retail & consumer insights 2016 financial … (global and domestic) can be found via the...

Retail & Consumer Insights

2016 Financial Benchmarking and Industry TrendsJune 2016

Introduction

Beyond the numbers

Top-performing companies

Looking ahead

Acknowledgements

1 | Retail and Consumer Insights | 2016 Financial Benchmarking and Industry Trends

Changing consumer attitudes, behaviors, and preferences—compounded by sweeping changes in technology—have necessitated dramatic change in the consumer packaged goods (CPG) industry over the past decade.The ongoing challenge to maintain market share is exacerbated by new entrants with innovative products and packaging—as well as a keener response to consumer concerns around issues ranging from artificial ingredients to social responsibility.

Scale is not always the competitive advantage it used to be. And consumers are less predictable in their tastes—buying non-fat milk and premium high-fat ice-cream, for example. Food manufacturers are continually having to pivot to keep up with quicksilver preferences.

In fact, 73% of consumer goods CEOs are concerned about shifts in consumer spending and behaviors, according to PwC’s 19th Annual Global CEO Survey.1 Meanwhile, barriers to entry are lower than ever as new entrants engage directly with digitally

Introduction

savvy consumers using data analytics, which allows sophisticated personalization and localization to target ever more differentiated shopper segments.

Top-performing CPG companies are successfully navigating this increasingly complex environment, despite challenges old and new.

As in previous years, we ran a financial performance analysis of CPG companies for the 2015 fiscal year. Our benchmarks include a range of metrics for growth, returns, income, liquidity, and balance sheet results. Reported results utilize median figures in order to reduce the effect of performance outliers on the overall metrics. This report summarizes our analysis of top-performing companies and the key CPG industry themes our analysis uncovered.

We confirmed these key themes via discussions with members of the Grocery Manufacturers Association (GMA) CFO committee and interviews with select

CFOs. We examined strategies around five key themes that represent a combination of leading practices and aspirational strategies that high performers are planning and implementing.

They include the following:

• Balancing productivity and profitability growth

• Revenue growth management

• Data analytics

• Portfolio coherence in mergers & acquisitions

• Innovation

Our additional analysis of companies by size (small, medium, large, and very large), sector (food, beverage, and household products), and source of revenues (global and domestic) can be found via the “Explore the data” tool at Retail and Consumer Insights: 2016 Financial Benchmarking and Industry Trends at pwc.com.

1 PwC, 19th Annual Global CEO Survey, 2016.

http://www.pwc.com/us/en/retail-consumer/financial-performance-report.html




Although 2016 got off to a slow start, economic growth continues to tick up, and cautious optimism prevails. Consumer spending is expected to pick up as well. Looking back at 2015, we saw turmoil in financial markets, slowing growth in emerging markets, a strengthening dollar, and dropping commodity prices. While macroeconomic and market forces have created headwinds against productivity, top-performing CPG companies are finding new ways to increase profitability.

To do so, they are building on their core strengths, fine-tuning their overall portfolios to achieve coherence, shoring up revenue growth management, and bolstering their digital strategies.

We gathered and reviewed publicly available data on a total sample of 107 CPG companies. We then sorted 48 companies with sales over $4 billion (large and very large companies) into performance quartiles and analyzed the results over five years to find the common characteristics linking the highest-ranking manufacturers. We were particularly interested in evaluating the top quartile (best or top performers) versus the bottom quartile (weakest or bottom performers) to uncover the specific business drivers that might explain the top quartile’s success.

We assigned scores to the 48 companies based on their relative performance across three fundamental metrics:

• Economic profit spread: This metric is based on return on invested capital (ROIC) and the weighted average cost of capital (WACC).

• Return on assets (ROA): Earnings before interest and tax (EBIT) for a reported fiscal year divided by net assets for the same year.

• Free cash flow relative to sales: A ratio that shows the percentage of free cash flow to the amount of sale.

As a result, we identified 12 top-performing companies (TPC). Within this group, five are beverage companies, four are household products companies, and three are food manufacturers. Among the 12 bottom-quartile performers, one is a beverage company, four are household products companies, and seven are food manufacturers. Our analysis reveals that in 2015, the top performers’ results differed from those of the bottom quartile in the following key metrics:

Net sales growth rates for both the top and bottom quartiles have continued to decrease since their 2011 highs. In 2015, the top-performing companies fell from 0.4% to -5.0% while the bottom-performing companies fell further into the red from -2.2% to -12.4%, making the spread between the quartiles the largest in the past five years.

Top-performing companiesAn analysis of the financial performance of leading manufacturers

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Headwinds such as slowing growth in emerging markets and volatile exchange rates attribute to revenue growth challenges, especially for US-based CPG companies with international operations. After years of subdued strength, the dollar has appreciated rapidly since mid-2014. Most basically, this represents increasingly diverging growth prospects for—and monetary policies in—the US versus the rest of the world.

