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Cash for Growth Working Capital in the Consumer Goods Sector
December 2014
Welcome to PwC’s Working Capital Survey of the Consumer goods sector. Working capital is the lifeblood of every company and a barometer for how freely cash flows. In efficiently run businesses, cash runs freely; in others, cash becomes tied up in working capital, restricting the company’s ability to grow. This is particularly true for the consumer goods sector, which are typically under significant margin pressures from their customer base and are facing volatile commodity pricing in their supply chain. In this survey, we look at the key working capital trends across the globe in the consumer goods sector. Among other findings, overall working capital performance suggest that cash is returning to the forefront of companies’ agendas as a source of funding for future growth. Globally, PwC is working with many companies to help optimise working capital and achieve sustainable performance improvement. As consumer goods companies seek to strengthen their balance sheets in the months and years ahead, many can likely benefit by taking a long, hard look at their working capital efficiency. Thank you for reading and we hope you enjoy this report.
Foreword
2 PwC – Cash for Growth
John Maxwell Partner – Consumer Sector Market Leader
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Executive summary Working capital can deliver cash today, for growth tomorrow
Globally, the largest companies within the consumer goods sector have experienced an uncertain trading environment which has caused revenue growth to plateau, with businesses struggling to replicate the levels of growth achieved in 2010. As a result of the difficulties, many companies have turned their attention towards cash management and optimising their operations to release cash from working capital. This effort has been reflected in better working capital performance across the sector since 2011, with European companies improving the most. Globally, the drivers of the trend have been better receivables and payables management. However in Europe, performance has improved across all working capital cycles, with enhanced inventory management being a key factor. To return to the levels of revenue growth achieved in 2010, companies need to invest in their future, which will require significant extra cash over the next few years. Our survey shows that if companies were to move to the next performance quartile, they would generate a total of €9bn of cash, while moving to upper quartile performance would release €13bn of cash. Cash is at your finger-tips.
Rob Kortman Director – Working Capital Management
Daniel Windaus Partner– Working Capital Management
Whilst revenue growth has stalled in recent years…
4 PwC – Cash for Growth
Number of companies in the study
Revenue distribution of companies in the study
Total global revenue in the consumer goods sector
Sales for the largest 157 companies in the consumer goods sector grew by 31% over the past four years equivalent to a Compound Annual Growth Rate (CAGR) of 7%. This was primarily achieved in 2010 and 2011 with growth rates plateauing since.
66
60
31
Americas
Asia, Africa & Australasia
Europe
€ 257 billion
€ 32 billion
€ 78 billion
Americas
Asia, Africa & Australasia
Europe
13.3%
7.1%
4.0% 3.7%
0%
2%
4%
6%
8%
10%
12%
14%
16%
0
50
100
150
200
250
300
350
400
2009 2010 2011 2012 2013
Reven
ue
valu
e €
bil
lio
ns
Revenue YoY revenue growth
… companies have focused on improving working capital performance as a source of cash
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Working capital performance across the sector has improved since 2011, with a 8.4% improvement in days working capital over the period which has resulted in the release of €0.5bn cash.
These improvements suggest that cash is returning to the forefront of companies’ agendas as a source of funding for future growth.
Industrial products sector working capital trend
4.2% decrease in days working capital
since 2012
€0.2bn
decrease in working capital
since 2012
46.5
44.2
47.6
45.5 43.6
20
25
30
35
40
45
50
55
60
0
5
10
15
20
25
30
35
40
45
50
2009 2010 2011 2012 2013
DW
C
Wo
rkin
g c
ap
ital € b
illi
on
s
Net Working Capital DWC
Working capital performance has improved in all regions, with Europe achieving the greatest development
6 PwC – Cash for Growth
Americas
Europe
-9.1%
Asia, Africa & Australasia
Key
Days of working capital
Percentage change between 2012 and 2013
-8.7%
-1.6% 46.9
44.6 48.0
44.7 44.0
2009 2010 2011 2012 201352.8 54.1 54.2
57.7 52.7
2009 2010 2011 2012 2013
42.9 39.4
43.5 42.6
38.7
2009 2010 2011 2012 2013
All working capital cycles have improved or remain consistent
Days sales outstanding Days inventory on-hand Days payables outstanding
Days sales outstanding Days inventory on-hand Days payables outstanding
Global working capital performance
European working capital performance
Working capital performance has improved by 1.7 days globally between 2012 and 2013. The drivers of the trend are improvements within the receivables and payables cycles.
