“Now is the time to turn cost-cutting into an opportunity and maximize productivity and operational effectiveness.” Andrew Cosgrove,
Global Consumer Products Lead Analyst
Managing margins successfully is critically important for beverage companies. With input costs soaring and growth slowing, companies need a strategically aligned response across a number of areas including performance and productivity improvement, sustainable cost management and pricing and promotion optimization.
Beverage companies are increasingly focusing on cost-to-serve (CTS) to better understand the cost impact of service requirements and the opportunities for joint value creation with customers. With a proper understanding of CTS, manufacturers can negotiate on the areas that may be impacting profitability, such as order size or delivery requirements, to reduce costs and enhance returns.
Working capital review
Working capital is a key area of focus for beverage companies. Brewing has reported a massive improvement in working capital levels since 2002. Cash-to-cash (C2C) is down 88%, or 35 days, driven by progress in both receivables and payables.
Despite this progress, a high-level benchmarking analysis suggests that up to US$33b is still unnecessarily tied up in the working capital of the largest 20 consumer products companies, equating to 5.3% of sales1.
The next generation of cost cutting
Beverage businesses have two fights on their hands. First, running the business as a whole in a cost-efficient manner, including effectively managing fixed overhead costs. Second, dealing with rising input costs, resulting from raw material and energy price inflation.
Most companies hope to mitigate the impact of rising input costs through a combination of pricing, short-term hedging, and extending further their existing cost saving programs.
However, concerns still remain. The impact of price rises varies hugely between individual commodities and from month to month, raising the question of whether companies can hedge at the right time. Also, companies have already pushed cost-saving initiatives to get through the recession.
What we are seeing now is the second or even third generation of cost savings, which are inevitably proving more difficult. The big challenge is deciding how and where further cuts can be made — either temporary or permanent — without damaging future growth.
Bringing together procurement operations is a natural starting point as it is unlikely to be challenged by internal resistance. If a company buys centrally with leveraged purchasing power, there should be a benefit for the group as a whole.
Managing pricing effectively
With a period of prolonged low growth prospects in developed markets and competition in emerging markets likely to increase, pricing pressures are unlikely to diminish. Consumers expect more and want to pay less — as do customers, putting pressure on trade investment and cash flow.
In response, brand owners are working hard — and investing significantly — to win back consumers, in particular through trade marketing advertising and promotion (A&P).
How we can help
We have extensive experience helping beverage companies to improve key aspects of business performance to create competitive advantage and position themselves to grow profitably. In fact, we have worked with all the leading brewers on working capital.
Typical aspects of our work include advising on:
- Reducing value leakage through the pricing waterfall
- Sales effectiveness, including:
- Working capital
- Customer segmentation and trading strategy
- Channel strategy
- Rightsizing the salesforce to support the customer base
- Improving salesforce execution
- Performance measurement and evaluation
- Review of system-wide strategy to improve brand performance
- Analyzing cost to serve, pricing and trade terms
1Cash on the table: consumer products companies and working capital management 2011, Ernst & Young, 2011.
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