EY's Profit or lose – CFO perspective

Profit or lose – the CFO perspective

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Almost every major consumer products and retail company has taken steps to capture the huge growth opportunity presented by Asia’s emerging markets.

However, for most companies profitability has been a secondary consideration.

Making growth profitable in emerging Asia is far from straightforward, especially as volatility increases. It requires companies to walk a tightrope between a series of apparent contradictions: they must be flexible but also efficient, embed local autonomy but benefit from global scale, and seek out both short-term gains and long-term opportunities.

Resolving these contradictions will be essential if companies are to profit, rather than lose, in emerging markets.

To achieve profitable, long-term growth in Asia’s emerging markets, we believe consumer products companies and retailers need to address each of the following eight business imperatives:

  • Empower local leadership to be agile, but ensure they are accountable.
  • Disrupt traditional approaches for local relevance.
  • Be granular in understanding current and future profit pools.
  • Create scale by placing bets across categories, price tiers and channels.
  • Balance efficiency with consumer immediacy.
  • Cluster for synergies based on common characteristics, not just geography.
  • Flex the approach as the market develops.
  • Create a culture that mandates disciplined execution.

Implications for CFOs

CFOs can help ensure their companies’ sustainable growth prospects in Asia’s emerging markets by shifting the focus from growth to profitable growth:

  • Rising internal and external costs can be a powerful barrier to profitability.

    In Asia’s emerging markets, external costs, including labor costs, commodity prices and the high costs of capital, are squeezing the profitability of investments. At the same time, internal costs, including too many fixed costs in the business, add to the pressure. CFOs must work carefully with their business partners to strip out costs that do not add value, and monitor carefully the execution of steps that are required to deliver profitable growth.

  • When allocating resources, CFOs must be careful to balance short-term growth and long-term profits.

    Investments in new markets in emerging Asia may be unprofitable at the outset, but companies should be careful to move quickly to a “pay-as-you- go” system, where it is possible to invest sustainably at the speed with which margin is generated. Growth for the sake of growing causes problems, because it cannot be replicated everywhere due to limited resources.

  • Diversification across markets helps to manage risk and drive scale.

    Across emerging Asia, countries, regions and cities are all growing at different rates and are at different stages of development. Diversification across segments, categories and products is essential to match the inherent diversity of the region, drive economies of scale and scope to reduce complexity and drive profitable growth. Companies also need to be flexible about their entry strategies and adapt them to suit different markets. This may include joint ventures where necessary.

  • Give local autonomy, but watch out for unwanted costs.

    Local managers need to be empowered to make decisions on the ground, but a strong governance framework is required to embed accountability. Local autonomy can also impose unwanted costs if not handled correctly by leading to duplication of effort because the same basic activities are replicated in multiple markets. This highlights the importance of putting in place clear roles and responsibilities, and thinking about where standardized and centralized resources can be provided to support local execution.

  • Make sure the right data is available to support investment decision-making.

    A granular understanding of current and future profit pools requires up-to-date information about this dynamic, fast-moving market. Companies need to combine internal and external data and have robust tools in place to analyze that data and extract insight. Once the right data has been collected, CFOs and their teams then need to be able to separate signal from noise and apply analytical insight to guide decision-making.

For a copy of the full report, please visit ey.com/consumerproducts.