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Cash on the table: working capital performance across consumer products segments - EY - Global

Cash on the table

Working capital performance across consumer products segments

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WC performance comparisons per brewer

C2C (based on sales)*

 

DIO (based on sales)*

 
     

DSO (based on sales)*

 

DPO (based on sales)*

 
     
*Average is sales-weighted
Source: annual accounts 2010
   

WC performance comparisons per F&B company

C2C (based on sales)*

 

DIO (based on sales)*

 
     

DSO (based on sales)*

 

DPO (based on sales)*

 
     
*Average is sales-weighted
Source: annual accounts 2010
   

WC performance comparisons per HPC company

C2C (based on sales)*

 

DIO (based on sales)*

 
     

DSO (based on sales)*

 

DPO (based on sales)*

 
     
*Average is sales-weighted
Source: annual accounts 2010
   


The size of the disparities in performance between companies within each segment also points to fundamental differences in management focus on cash and process efficiency.

Working capital performance varies widely across consumer products segments. Part of this is due to varying industry characteristics and dynamics which include the actual products and the country and customer sales mix and manufacturing and distribution strategies deployed for the companies comprising each segment.

Of the three consumer products sub-segments, brewing exhibits by far the lowest level of cash-to-cash (C2C) (5 days) due to a strong performance in payables. The differential between receivables and payables cycles (DSO – DPO) is significantly negative (-21 days).

In other words, brewers are able to collect from customers much faster than they pay their suppliers.

Household and personal care carry lower levels of working capital (C2C of 28 days) than food and beverage (34 days), helped by a stronger performance in payables and receivables, partly offset by a weaker performance in inventory. The DSO – DPO differential is negative for household and personal care (-7 days) and positive for food and beverage (6 days), suggesting a lack of focus on cash conversion cycle for the latter.

Within each segment, the spread of C2C performance among companies is significantly greater for brewing than for other consumer products segments. This may be partly explained by differences in how various brewers manage their production and distribution models.

For example, US brewers are bound by a three-tier distribution system, while others may operate with or without in-house bottling operations.

Variations in working capital performance across consumer products segments, 2010

Days Brewing F&B HPC
DSO 32.0 35.1 33.5
DIO 26.1 28.4 34.3
DPO 53.4 29.2 40.0
C2C   4.7 34.3 27.8

Source: EY analysis, based on publicly available financial statements

Changes in C2C per segment, 2002-10

Source: EY analysis, based on publicly available financial statements

Brewing leads the way

Brewing saw a further improvement in C2C performance in 2010 compared with 2009, with a drop of 7 days to reach just 5 days. Progress has been made on the back of higher payables and lower receivables.

This brings the total reduction in C2C achieved since 2002 to 35 days, equivalent to a fall of 88%. Progress has been steady over the years, with an acceleration since 2005. This focus on cash may have been partly driven by the need to address balance sheets, stretched by aggressive acquisition strategies.

Progress since 2002 has come from both payables and receivables, with DPO up 23 days (or 75%) and days sales outstanding (DSO) down 14 days (or 30%). The DSO – DPO differential improved from a positive 15 days in 2002 to a negative 21 days in 2010.

Brewers took advantage of consolidation and increased buying power to improve terms with suppliers (the four brewers analyzed in our study have a combined market share close to 50%). Improved billing and collections were also contributing factors.

Inventory levels, however, were slightly higher, with DIO up 1.6 day (or 6%), adversely affected, to an extent, by a rise in certain commodities prices, such as barley and malt in 2010.

WC performance comparisons
per brewer

A key feature of the brewing landscape has been the rising proportion of sales coming from emerging countries. In 2002, emerging countries accounted for about a quarter, 23%, of total sales.

Today the figure among companies in the study has grown to 40%. Sales to Latin America lead the way at 20%, followed by Central and Eastern Europe (10%), Africa and Middle East (5%) and Asia Pacific (5%).

A rebound in performance for food and beverage

Food and beverage managed to cut working capital levels (C2C) by 8% in 2010 compared with 2009, with each working capital component contributing to this improvement. Part of last year's improvement, however, reflects a rebound from the deterioration seen in 2009.

Latest findings mean that C2C fell by 15% since 2002, with six out of nine companies reporting an improvement. Performance was unchanged during the period 2002-2005, and then improved significantly in the ensuing three years (2005-2008), with C2C dropping by 12%.

The global downturn had a significant impact on the segment's working capital results, with C2C dropping by 6% in 2008 compared with 2007, and then rising by 5% in 2009 compared with 2008.

Payables were the prime driver behind the segment's performance of the last eight years. DPO rose by 16%, owing to stronger focus on procurement and sourcing, as well as to progress made in extending payment terms. Levels of inventories and receivables were slightly down (DSO and DIO down 4% and 2%, respectively).

Supply chains today are leaner and more responsive than a few years ago, resulting in greater operating efficiencies and lower levels of inventory. Remarkably, progress was achieved against a backdrop of input cost inflation and more aggressive inventory management by retailers.

The slight improvement in receivables performance since 2002 was driven by the gains achieved in 2010 (DSO down 4%). Pressure on payment terms has been partly mitigated by the positive impact of initiatives regarding billing and collection.

WC performance comparisons
per F&B company

Performance was also helped in 2010 by the regulatory decision in France to cap corporate payment terms, although some exceptions are allowed (DPO of European retailers dropped by 3% in 2010 compared with 2009). It is notable that in 2010 compared with 2009, DIO was marginally down (-1%), while DPO rose further by 3%.

Strong results for household and personal care

Household and personal care reported a strong working capital showing in 2010 compared with 2009 (C2C down 12%), but entirely driven by an increase in payables (DPO up 17%).

Advertising spend rose further and results benefited from the exceptional performance of one particular company. By contrast, there was a notable deterioration in inventory performance (DIO up 7%), adversely affected by higher input costs, while receivables performance remained unchanged.

These results bring the total reduction achieved since 2002 to 30% (equivalent to a fall of 12 days), with the entire gain achieved in the last three years. Each company but one managed to improve performance.

WC performance comparisons
per HPC company

Payables and, to a lesser extent, receivables contributed to this performance, with DPO up 38% and DSO down 6%. Inventory levels, however, were higher, with DIO up 4%.

In addition to the benefits realized through better terms and a strong focus on procurement and sourcing, payables results were boosted by a surge in levels of advertising spend.


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