EY - Unlocking margins in consumer products

Unlocking margins in consumer products

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Margins at consumer products companies are being squeezed from multiple directions.

In our survey of more than 180 consumer products (CP) executives, 75% of respondents say it has become harder to sustain or grow operating margins over the past three years. Among the top 50 consumer products companies, margin has grown by just 60 basis points, on average, over the past decade. This shows clear room for improvement.

EY – building blocks for breakthrough margin performance

Companies are at various stages of maturity in their approach to margin management. Although many are finding it harder than ever to grow or sustain margins, a small number of companies are able to deliver “breakthrough” margin performance.

So what do they do differently?

 

We believe companies need to adopt an Integrated Margin Management framework. This report outlines that approach and describes the steps that companies need to take in order to embed it in their organization.

Doing so will require management to ask themselves some key questions:

  • Where are you today?
  • Are you aligned with your core strategic and leadership vision?
  • What is the roadmap to get you to your future state?

Three building blocks for delivering breakthrough margin performance

1. An integrated approach to margin management, driven by senior leadership

A key problem has been a lack of collaboration. Approaches to margin management tended to be reactive, and were influenced more by functional objectives than the business as a whole.

“Our focus on continuous improvement means that we are constantly driving waste out of the system.” - José Lopez, COO, Nestlé

 

CP companies must look at margin holistically, considering performance and opportunities in a more end-to-end way. This means working collaboratively with internal and external stakeholders as a single organizational unit rather than as a collection of functions, partners and geographies.

Embedding a pervasive culture of margin management starts with the vision and urgency for change articulated by senior leadership. Business leaders must remain at the forefront and continue to break down the barriers to unlock the full margin potential of their products and brands.

EY - Integrated margin management functional interventions

By driving margin performance from the very top, companies can embed it deeply into the business and make it part of the fabric of day-to-day decision making.

 

2. Improved insight on margin performance to drive better, faster decisions

Most multinational consumer products companies have now implemented ERP platforms, which have the ability to provide vast amounts of useful data. However, many companies find it difficult to access this data because of poor integration with other systems and a lack of standardization. Even where good quality data is accessible, extracting meaning from it and focusing on the right data sets is a challenge.

“The decision we took was to get margin into the conversation and the rhythm of the business, equipping people with the tools they need to manage it themselves.” - Chris Davies, former CFO for the Americas, Diageo

 

EY - key drivers of margin and monitoring angles

Our approach requires companies to make step changes to the visibility of performance data and then to use that information to make the right margin decisions for the organization. This requires companies to address the following steps:

  • Gain a consistent view of the drivers of margin performance
  • Look beyond the boundaries of the organization to identify drivers of margin performance
  • Make bold decisions quickly to enable effective competition
 

3. An operating model with margin at its core

A silo-based operating model can inhibit end-to-end thinking around margin, and mean that decisions are taken with consequences that are poorly understood. There may be a lack of rigor around performance management and incentives to drive margin performance.

“We always seek to communicate and explain our strategy and direction,” - Leonardo Senra, Finance, Investor relations and IT Director, Souza Cruz

 

Companies need to assess the structure of their operating model to ensure that it is optimized to deliver strong margin performance. This helps to embed accountability, drives the right behavior across the organization, and ensures that margin performance remains a key priority that is monitored and managed appropriately.

An Integrated Margin Management framework helps companies to challenge the structure of its operating model and ensure it is fit for purpose. There are three key priorities that companies need to consider:

  • Transcend traditional barriers with margin orchestration – providing end to end accountability for total margin across the organization either via a category/product aligned operating model or introduced via a specific role
  • Increase awareness, motivation and organizational capability at every level of the company
  • Make margin management sustainable by embedding it into business-as-usual from annual strategic planning to day-to-day execution.

The outlook for margins

: EY – integrated margin management

Looking into the future, there are few signs that the pressure on margins is about to dissipate. A majority of respondents only sees the squeeze becoming even

With profitability under pressure in both developed and rapid-growth markets, companies recognize that they must apply a more rigorous focus to margin management than ever before.

 

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Three building blocks for delivering breakthrough margin performance


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Integrated margin management functional interventions are making way for an end-to-end approach


EY - Integrated margin management functional interventions
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The importance of insight across key drivers of margin and monitoring angles


EY - key drivers of margin and monitoring angles
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Integrated Margin Management


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