European companies have achieved an even more notable improvement of 3.8 days over the past year. Enhanced receivables and inventory performance have been the key drivers, with receivables performance at a 5-year best.
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47.5 47.3 49.8 48.1 47.4
2009 2010 2011 2012 2013
34.7 35.8 38.3 36.7 36.7
2009 2010 2011 2012 2013
35.8 38.8 40.6 39.4 40.4
2009 2010 2011 2012 2013
52.1 50.1 51.4 50.7 49.4
2009 2010 2011 2012 2013
38.0 39.1 41.3 40.8 38.9
2009 2010 2011 2012 2013
47.2 49.7 49.3 48.9 49.5
2009 2010 2011 2012 2013
1.3 day
improvement
no change 1.0 day
improvement
0.7 day
improvement
1.9 day
improvement
0.6 day
improvement
41
27
50
37
54
40
35
59
0 20 40 60 80 100
DSO
DIO
DPO
DWC
Upper Quartile
Median
Performance varies widely within the industry…
8 PwC – Cash for Growth
Working capital performance ranges widely across the consumer goods sector, with a median of 37 days.
Notably, performance variance is wide across all working capital cycles, suggesting there is room for improvement across all areas.
Min/Max Range
Working capital performance range
Days
Working
Capital
Days
Sales
Outstanding
Days
Payables
Outstanding
Days
Inventories
On-hand
… with improvements achieved across good performers and bad performers
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Interestingly, 18% of companies operating below the industry median deteriorated by more than 10 days, whilst this was only 8% for those operating above the industry median.
The Leaders 54% of companies with days working capital above the industry median have improved their performance over the past year.
The Laggards 53% of those performing below the median improved.
53%
54%
Globally, €9bn to €13bn of cash could be released from working capital across the sector
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Working capital
€9bn to €13bn
PwC – Cash for Growth
Our approach to sustainable working capital
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Working with a global FMCG on an operational working capital improvement programme
The key issue
The company decided to increase its focus on cash management in order to improve its position in the competitive landscape. An internal programme was initiated to start the project, but results were limited due to the cross-functional complexity in the organisation.
Management realised that a dedicated focus was required to achieve the cash objectives.
How we helped
Our team worked with the company to assess their working capital improvement potential and to investigate how the introduction of a cash-focused culture could be elevated on the agenda.
We performed an order to cash (debtors) working capital diagnostic review. This identified c€350m of benefit potential.
Our fast-paced approach was essential to raise organisational awareness of poor cash performance and raise receptiveness to change behaviours.
The order to cash (OTC) workstreams focused on the standardisation of the end to end process, the implementation of a global credit policy, the development of local actions plans and the standardization of the credit collection approach and payment terms across the business units.
The result: we identified and delivered net working capital cash benefits close to €360m , reducing DSO from 61 days to 52 days.
A “blue-print” for improvement was developed and piloted in the largest operating entity.
Establishment of a global OTC competency centre provided board-level support and commitment to “roll-out across the globe” leading practice policies, processes, metrics and IT enhancements.
All business units and sales organizations were integrated into the end to end OTC process.
We supplement our working capital and cash management methodologies with core consulting approaches to make sure that improvements are tangible and sustainable.
12 PwC – Cash for Growth
Complete a working capital benchmarking exercise to compare performance against peers and identify potential improvement opportunities.
Perform a diagnostic review to identify ‘quick wins’ and longer-term working capital improvement opportunities.
Develop detailed action plans for implementation to generate cash and make sustainable improvements.
