How to make capital decisions now with the future consumer in mind

Improving the capital allocation process can help consumer products companies focus investment decisions on tomorrow’s shopper.

Consumer product companies face a complex and ever shifting landscape, fraught with significant penalties for missing emerging consumer trends. Every day, they consider their portfolios as they judge whether finite capital should be invested in existing power brands or newer ideas. Layered on top of this is the continual need to improve processes and cut costs to remain price competitive. When these initiatives falter or bad decisions are made, pressure from investors and activists can be intense. Activists can appear who seek to increase the return to equity holders or even break up the company.
 

The best of these companies are rethinking the processes they use to make informed capital decisions. They have become more nimble and use significant analytics in their decision-making. This has allowed them to think more creatively and see more success when considering an emerging trend, a new geography or even a technology that is synergistic to their existing portfolio.

Not all consumer companies are there however. EY recently conducted a survey of 536 CFOs across sectors, including 109 from the consumer industry (pdf). The vast majority of consumer CFOs (69%) say their capital allocation process is only “somewhat successful.” The responses also suggested ways that consumer products manufacturers may be able to improve their capital allocation process.

Consider alternatives to current strategies

The best consumer companies have evolved their capital allocation programs to reflect the changing world. As an example, companies are being more thoughtful about the balance between investing for the future versus returning capital immediately to shareholders. For many years, consumer companies have focused on returning some portion of capital to shareholders through dividends and/or share repurchases. Although these programs can certainly make sense, the prevalence and significance of these programs are higher than other industries that are more focused on top line growth such as technology or life sciences.

Improved decisions with better data and analytics

One of the challenges that consumer companies face is the complex and ever-changing landscape of customers. As a result, the data necessary to make informed capital allocation decisions – or the tools and expertise for analyzing and understanding that data – can be a barrier for consumer companies. This is in fact a notion we see in the survey: insufficient data is seen as the biggest obstacle to optimal capital allocation, with 45% of consumer CFOs naming this as the primary impediment.

This may seem counterintuitive as consumer companies, unlike those in many other industries, have always been known to having access to lots of data on their operations and external information such as POS data. However, much of the data is backward looking and is not as helpful when trying to figure out what consumers may want in the future.

Consumer companies need to move past metrics such as historical sales growth on the existing portfolio and instead use information and analytics to identify new areas where growth is just beginning to bubble up. Best in class companies are using demographic, geospacial, social media and survey data, as well as in-depth consumer interviews that can spotlight the most promising future trends.

Many of the best consumer companies recognize that investing capital in building data processes leads to better capital allocation decisions, which in turn leads to better returns and more capital that can be invested in the business.

Focus on long-term strategy

It is not all difficulties for consumer companies when it comes to capital allocation programs. In some areas they appear to be ahead of their peers. For example, they tend to be better at making unbiased decisions, aligning capital allocation goals with long-term strategy, and having the ability to fund projects that meet investment approval criteria.

Almost half (47%) of consumer company CFOs say consistent processes are always followed and capital allocation decisions are free from bias and politics, compared with 40% overall.

Meanwhile, 66% of consumer CFOs whose companies have a formal capital allocation process say it is directly linked to the overall strategic plan, compared with 63% overall . At the same time, the vast majority (91%) say they are typically able to fund all investment opportunities that meet approval criteria, compared with 84% overall. This enhanced ability to fund investments may also be the reason why consumer companies are also more likely to return capital through dividends or share repurchase programs. The real question, however, is whether there are more areas of potential investment that would be apparent with better data and analytics.