Joint Value Creation Beyond Price

ECR Europe Advisory – May 24

BACKGROUND • Market place increasingly challenged by deflation and

declining or stagnant market size. • Manufacturers and retailers rely more and more on “price”

as the only value driver.BOARD November 2004• The current trading environment, shaped among others

by discounters, has emerged because ECR retailers and manufacturers have not yet been able to totally fulfil consumer wishes.

• Price is only one value driver. ECR Europe recognises the role played by other value drivers (e.g. health, convenience, proximity, changes in household profiles).

• Major roadblock to value creation, implementation of ECR demand creation processes: the buyer-seller relationship looking on quick return rather than looking to build sustainable value foro the consumers and shopperso for the companies

THE RECOMMENDATION

• ECR Europe shall set up a project to improve Joint Value Creation Beyond Price.

The project aims at: • Review: explain/understand the environment• Encouraging a wider usage of Joint Business

Planning to increase shopper and consumer attraction and loyalty

• Present innovative solutions in the shopping experience and product offer which lead to market growth by addressing other consumer/shopper value than price.

1. THE ENVIRONMENT / WHERE WE ARE TODAY

THE EUROPEAN YEARLY CONSUMER BASKET SIZE

9400 9700 1000010500

1110011600

1220013000

13400 13800 14000

0

2000

4000

6000

8000

10000

12000

14000

1993 95 97 99 O1 2003Source: Eurostat, Final Consumption Expenditure of Households, yearly spendings per inhabitant

EURO PER HABITANT

THE EUROPEAN CONSUMER BASKET SIZE

Source: Eurostat, Final Consumption Expenditure of Households, yearly spendings per inhabitant

19%

19%

20%

20%

21%

21%

22%

22%

23%

23%

24%

1994 1998 2003

0

500

1.000

1.500

2.000

2.500

3.000

FMCG Share

FMCG Spend

FMCG: Food, Drinks, Household maintenance products, Personal care products

FMCG spend increasing but we are losing

share of household

consumption

DISCOUNTED

PRODUCT LINE

INTRODUCTIONHARD PROMOTIONS

P

PRICE COMPARISON

WHY ? - FOCUSING ON PRICE

How important is price to the consumer?

Price identified as important issue

Source: Eurobarometer – Spring 2003

14

22

15 14 14 13 13

4 3 2 20

5

10

15

20

25

EU-15

IT D E F BE AT UK NL S DK

Trade Marketing

Consumer Advertising

Consumer Promotion

Percentage of U.S. Marketing Expenditures

(2003 Total U.S. Marketing Expenditures - $1 Trillion)

Sources: M.Sorrell – ECR Paris - Donnelley Marketing; PROMO, Veronis Suhler, Cannondale Associates, PoP Insights (Losin’ that lovin’ feeling)

0%

25%

50%

75%

100%

1990 1995 2003

47% 51% 54%

28% 25% 18%

25% 24% 28%

Growing manufacturer investment in in-store marketing programs

Focus Shift

Brand buyer

Promotion buyer

Private labelbuyer

ALDI-buyer

23 %

15 % 17 %

11 %

10 %

15 %

(28 %)*

(37 %)*

(17 %)*

(18 %)*

How to read the chart (example): 23% of 100 brand buyers in 2000 turned in 2001/2003 into promotion buyers

source: Analysis based on GfK consumer panels in Germany

In total, 1% of customers changed channel

PLAYING ON PRICE DRIVE TO DISCOUNTERS

Leaders in communication

DIAGEO P&G VODAFONE TESCO LIDL0

5

10

15

20

25

2004

2003

WHY? - LACK OF INVESTMENT IN INNOVATION

Source: Eurostat, growth at constant prices. <The Economic portrait of the European Union »

2.8 2.81.9

3.0

6.25.4

4.8

0.1

-1.9

-0.1

-4

-2

0

2

4

6

8

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Private Consumption Investments

Eroding consumption can be linked to eroding investment in innovation

2. Results of Survey

Do you see more focus on price than ever before?

Do you consider this price focus an issue?

Do you consider this an issue?

…. 41% manufacturers and 47% retailers think it is the biggest issue but only 16% of others (consultants).

0%

10%

20%

30%

40%

50%

60%

70%

biggest issuefacing theindustry

significantissue

small issue Not an issue

Manufacturer

Retailer

Other

What do you consider the most important measure today?

