Driving Profitability with World-Class Revenue Management ... · Instead,&bestOinOclass&Revenue&Management& incorporatesfive&cricalcomponentstoaccelerate& andfuelprofitablegrowth

1 PROMOTION OPTIMIZATION INSTITUTE | FALL SUMMIT 2015 | DALLAS TX

Driving Profitability with World-Class Revenue Management Capabilities


Revenue Management Overview

Revenue Management Component Deep Dives

Brand, Channel, Price, Pack Architecture

Pricing & Trade Promo@on Management

Joint Business Planning

Wrap Up


Many macro factors are crea@ng pressure on the CPG industry

Low Growth in Mature Markets

•  Domestic demand predicted to grow at population growth

•  Consumption levels haven’t bounced back post recession

•  Commodity cost escalation and volatility putting margin pressures

•  Above trends only marginally offset by growth in emerging markets

Intensifying Competition

•  Small brands taking share

•  Scale losing value except in select areas (DSD, Distribution, etc.)

•  Large players winning based on brands, cost advantage and out-investing in capabilities

•  Mid-sized players getting squeezed

Changing Retail Landscape

•  Additional 290M retail sq. feet coming online by 2025 – with flat consumption

•  Fast growing new retail formats (Club / Dollar /Drug)…

•  …with fundamentally different go to market and trade requirements

•  Online grocery retail becoming a commendable force – expected to be 10% of the market by 2025

Evolving Consumer Preferences & Profiles

•  Two distinct consumer segments emerging: Selectionist & Survivalist

•  Growing ethnic population but homogenizing tastes

•  Increasing focus on organic and healthy choices

•  Digitally savvy consumers seeking mobile / social media forums to interact with brands


Revenue Management is one of the key capabili@es CPG companies are leveraging to address these challenges head on

Revenue Management enables CPG companies

to access new profit pools, move the demand

curve and sell more products at higher

prices through segmentation and

differentiation

Before

After

Pric

e Volume


While Revenue Management seeks to drive profitable growth (oJen in categories with flat growth), it does not involve crime


Nor does it involve simply redefining what is meant by success


Instead, best-‐in-‐class Revenue Management incorporates five cri@cal components to accelerate and fuel profitable growth

Portfolio Opportunity

Mapping

Brand, Channel

Price, Pack Architecture

Active Mix Management

Pricing & Trade

Promotion Management


Discussed in detail on following pages

Enablers

Feedback Loop

Tools and IT enablement

Skilled, empowered organization

Information, data, and analytics

Enabling processes







Wrap Up


Despite progress, new product introduc@on failure rates remain high

Source: “Creating what Consumers Want”, Strategy+Business, Spring 2015; Affinova

… of newly introduced CPG products fail

… of new product concepts never launch

… of new product sales cannibalize existing brand purchases

66% 65% 50%

“CPG companies don’t have a clear grasp of which combinations of features, packaging, price, and even labeling will persuade consumers to make a purchase”


Brand, Channel, Price, Pack Architecture (BCPPA) is a cri@cal, but oJen overlooked step in the tradi@onal product development process

Traditional CPG Innovation Approach

Business Growth

Strategies Ideation

Concept Testing & Product

Validation

Commercial-ization, Retail Execution &

Launch Plans GAP

Many CPG companies today are struggling to get BCPPA right §  Market structure models (IRI Symphony, HRCP) identify opportunity areas but are limited to

historical data §  New product forecasting models (e.g., BASES) size very specific ideas, but cannot cover a wide

enough range of alternatives in a timely and cost-efficient way §  Attitude & Usage (A&U) studies and ethnographies do not provide specific enough input (e.g.,

brand, price, channel, pack, functionality) §  None of the standard approaches factor in company capabilities, economics, or competitive

reactions


BCPPA integrates market and company data to simulate behaviors in an unconstrained environment

Consumer Segmentation

Shopper Segmentation

& Mission

Channel & Retailer Strategy

Category Perspective

Consumer Buying Behavior

Competitive Strategy & Response

Price-Value Proposition

(Features & Attributes)

Margin Potential

(Informed by Cost Structure)

BCPPA

Consumer Preference & Willingness

to Pay

Behavioral Market

Structure

Company Financials

Retail Consumption

Data


It leverages conjoint analysis to understand consumer preferences – anyone in the market for their own jet?







