Profitable Revenue Growth: A New Revenue Model For Australian FMCG this Year 🎉
What are the vital steps to achieve profitable revenue growth in Australian FMCG this year? Are bestsellers, like Coca-Cola and Pepsi generating as much revenue for leading FMCG suppliers as they used to? Or have changing consumer behaviours, new entrants to market, and a totally different channel environment, created an underlying profit problem for traditional FMCG suppliers?
>Download Now: Free PDF How to Improve Product Pricing
In this article, we will answer these questions by discussing FMCGs’ new price promotion and marketing strategy lately. We will explain the common challenges of revenue growth management today. What’s more, we’ll reveal what leading FMCGs are doing differently to respond to a very different and changing marketplace.
We argue that great leaders achieve profitable revenue growth by focusing on the right priorities of the business – especially value and pricing. These two areas really affect company performance and can forward predict the sustainability of your business strategy and growth prospects.
We believe that FMCG companies should amplify revenue management capabilities to reignite sales and profit growth.
By the end of this article, you will better understand what profitable revenue growth is and gain insights on how intensifying revenue management capabilities can help consumer goods companies achieve profitable revenue growth.
The problem FMCG now face with profitable revenue growth
For decades now, the FMCG industry enjoyed indisputable success. In 2010, the consumer goods industry made 23 of the world’s top 100 brands and increased total return to shareholders (TRS) by around 15% a year for 45 years. However, the story of growth is changing and leading FMCG suppliers are not as sure of themselves as they once were.
In fact, now, unlike any time before, best-selling FMCG brands have to fight for consideration in the supermarket aisles or else get replaced by their cheaper Private Label alternatives. For example, Nielsen data indicates that many household brands have been experiencing a steady year on year decline over the past ten years.
Consumer preferences have changed and are changing rapidly still. What’s more, traditional TV advertising is not giving them the ROI that it used to.
If we take a quick look at why this is happening we can see that for one, millennials just don’t watch as much TV as the older generations did. The trend has shifted to websites and social media platforms to buy fashion, shoes, makeup, food, groceries – you name it. Millennials much prefer buying online and based on social media recommendations. However, leading FMCG suppliers don’t have a good social media presence. Not only this, a new range of products to appeal to changing habits and preferences. Again, an area leading FMCG suppliers have been very slow to adapt to or learn from.
For instance, advertising Doritos on TV may be good for the older generations who know what Doritos are, but not so good for millennials who may not know the Doritos brand story or watch TV at all. While digital and social media platforms are just support mediums for the older generations. A subtle mix of products, channels and platforms are now required to reach a mixed and varied audience and appeal to their needs and wants.
But the biggest problem Australian FMCG faces today is an overuse of price promotions to drive revenue. Based on a report from Nielsen, 40% of FMCG brands were sold on promotion in the last 12 months, which is up from 30% in 2009. The study says that regardless of whether the product was on promotion, 48% of these sales would still happen anyway. The research further reveals that it’s worth $11 billion in sales discounting that really didn’t need to happen. This means hard-earned revenue and margin down the drain for no reason.
So, what should FMCG companies do to reignite sales and achieve profitable revenue growth? The answer is to improve pricing and revenue management capabilities. Because the current practices are not adding value to the business, its customers (retail supermarkets) or the end-consumer. In fact, everyone in the value chain wants things to change.
Australian FMCG’s Dilemma: Price Promotion and Dumb Marketing
A report from Nielsen revealed Australian retailers’ method of “relentlessly promoting products with no regard for sales uplift” is unacceptable and is leading to billions in wasted promotions yearly.
The report further shows Australia has the highest discounted retail sectors worldwide. The increase is from 30% to 40% of products sold on promotion in the last eight years. Retailers have spent $51 billion on those promotions. But latest research indicates that 48% of those sales, regardless of whether the product was on promotion or not, would have still happened anyway.
As a result, Australian FMCG suppliers have a $11.3bn opportunity to refine promotion effectiveness (based on the retail sales value of the applied discounts on sale that create minimum sales). That’s a lot of money taken away from advertising and product innovation; and both are required to drive the long-term health of every FMCG brand and also the category as a whole.
Deep diving into how Australian retailers have discounted in the past; FMCG pricing strategy has 4 distinct discount strategies. These were:
- Hi-Lo – smaller discounts but bigger discounts when they happen
- Hi-No – limited numbers of promos, ideal for products with low sensitivity to discounts, like canned tomatoes or bread
- Everyday Low Price – frequently low-priced items, like laundry products; and
- Highly price-sensitive – products sold more significantly when discounted, like pasta or deodorant
The report highlighted that these discounting practices have significantly and negatively impacted many FMCG brands. Not only that but excessive discounting also wasted $11 billion of marketing investment on poorly structured promotions.
On a positive note, there’s a clear way ahead that will benefit the growth and profit aspirations of both the supermarkets and the FMCG brands. That is, for the FMCGs to regain the confidence and capability in using advertising and innovation in building their brands.
Why is revenue management important for FMCG’s profitable revenue growth?
To amplify revenue management capabilities, FMCGs want to reignite FMCG sales and profit growth by focusing on their customers, shoppers, and end consumers. Which is strangely a very new concept to FMCG suppliers – who for many years have had a firm internal focus on profit and volume growth.
