Cash on the table 2015
Consumer products working capital management
In 2014, consumer products companies became ever more efficient in meeting top-line growth challenges posed by investor expectations. The latest in the series of working capital (WC) management reports by EY reveal a further improvement in WC performance from 2013 for Household and Personal Care (HPC), Food & Beverage (FB) and Brewing.
- HPC reported the biggest improvement in 2014, with a drop of as much as 19% in cash to cash (C2C).
- FB saw a reduction of 5% in C2C.
- Brewing’s C2C was a negative eight days, almost two days lower than in 2013.
These latest findings for 2014 mean that the CP industry has delivered a substantial reduction in its level of C2C since 2007, with progress continuing to be made in recent years in contrast to other industries. This ongoing improvement reflects the impact of many of the initiatives taken to boost return on capital, partly prompted by renewed pressure from shareholders.
Yet, at the same time, progress in WC remained far from uniform, with major differences in the degree of change between companies in each CP segment.
These differences are underlined by the fact that current WC performance continues to vary widely across each CP segment. While these performance gaps may partly 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.
CP companies may have as much as US$39b in excess WC, over and above the level they require to operate their business model efficiently and meet all their operating requirements – a figure equivalent to 6% of their combined annual sales. Interestingly, the WC performance gap between leaders and laggards has widened in 2014.
To capitalize on this opportunity, CP companies will need to embrace more substantial and sustainable changes in the way they do business and manage their WC.
Our expectation for 2015 is that WC performance for the CP industry as a whole will continue to improve, but probably at a more moderate pace than in the previous year. The results are also likely to show even wider divergences between individual companies within each CP segment, reflecting varying levels of success in planning and executing effective responses to a rapidly evolving marketplace.
Opportunities going forward
The wide variations that our research reveals in WC performance between companies in each CP segment point to significant potential for improvement — amounting to an aggregate US$39b of cash for the top 20 CP companies.
Differences in WC performance between companies in each CP segment may be partially due to:
- Variations in country and customer sales mix
- Degree of vertical integration and the nature of supply contracts
- How manufacturing, supply chain and procurement strategies have been deployed
Yet, on their own, these factors are not sufficient to explain the size of the gap. This suggests that companies in each segment fundamentally differ both in the degree of management focus on cash and also in the effectiveness of their WC processes.