Assist the realisation of sustainable working capital reduction by implementing robust, efficient and collaborative processes.
1.
2.
3.
4.
How can we support you?
Addressing the key levers:
• Identification, harmonisation and improvement of commercial terms.
• Process optimisation throughout the end-to-end working capital cycles.
• Process compliance and monitoring.
• Creating and embedding a ‘cash culture’ within the organisation, optimising the trade-offs between cash, cost and service.
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Examples of areas where PwC could help you to release cash from working capital
Cash culture & visibility - The aim is to create a culture whereby cash is important & performance is clearly visible Key cash driver focus areas: • Cash related management incentives • Top management sponsorship • Clear roles & accountability's • Corporate Working capital framework • Defined targets per division / country • Working capital reporting dashboards by division / country
Accounts receivable
• Credit risk policies • Aligned and optimised customer terms • Optimised Customer marketing agreements and
processes • Billing timeliness and quality • Contract and milestone management • Prioritised and proactive collection procedures • Systems-based dispute resolution • Dispute root cause elimination
Accounts payable
• “Centre Led” procurement • Consolidated spending • Aligned and optimised supplier terms • Supply Chain Finance • Purchasing channels (to avoid contract leakage) • Payment method and frequency • Early payment prevention
Inventory
• Lean and agile supply chain strategies • Global coordination • Forecasting techniques • Production planning • Accurate tracking of inventory quantities • Differentiated inventory levels for different goods • Balanced cash, cost and service
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PwC’s Working Capital Management Group brings together experienced practitioners from across the world. Our people have many years of experience at delivering world class working capital performance both as consultants and from time spent in industry.
To find out more, please go to www.pwc.com/working capital
PwC – Cash for Growth
For more information about working capital in the consumer industry, please contact:
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Daniel Windaus
Partner, Working Capital T: +44 (0)20 7804 5012 E: [email protected]
Our global network
Asia
Tze Wee Wee T: +65 6236 4619 E: [email protected]
Denmark
Bent Jorgensen T: +45 3945 9259 E: [email protected]
Middle East
Matt Wilde T: +971 50 900 3071 E: [email protected]
Switzerland
Reto Brunner T: +41 58 792 1419 E: [email protected]
Austria
Christine Catasta T: +43 1 501 88 1100 [email protected]
Finland
Michael Hardy T: +358 50 346 8530 E: [email protected]
The Netherlands
Rick van Dommelen T: +31 887 926 476 E: [email protected]
Turkey
Husnu Dincsoy T: +90 212 376 5308 E: [email protected]
Australia
David Pratt T: +61 (2) 8266 2776 E: [email protected]
France
Francois Guilbaud T: +33 156 578 537 E: [email protected]
Norway
Jonathan Pycroft T: +47 952 601 97 E: [email protected]
USA
Paul Gaynor T: +1 925 699 5698 E: [email protected]
Belgium
Damien McMahon T: +32 2 710 9493 E: [email protected]
Germany
Joachim Englert T: +49 699 585 5767 E: [email protected]
Spain
Josu Echeverria T: +34 91 598 4866 E: josu.echeverria.larranga@
es.pwc.com
CEE
Petr Smutny T: +42 25 115 1215 E: [email protected]
Italy
Riccardo Bua Odetti T: +39 026 672 0536 E: [email protected]
Sweden
Jesper Lindbom T: +46 70 9291154 E: [email protected]
Rob Kortman
Director, Working Capital T: +44 (0) 7803 859001 E: [email protected]
John Maxwell
Consumer Sector Market Leader T: +1 (973) 236-4780 E: [email protected]
Neil Sutton
Global Retail and Consumer Deals Leader T: +44 (0) 20 721 31075 E: [email protected]
Mike Jervis
UK Retail and Consumer Deals Leader T: +44 (0) 207 212 6610 E:[email protected]
PwC helps organisations and individuals create the value they’re looking for. We’re a network of firms in 157 countries with more than 184,000 people who are committed to delivering quality in assurance, tax and
advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional
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Design Services 28682 (07/14).
