Cash on the table 2014
Consumer products working capital management
For the consumer products (CP) industry, 2013 was a year of sharp improvement in working capital (WC) performance.
Against a background of slowing sales growth, pressure on margins and intense scrutiny from shareholders, companies intensified their efforts to boost returns on capital and increase cash returns in order to remain relevant to investors.
Of the three selected segments within the CP industry:
- Food & Beverage reported the biggest improvement in WC in 2013, with a drop of as much as 15% in cash-to-cash (C2C)
- Household and Personal Care (HPC) saw a reduction of 5% in C2C
- Brewing’s C2C was a negative five days, three days lower than in the previous year
These findings mean that the CP industry has managed to achieve a substantial reduction in its level of C2C since 2007. However, a closer review reveals major differences in the degree and speed with which different companies in each segment have been able to deliver these increased efficiencies.
These differences are underlined by the fact that current WC performance continues to vary widely between companies in the various CP segments. While these performance gaps may partly be result from variations in business models, they also highlight fundamental differences in the intensity of management focus on cash and the effectiveness of WC management processes.
Overall, our research findings suggest that the leading 20 CP companies still have up to US$35 billion tied up unnecessarily in WC. This figure is equivalent to 5% of these businesses’ combined sales.
To capitalize on this opportunity, CP companies will need to drive continuous operational and structural improvements, addressing “root and branch” aspects of WC policies, processes and metrics.
Barring any further significant changes in commodity prices, WC performance for the CP industry as a whole will continue to improve in 2014, but probably at a more moderate pace. The results are also likely to show even wider divergences between individual companies within each CP segment, as some embrace more substantial and sustainable operational and structural changes in the way they address WC.
Opportunities going forward
The wide variations that our research reveals in WC performance between different automotive suppliers in each region point to significant potential for improvement — amounting to an aggregate US$35 billion of cash for the top 20 CP companies.
Part of the performance gap between companies within each region may be as a result of differences in country and customer sales mix, manufacturing and supply chain infrastructure, the degree of vertical integration and the nature of supply contracts.
Yet, on their own, these factors are not sufficient to explain the size of the gap. This suggests that there are fundamental differences in the degree of management focus on cash and process efficiency between companies within each region.
Change in WC metrics across the industry, 2007-2013
WC cash opportunity per segment, 2013
*WC scope = sum of trade receivables, inventories and accounts payable
Source: EY analysis, based on publicly available annual financial statements