marketing, was more forthcoming about his company’s recent use of the tactic for promotional activities.
“Often you’re forced to go to a round pound or a third-off by retailers, but we are doing a bit of work around price elasticity,” explains Mauleverer. “What is the effect of going to 20% instead of 33% or indeed to the nearest round pound? Then we go back to the retailers and say ‘if we only go to 20% and if you get the timing of the promotion right, it’s pretty much the same effect as 33% –and neither of us are losing that extra bit in pure margin’.”
A spokesperson for a large UK-based foodservice manufacturer that supplies national, high-street food chains says his company has also successfully rolled out a multi-pronged revenue growth management strategy.
“We seek to reach an agreement with our customers to de-list any tail-end SKUs – so any SKUs with low production runs, which from a manufacturing perspective are very inefficient because they have a relatively low margin associated with them,” the spokesperson says. “In addition, we work with our customers, or independently, to value engineer products through raw material substitution where we think it is appropriate without denigrating the quality of the product. We also push customers towards products that are mutually beneficial for them and us because we know they sell well and therefore we’ve got economies of scale over production, which means we can generate a better margin from them.”
Another tactic some food manufacturers are using is to work out which products are not selling well and, of which as a result they have excess stock likely to be wasted. They are then pushing out that product at reduced margins, Julian Mosquera, a director at LCP Consulting, a BearingPoint company, says.
“Through forward planning, manufacturers should spot shortfalls in capacity and target retailers on a price point that would drive volume down those production lines [family of products]” says Mosquera. “The benefit of this is that retailers would come to learn that when an offer is made it is one-time and short-lived – and when the manufacturer is unable to offer a better price point it is because they are fully committed. This would also drive retailers to manage more carefully their supply and promotional plans, which effectively become commitments that can’t be readily changed at the last moment as happens all too often today.”
The challenges
While the advantages of embracing revenue growth management appear manifold, successfully implementing the approach presents a number of different challenges for food manufacturers. One issue is revenue growth management requires input from marketing, finance, supply chain, research and development, sales teams and account managers.
“The fact that you need multi-functional capability is one of reasons it’s often difficult for consumer packaged goods players to crack this,” says Medeiros. “You need to find a marketer that is comfortable with the finance function and they also need to be adept at the analytical function, but finding these skills in one person is difficult, so the trick is therefore to build cross-functional teams with someone who acts as the coordination point.”
Another issue is managing the friction revenue growth management can cause when food manufacturers look to roll out their strategies with retailers, Sanford Bernstein’s Howard says.
“The problem this year is the retailers are no longer happy about the big food companies pulling back on this supposedly ineffective promotional spend because it is effectively a net price increase [manufacturers] are trying to take,” she explains. “Instead, retailers are going in the other direction and saying we want more price concessions and more promotional spending otherwise we are going to take away your shelf space. What you have now got is much more of a tug-of-war going on around what the appropriate pricing is and what the appropriate level of promotional spending is. It is a much less collaborative relationship than it was in the past.”
In the UK, friction between retailers and manufacturers has increased after food manufacturers looked to downsize products following the country’s vote for Brexit in an attempt to manage input cost inflation caused by the depreciation of the pound.
“There was a window of opportunity post the EU referendum when people could tactically push ‘shrinkflation’ products through and retailers accepted it,” says Medeiros. “We’re now in a world where retailers are saying ‘you’ve done that, we’re not accepting it any more. You have to find out other ways of incorporating that’ [input cost inflation].”
Will ‘big data’ lead to greater adoption?
One of the ways food manufacturers can do so is through the use of revenue growth management and that is why its use is expected to accelerate. Another factor in the greater adoption of revenue growth management by food manufacturers is the rise of big data and advances in technology as companies move towards the digital transformation of their business.
By as early as next year, US information technology consultants Gartner predicts more than half of large organisations globally will compete through the use of advanced analytics and proprietary algorithms.
“With machine learning and algorithms, food companies can improve their price management,” says Matt Bennett, director of strategic consulting for the food and consumables team at US-based cloud software company PROS. “Machine learning analyses real data, applies algorithms that discover a customer’s willingness to pay and provides sales teams with real-time guidance so they deliver an optimized and winning price.”
To illustrate his point, Bennett cites the fictitious example of a food manufacturer supplying French fries to customers located in 15 countries across Europe. “These customers want to know your fries are available exactly when they need them, in the quantities they require, and they need to count on a price that works for them,” says Bennett. “In the past, your sales team sold based on gut feel, their experience and long-term relationships, perhaps for many years. Machine learning and algorithms leave no doubt about what customers are willing to pay. Ultimately, it’s about selling profitably to satisfied customers.”
Does it over-complicate matters?
However, as Clive Black, head of research at UK stockbrokers Shore Capital points out, this is exactly what market traders have been doing for hundreds of years.
“To me the term revenue management may be suitably modern in terms of its management speak, but, at the end of the day, folks are trying to sell as much as they can at the best price to people who will flog it for the best price possible,” Black says.
And, based on recent history, Black is not convinced the grocery retail industry – and particularly the big four food retailers in the UK – needs another newfangled approach to pricing.
“Messrs Burnley, Coupe, Lewis and Potts [the CEOs, respectively, of Asda, Sainsbury’s, Tesco and Morrisons] are pretty much renowned for their simplicity and simplification and the deconstruction of layers of complexity has contributed massively [to their recent revival],” says Black. “This has led to SKU rationalisation, supplier rationalisation and a reduction in multi-buys. It’s been a delayering of complexity to get to the point that supplier-retailer relationships are much more understandable, much quicker and much leaner. There will be science, there will be insight and there will be intelligence applied to evolving relations, but I think there will be a virtue in keeping it simple.”
That may well be so but, in the ultra-competitive world of food manufacturing, it is highly unlikely companies will allow rival businesses to potentially steal a march by using a tool that can boost the top line. As a result, you can expect use of the phrase revenue growth management to become more commonplace among food groups in the future.
