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Cash on the table: working capital challenges for consumer products companies - EY - Global

Cash on the table

Working capital challenges for consumer products companies

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To sustain gains and to achieve working capital efficiency, businesses must be responsive to an environment of profound change.

Consumer products companies proactively focused on working capital management are achieving success. To sustain gains and to achieve even greater working capital efficiency, businesses must respond to an environment of profound change by facing key challenges.

Responding to retail consolidation

Consumer products companies are increasingly dependent on a few key retailers. Consolidation in the retailing industry continues to create more, ever-larger and more sophisticated customers.

Larger retailers possess increased buying power. Not only are they resistant to price increases, but they also tend to demand discounts and rebates together with enhanced payment terms and service. In addition, by developing their own private label products, these retailers have been eroding the value of the suppliers’ brands.

Changes in payment terms policies of the largest retailers have had a significant impact on the consumer products industry’s working capital performance, with significant variations over time and by region.

For the 13 largest retailers (by sales) in the US and Europe, analysis of their payables performance shows an increase of 8% in days payable outstanding (DPO) (based on cost of sales) between 2002 and 2005, indicating that retailers have been pursuing extended payment terms with their suppliers.

Since then, performance has remained almost unchanged. For retailers in the US, performance patterns were similar to the total, while in the UK, DPO dropped slightly in the first period (-2%) before rising significantly more recently (+9%).

For retailers in Continental Europe, DPO rose 9% between 2002 and 2005, and then fell back 3% between 2005 and 2010.

DPO retailers versus DSO consumer products industry, 2002-10*

*CP industry represented by the 20 largest branded companies (by sales), headquartered in the US and Europe.
Source: EY analysis, based on publicly available financial statements

DIO retailers versus DSO consumer products industry, 2002-10

Source: EY analysis, based on publicly available financial statements

In addition, retailers in general have been trying to operate with lower levels of inventory. Days inventory outstanding (DIO) [based on cost of sales (COS)] of the largest retailers fell by 4% between 2002 and 2005 and then by a further 3% between 2005 and 2010.

Responding to heightened commodity risk

Rising input costs are exacting a material impact on the working capital performance of the consumer products industry affecting inventory and payables and receivables, especially among the food and beverage and brewing segments.

Commodity prices rebounded in 2009 following a sharp decline in the second half of 2008, but the average for the year was still down 18% compared with the previous year.

In 2010, cost inflation returned, with prices approaching and, in some cases, exceeding the peak levels experienced by the industry in 2007-2008. The Food Price Index rose by 17% in 2010 compared with 2009, and by 24% in December 2010 compared with the same month of 2009.

To some extent, consumer products companies have been able to pass such costs along to customers. In some cases, the impact of increased volatility and generally higher input costs has been smoothed by hedging strategies.

Similarly, most have taken steps to adjust to higher prices by pursuing increased cost efficiencies across the supply chain. Some have also managed to cut cost inputs, for example, substituting palm oil for olive oil, or redesigning products to require less packaging.

Changes in commodity prices, 2002-10

*Average of 5 commodity group price indices
Source: Food and Agriculture Organization, United Nations

Managing opportunities and risks of global supply chains

With increasing globalization of supply chains, consumer products companies have opportunities to optimize costs. This trend, however, has also added a significant degree of complexity and risk: the longer and the more interconnected the supply chain, the greater is its vulnerability to business disruptions.

The working capital challenges for the industry include deciding on the balance between lean manufacturing and supply chains, lead times and inventory and service levels.

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