Wrap Up


Pricing and Trade Promo@on Management is not intended to start a price war and drive profit margin to zero


Advanced analy@cs – in the form of PEA and TPO – can drive improved trade promo@on efficiency and effec@veness

Trade Promotion Management

TPM

Post-Event Analysis

PEA

Trade Promotion Optimization

TPO

Driving Improved Trade Effectiveness via Advanced Analytics

Trade spend is typically the 2nd biggest line item

behind COGS, yet CPGs often have a negative

ROI on this investment

Leveraging advanced analytics, including PEA and TPO, can help

CPGs drive an improvement in trade ROI of 10 to 20 percentage points

Discussed in detail on following pages


PEA has long been a top priority for Senior Management, but companies con@nue to struggle to get it right

§  Although the concept of PEA is not new, it's still very challenging to get right

§  PEA has become increasingly complex over time due in large part to the expansion and disconnected nature of the data sources used to measure and understand performance

§  Even in today’s advanced digital age a large number of companies attempt to address PEA by building multiple (sometimes thousands of) spreadsheets across the organization…

§  …but in this kind of environment, the bulk of the analysis is sporadic, ad hoc, and often decidedly wrong

§  Even with high demand for a reliable tool, and despite technology vendors making it sound easy, there is no perfect answer in the market today

§  So up to now, companies have had to accept imperfect and unreliable results or severely limit or forego altogether this important capability

PEA


GeXng PEA right requires following a set of guiding principles

Getting PEA Right

Address gaps in foundational TPM capabilities or customer planning processes

Embed the PEA Capability Within the Organization

Use the Right Tools

Understand Limitations of Source Data

Identify One-Time Events That Can Introduce False Causalities

Automate What You Can

Manually Intervene When Necessary

Realize Event-Level ROI Is the Beginning of the

Process, Not the End Goal ROI ROI


Best-‐in-‐class PEA capabili@es minimize @me spent on “data factory” work, allowing more @me for value-‐add analysis to drive insight and ac@on

Raw Data

Insight Action

Business Leaders

Reliable Data

Data Factory

Analysis Factory

TPM •  Promotions •  Payments

EDW •  Product •  Customer

Market Data

Retail Link

IRI

Nielsen

POS

Post-Event Analysis (PEA)

Minimize time spent here Maximize time spent here


Trade promo@on op@miza@on (TPO) leverages predic@ve capabili@es to enhance decision making

Minimal Optimization

What-If Optimization

Facilitated Optimization

Automated Optimization

§  Involves optimization based on heuristics and subjective analysis of previous promotions

§  Depends on minimal analysis of basic metrics such as incremental shipments

§  Uses advanced analytics to predict consumption and shipment volume

§  Allows the development of “what-if” event and plan scenarios

§  Uses profit-based metrics to prioritize and select events

§  Provides planners with simple tools that help reduce time consuming “what-if” trial and error attempts in a TPO tool

§  Supports optimization analyses with tools such as seasonality and trend plots, merchandising effectiveness profile, price sensitivity profile, sensitivity analysis (e.g., ROI vs. volume), and automated event scenario creation

§  Takes facilitated optimization to the next level by automatically identifying optimal scenarios within a given set of constraints

Increasing Level of Optimization

Trade Promotion Optimization (TPO)


TPO allow users to conduct “what-‐if” analysis, leveraging sophis@cated models to predict event-‐level volume

Predicted Volume

ACV, Trend, Seasonality, Distribution

FSI, Package Promotion

Feature, Display

Regular Price, Price Discount

Size / Brand / Time Switching

Inputs

β In (1+ % ACV Feature & Display r,t) + β r Incremental Volume* r,t-1

exp α r + βr Week Number t + β (Seasonality Indext) + Volume r,t =

β r ln Regular Unit Price r,t + β In (% ACV Distribution) +

β r In (1 + % ACV Featurer,t) + β r In (1 + % ACV Displayr,t) + βr In (1 + % Discount r,t) +

ACVr / 10

βp Incremental Volume* r,t,pACVr / 100***

∑n

p = 1

Average Competitive Price / Poundr,t

100

β f (FSI Value f) + β f (FSI Value** f=1) +∑4

f = 1

+β In (1+ % ACV Feature & Display r,t) + β r Incremental Volume* r,t-1

exp α r + βr Week Number t + β (Seasonality Indext) + Volume r,t =

β r ln Regular Unit Price r,t + β In (% ACV Distribution) +

β r In (1 + % ACV Featurer,t) + β r In (1 + % ACV Displayr,t) + βr In (1 + % Discount r,t) +

ACVr / 10

βp Incremental Volume* r,t,pACVr / 100***

∑n

p = 1

Average Competitive Price / Poundr,t

100

β f (FSI Value f) + β f (FSI Value** f=1) +∑4

f = 1

+

Volume = ƒ (Base Volume, Price, Merchandising, Cannibalization, Consumer Promotion)

Predictive Models

ILLUSTRATIVE


However, several CPG companies face challenges in realizing TPO’s full poten@al

Challenges Faced by CPG Companies in Realizing TPO Benefits

Model Accuracy

§  No rigorous statistical validation methodology in place

§  Can’t handle some business scenarios accurately (drop-off over time, BOGO vs. TPR, etc.)

§  Models require ongoing refinement to ensure they continue to predict with acceptable degree of accuracy

Accuracy of Inputs

§  Sales teams lack analytical capability to effectively use model

§  Teams have to get used to entering more details of the promotions, e.g., execution details such as %ACV, etc.