Of the measures you use with your partner, which do you think is most important

…. Manufacturers think it is gross margin, retailers total profit

0%5%

10%15%20%25%

30%35%40%45%

% GrossMargin

SalesRevenue

GrossProfit

ShopperMeasure

Manufacturer

Retailer

Other

What do you consider should be the most important measure

today?

How much time do we spend talking together?

When you work with your partners how much time do you spend talking about consumer needs other than pricing and

promotion?

How long is our current business model sustainable ?

…. 50% of retailers do not think their business model will last more than 2 years

0%

10%

20%

30%

40%

50%

60%

1-2 years 3-10 years indefinitely

Manufacturer

Retailer

Other

Do we have a good executable ECR framework to drive value

beyond price?

3. Encouraging a wider usage of Joint Business Planning to

increase shopper and consumer attraction and

loyalty

Value Creation beyond price

Strategic Understanding

Shopper Understanding

JBP

Execute

Scorecard

Bas

is f

or V

alue

C

reat

ion

Impl

emen

tati

on

CRM

ECR Scorecard

Category Management

Promotion Tactics

Shelf Availability

NEW

POS Management

Using Traceability

Shrinkage

Consumer Direct Logistics

Efficient A

ssortment

Companies’ position, business objectives and KPI

Internal budget for sales and margin

Internal budget fine tuning, match of category/ customer plans with resources allocation

Tune potential by Customer/category to get target feasibility

Fix customer budget and set customer plans

Identifies potential to grow by Customer/category

Supplier Strategy

IMPLEMENTATION

QUARTERLY REVIEW

CUSTOMER STRATEGIC REVIEW

CATEGORY/CUSTOMER PLAN

Retailer Strategy

Look for consistency in categories/ point of sales Define category objective on: • Competitiveness• Offer segmentation• Own brand share

CHANNEL STRATEGY

Identifies a strategy by department/consumption occasion

CHANNEL MARKETING PLAN

category strategic plan

Strategic Understanding

ECR 31

Strategic Value Creation Options

Innovate

Effectiveness

•Customer specific

•Time specific•Location specific

SOLUTIONS

Efficiency

• Supply • Category •Joined business process

IMPROVE

Volume•Price•Shelf space• assortment/range

OPTIMIZE

JBP template - opportunityjoint business plan 2005

2004 sales 2005 plan %

What? When? How? Who?

Agreed by (Manufacturer)……………………………………………………………. Agreed by (Retailer)………………………………………………………………….

Position ………………………………………………………………. Position ………………………………………………………………...

• Co-operation is in all levels:Strategic planning• KPI’s and targets• New Solutions/InnovationsProcesses• Insights: consumer, shopper,

market…• Category Management

• Category Role• Category Assessment• Category Tactics:– Assortment– Promotions

– Pricing

• New Product Introductions• Supply Management• Integrated systems and

information

Category DefinitionCategory Definition

Category RoleCategory Role

Category AssessmentCategory Assessment

Category Performance MeasurementCategory Performance Measurement

Category StrategiesCategory Strategies

Category TacticsCategory Tactics

Plan ImplementationPlan Implementation

Cat

ego

ry R

evie

wC

ateg

ory

Rev

iew

New levels for co-operation

Working together beyond price

4. Present innovative solutions in the shopping experience and product offer which lead to market growth by addressing other consumer/shopper value than price.

Conference

Consumption driven trendsTassimo: Café quality beverages

with convenience delivered with new technologyFerrero: Easier to use & added-value

chocolate snacks combinations

Retail Innovation

Heinz: Different range for different time of the day Veropoulos: Shelf-space innovation

….to drive sustainable sales and value growth we need to

• Go back to basics – understand shopper and consumer needs

• Collaborate on joint business plans and broader measures to impact ALL value creation drivers

• Provide genuine innovations beyond price that improve the shopping experience and the product offering

…… Then we can deliver a win for our industry and a win for our shopper.

NOW LOOKING FORWARD….

Value creation beyond price Program

Framing the issue: – Deflation, commoditisation, reduce share of wallet for grocery – Definition of different values (consumer, manufacturer, retailer)– Roadblock: buyer-seller/cash/margin culture– The creation of long term value: economist and financial

perspectives, benchmark with other sectors, benchmark across categories

Process• Strategic alignment (roadmap of joint value creation collaboration)• Principles of Joint Business Planning• Business Planning: how to integrate various business processes

within your company and with your trade partners (Organisational design)

• Scorecard (measurement of value created and return )

Value Creation• Case studies - Shifting money from price to other value drivers • Benchmark categories: which are growing and how/what is driving

their growth. A contrario : categories destruction by price strategy