In the FMCG industry, the behaviour of the consumer significantly changes depending on the consumption occasion.
As brand loyalty shows a steady decline, more consumers are beginning to base their buying decisions on occasions. They will likely switch brands if the occasion calls for it. For example, shoppers are much more like to purchase a different brand of coffee or bread from the supermarket when they are in a hurry or don’t have time to go look for their preferred brand on the shelf. Little wonder, then that private label is growing in popularity as brand loyalty decreases.
Shoppers buy differently now than twenty years ago. For example, now shoppers tend to buy groceries, with an occasion in mind. Like when they want to buy a few snacks for eating on the go, stock up on food items for a party, or get the necessary ingredients for a healthy family dinner. The occasion is the determining factor where to shop, what to buy, and how much to spend.
Changing consumption patterns is the key to unlock more revenue and pricing opportunities in today’s FMCG world.
Revenue management teams and product managers want to leverage different consumption habits and occasions to their benefit. And, many are doing just that.
Some FMCG companies, for example, are now trying to set themselves apart from the competition by focusing on the consumer, shopper, and customer. They are segmenting the market and designing totally new product ranges and price pack architectures to align with new consumption patterns.
Common Challenges of Revenue Growth Management
Despite this new focus on consumer consumption, the ever-changing shift in consumer behaviours, sophisticated data and analytics, channel shifts, among others have created new revenue management challenges. Below listed are some of the most pressing challenges for Revenue Growth Management teams:
There’s no trade promotion optimisation solution
Many businesses still completely depend on manual spreadsheets. FMCG revenue management actually runs with very little sophistication at all. To date, there’s been little investment in capabilities like data harmonisation and advanced price data analytics. Not only that, but next to no predictive outcome generation to make the turn to revenue growth management. This function supports the capacity to act in opposition to intelligence and is inherent in an extensive trade promotion optimisation solution.
Limited ability to quantify the return on trade investment accurately
Factors such as limited logical capabilities, time constraints, or an incomplete vision of a consumer-focused FMCG business, has limited many FMCG suppliers’ ability to accurately measure the return on trade investment. Which is a common obstacle for consumer goods companies trying to optimise trade spend.
Price and promotional guidelines are poorly defined
FMCG businesses are still pricing using a fair element of guesswork. There are bare-bones price guidelines in place. The lack of pertinent data and information to create price guidelines makes it difficult for sales planning, product pricing and new product development.
Unclear Roles and Responsibilities
It is still common to find important roles and responsibilities in RGM teams to be left vacant or filled with available talent as opposed to the right talent for the job, team and mission. As a result, information disconnects and confusion about objectives commonly occur. Not only that but also redundant work, and missed opportunity. The lack of role definition and responsibilities leads to teams working at cross wires and without a common purpose. Disengagement is widespread, in spite of reasonably high salaries. FMCG talent commonly circulates from one leading FMCG business to another. Talent churn and burn is a serious problem.
Lacks process to monitor trade spending effectively
When an FMCG business lacks a process to monitor trade spending effectively, the benchmark used to measure accountability goes either unchecked or continuously change. Many FMCG businesses do not have a clearly defined RGM method to set and monitor KPIs.
How should FMCG companies respond to the changing marketplace?
FMCG businesses should understand the external market. This means:
- how consumers are significantly changing
- how well-positioned they are to respond to the changes
- the scale and trajectory of competition that syndicated data do not monitor growth and rate of innovation, if it’s higher than the competitors (particularly niche competitors)
- the level of advancement of competitors on making model changes (that might be competitive disadvantages the company)
- how strong are the channel partners’ business models (and the degree of the company’s risk)
- determine the business’ future plans take advantage of growth tailwinds and attractive niches
Recognising these external factors makes the basis for creating scenarios. Such as how quickly change will happen and how the present business model might cope in each scenario.
Implications
- Understanding the current situation of any business is vital to creating a successful growth strategy. If a business has a lot of weak areas, like sales, performance, or marketability, a premature attempt to grow can eventually collapse the business.
- Although the current profitability of a business looks good, a company should always explore opportunities for growth. Because it provides greater overall profitability and keeps potential, or present investors interested in the organisation.
- Companies should make a comprehensive revenue growth management approach a priority to trade investment. Not only that but also to budgeting, pricing, and funding guidelines too.
〉〉〉 Get Your FREE Pricing Audit 〉〉〉
Conclusion
Profitability has a huge impact on any organisation and sometimes business owners don’t even know their numbers.
A business can’t survive for a long time without making a profit. Although measuring the profitability of the business (both current and future) is very important in evaluating the company.
For a company to survive and stay attractive to investors and analysts, both profitability and growth are very essential. Profitability is vital to a company’s existence, while growth is critical to long-term survival.
Click here to access your free guide on building an effective pricing capability now.
For a comprehensive view and marketing research on integrating a high-performing capability team in your company,
Download a complimentary whitepaper on How To Maximise Margins.
Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?
If so, please call (+61) 2 9000 1115.
You can also email us at team@taylorwells.com.au if you have any further questions.
Make your pricing world-class!