§  Teams required to force-fit promotions to TPM format

Tool Challenges

§  Functionality –  Questionable ROI metrics –  Various functionality bugs

§  Usability –  Poor Interface design

§  Performance –  Tool is slow and often

unresponsive

Results in organization’s lack of trust and frustration with the tool leading to lack of adoption


A combina@on of accurate inputs, strong models, func@onality, and suppor@ng processes can help achieve TPO’s full poten@al

+ +

Description: Tool is intuitive and with robust and reliable functionality

Successful TPO Implementation & Reliable Models

Functional Tool

Right Processes / Change Management

Description: With proper inputs, the model predicts accurate results within +/- 5%

Strong Models

•  Model refresh mgmt.

•  Statistical model validation

•  Transparent fit assessment

Description: Model inputs reflect projected execution, not just the promotion plan

Accurate Inputs

•  Timely and accurate setup

•  Training and support

•  Functional review and business configuration

•  Testing and issue resolution

Requirements for Successful TPO Implementation







Wrap Up


Joint Business Planning is more than making it through a mee@ng without telling our customers they are stupid


Joint Business Planning is about “we” – not “us vs. them”


“Collabora@on” – American Heritage Dic@onary

“To work together, especially in a joint intellectual effort.”

“To cooperate treasonably, as with an enemy occupation force

in one’s country.”


A recent Strategy& survey of manufacturers and retailers indicates that both believe in the importance of collabora@on…

Importance of Collaboration to Future Success

25% 15% 35% 10% 75% 95% 30% 5% 90% 80% 0% 60% 50% 55% 65% 100% 70% 85% 40% 45% 20%

92%

5%

Importance

Som

ewha

t Im

porta

nt

Very

Im

porta

nt

56%

0%

39% Impo

rtant

8%

Response Percentage

Retailers Manufacturers

Source: Manufacturer and retailer collaboration survey conducted by PwC Strategy&


…and have achieved many benefits from it

Achieved Benefits of Collaboration

60%

10%

40%

50%

20%

0%

80%

70%

30%

90%

100%

53% 50%

Increased customer loyality

75%

60%

30%

65%

55%

More effective and efficient

planning

80%

Perc

enta

ge A

chie

ved

Reduced out-of-stock

20%

40%

50%

More effective promotions

30%

More effective new product introductions

Share growth

60%

50%

Revenue growth

Retailer Manufacturer



Retailers cite TPM collabora@on as the best quality, but opportuni@es exist to incorporate market/consumer insight


Retailer’s Perspective on Quality of Interaction By Functional Area

Low Medium High

Benefits of Market Research/Consumer Insight

Not Beneficial Somewhat Beneficial

Beneficial

Mar

ket R

esea

rch

/ C

onsu

mer

Insi

ght

TPM

In-S

tore

R

esea

rch

Eva

luat

ion

of

com

petit

ors

perfo

rman

ce

Sho

pper

In

sigh

ts

Hou

seho

ld

leve

l dy

nam

ics

Retailer Manufacturer


Collabora@ve manufacturers have broken down data barriers – now the key challenges are more strategic in nature

More strategic barriers

Data-related barriers

Barriers to More Successful Trade Promotion 5%

0%

100%

95%

90%

85%

80%

75%

70%

65%

60%

55%

50%

45%

40%

35%

30%

25%

20%

15%

10%

52%

17%

40%

67%

56%

92%

Less Collaboartive Manufacturers More Collaborative Manufacturers

Insufficient Data

Poor Data Quality

Inability to Align with Partner Goals



Joint business planning between manufactures and retailers helps establish common goals to create win-‐win scenarios

Components of Joint Business Planning

Line of Sight

Appropriate Metrics

Joint-Event Planning

•  Finalize promotional details jointly (e.g. Exact funding, mechanics, timing / calendar, execution)

•  Communicate internally to realign with internal plans (S&OP, promo guideline compliance)

§  Gain

•  Set common product, event and time based performance metrics for manufacturer and retailer to develop common goals

•  Enforce uniform measurement and tracking practices to ensure invoicing is tied back to the individual promotional tactic

•  Establish a clear line of sight and fluid communication mechanisms with customers on product strategies, volume planning, product hierarchies, category definitions, mix, BI etc.

•  Support ongoing communication with clearly defined operating model including people, processes and tools







Wrap Up


In closing …


Thank you for your @me today – please feel free to reach out to discuss any of these topics in more detail

Dallas Mobile: +1 817-‐789-‐5657 [email protected]

David Ganiear Partner, PwC Strategy&

Retail & Consumer PracHce

Documents

Driving Profitability with World-Class Revenue Management ... · Instead,&bestOinOclass&Revenue&Management& incorporatesfive&cricalcomponentstoaccelerate& andfuelprofitablegrowth