Change Is the Only Stable Factor

October 31, 2007 by Debashish Chatterjee and Wolfgang Peter, both SAP AG

The world population is growing significantly, presenting a (theoretical) opportunity for growth in the consumer products (CP) industry. But unfortunately, buying power is unequally distributed around the world. Developed countries do not expand that much, and the share of wallet (SOW) that people spend for CP goods is stable. The SOW for daily needs in emerging markets is much higher but limited in total. Being successful in the two worlds requires organizations to adopt different strategies.

Other factors influencing the CP industry include increasing concentration of power in fewer companies, decreasing brand loyalty of consumers for nonpreferred services, less predictable consumer behavior in a drastically changing environment, and the increasing power of the retail industry.

All of this may sound complicated but is often stated simply. The CFO of a major CP company once explained his view of success in the industry: “Sixty percent of success is marketing, 30 percent is delivery excellence, and the rest is routine.” Gaining the hearts of the consumer is key, keeping promises ensures survival, and providing the most innovative products and services spells success. So, is the CP industry simple – or not?

Innovation differentiates

In the past, innovation came from within the four walls of a company, but most companies are now facing diminishing returns from internal research and development. Leaders like Procter & Gamble (P&G) have established open innovation strategies that leverage global networks of institutions and individuals to find solutions to well-defined problems. This radical model produces more than 35 percent of the company’s innovations and billions of dollars in revenue.

Innovation must be localized to enable growth in the BRIC (Brazil, Russia, India, China) markets. For example, rural Chinese believe that salt whitens teeth. This led P&G to develop and market Crest Salt White. Few companies have been as successful in China as P&G. However, this success did not come from blindly copying successes in the West. P&G sent its staff into villages to get a feel for what the rural Chinese wanted to buy, and then the company innovated at a local level.

Foundation for success

Advertising floods TV, magazines, and newspapers. Does all this effort automatically turn into profit? Hardly. Efficient marketing is the basis for profitable sales, but it’s not easy to achieve. “I know that I spend half of my marketing money badly – but I don’t know which half,” an industry leader said years ago. Since CP companies spend up to 20 percent of sales promoting products for retail, it is important to understand exactly which dollar is effective.

There are two dedicated groups of CP companies: brand owners and contract manufacturers. Marketing is obviously a big deal for brand owners – to reach the hearts and brains of consumers. But it’s also important for contract manufacturers, because their route is through the shelves of retail stores.

Marketing aims to attract the consumer; sales is about reaching the consumer in reality. And today’s consumers are getting smarter: They expect the right product with the best service for a low price, at any time and everywhere.

Faced with an empty shelf for a favorite product, what is the consumer’s reaction? Take another product, visit another store? If this happens again, does the consumer switch allegiance to another retail outlet?

The biggest risk for both the CP company and the retailer is poor product delivery, leading to out-of-stock situations – which are even worse if they happen during a promotion, but statistics show that up to 15 percent of products in a promotion are out of stock. Similarly, consumers expect to buy fresh products, not items that turn out to have expired best-before dates. Delivery failures create lost sales, lost income, and lost trust in a favorite brand.

The supply chain for a product runs through multiple steps, from manufacturing through distribution to the retail shelf. The consumer may blame the retailer for that empty shelf space, but the culprit is more likely the manufacturer or distributor. Players along the whole supply chain must be orchestrated to provide the best service to the consumer.

Make the right decisions

New technologies can help CP companies gain valuable consumer insight across multiple channels and formats while retaining brand loyalty. Leading manufacturers and retailers are building sophisticated information systems to draw consumer insight from many sources, such as point-of-sale data, loyalty cards, consumer surveys, Internet sales data, and syndicated data from the likes of AC Nielsen and Information Resources, Inc. These investments aim not just at short-term replenishment of shelves to reduce out-of-stocks, but at the real payoff that comes from discovering new demand trends that trigger product innovation.

The CP industry needs a collaboration platform for business innovation to foster consumer-driven innovation. It must be flexible and easy for suppliers, manufacturers, retailers, and service providers to adopt. Such a platform would capture consumer buying behavior quickly at the local store level, and it would provide insight into the entire supply network – not just to match demand with supply but to support the creation of new and profitable products. A combination of applications and technologies orchestrated on this unified platform for consumer business could usher in the next wave of growth for the consumer industries.

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