This is boosting imports but hurting exports. Companies are managing through the current volatile macroeconomic environment by taking responsible pricing actions, tightly controlling costs, and optimizing global sourcing to minimize and mitigate the impacts of the current foreign exchange challenges. As a result of these actions, and despite experiencing double-digit reduction, manufacturers are enjoying consistent gross margins.

In 2015, top performers’ gross margins remained consistent at 58.0%. Five of the 12 top-performing companies are beverage companies, which also continue to enjoy traditionally high margins. Bottom performers enjoyed an increase in gross margins from 21.2% to 25.7%, with the gap between the two quartiles decreasing to 32.3 percentage points.

In the same year the top-performing companies’ EBIT growth declined from 0.4% to -7.4% while bottom-performing companies fell further into the red from -6.8% to -16.4%. The spread between the two quartiles slightly increased by 1.7 percentage points.

Large CPG companies make substantial investments in innovative products as well as in marketing and advertising to support their core brands and drive future growth.

In 2015, selling, general, and administrative (SG&A) as a percentage of net sales among top performers (30.9%) and bottom performers (4.8%) both increased, with top-quartile manufacturers showing a steeper incline. This increase is most likely a result of the decrease in net sales growth as previously discussed.


Return on market capital continues to be a troubling metric for top performers, declining from 4.0% in 2014 to 3.4% in 2015. For bottom performers, return on market capital improved slightly to 3.8%. Even though it’s only a small improvement, this is the first time since 2011 that the bottom-performing quartile has a better return on market capital than the top-performing quartile.

The cash conversion cycle metric measures the speed (in days) in which a business can turn assets into cash; a lower number of days indicates better performance. We found that the gap between top-and bottom-performing companies narrowed to 6.5 days as top-quartile manufacturers decreased their cash conversion cycle to 35.6 days, an improvement of 1.8 days over the previous year. Slight negative movement was noted for bottom performers with a cash conversion cycle of 29.1 days.

For return on equity, it is not surprising that top-performing companies consistently reported a higher return on equity metric. In 2015, however, the gap narrowed slightly with top-performing companies decreasing to 31.5%, a decrease of 1.5 percentage points, while the bottom-performing companies increased to 9.6%, an increase of 0.4 percentage points.

High-performing CPG companies go beyond productivity without sacrificing innovation. They focus on their strengths in pursuit of profitability. As a result of responsible pricing actions, cost controls, and optimized global sourcing to minimize foreign exchange impacts, top performers are enjoying consistent gross margins. We examine the leading practices of high-performing companies in the following section.

TPC median cash conversion cycle

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High-performing CPG companies go beyond productivity without sacrificing innovation. They focus on their strengths in pursuit of profitability.


As we analyzed high-performing companies in the consumer packaged goods industry, we uncovered five key trends.Further discussion with members of the GMA CFO committee as well as interviews with select CFOs helped inform and solidify our investigation of these key themes. We examined strategies around these trends that represent a combination of leading practices and aspirational strategies that high performers are planning and implementing.

The five key themes outlined include:

Beyond the numbersFive trends at high-performing companies

From productivity to profitable growth: Finding the right balance

Revenue growth management: Advantages of a consistent, holistic approach

Portfolio coherence in M&A: Finding the right fit of mainstay brands

Data analytics: Generating insights to engage consumers and manage supply chains

Innovation: Agility to correct course rather than perfection out of the gate


In the face of intense margin pressures, an unrelenting cost structure, and ephemeral consumer demands, leading manufacturers balance productivity with innovation. They achieve profitability over the long term by paring down their portfolios to drive margin and profitability—and building on the specific strengths at which they excel.

One large CPG company, for example, divested more than 50 brands in a strategic plan to drive profitability rather than grow revenue. The result is a unified, coherent portfolio instead of a mad scramble to find new sources of growth or continued cost cutting as the principal source of value creation.

Companies need to adopt a far-reaching top-down approach that maps out the potential growth avenues over a multi-year time frame. They must identify a portfolio of big ideas to make the kinds of step changes that will likely double or triple the value of their most advantaged units, while helping to establish that the resulting organization will be strategically coherent and competitively advantaged.

Three elements of a clearly defined coherent strategy are:

1. A value proposition that resonates with customers, supported by

2. A system of distinctive capabilities, combined in a way that competitors can’t match, with

3. A portfolio of products and services that are aligned with the first two elements.

Growth can only occur from a position of strength; an organization has to be able to deliver on its value proposition, translating concept into competitive position with a viable, sustainable business model that generates profits and cash flow.

Can’t cut your way to prosperity

“You can’t cut your way to prosperity,” says Ron Dissinger, CFO at Kellogg Company. “You need the right innovation programs and commercial activation to sustain revenue growth. Food companies financial structures tend to be very sensitive to top line growth or decline.”

He explained that shifting consumer preferences from the center of the store to the perimeter—as consumers shop for more fresh products—requires packaged good companies to “be more effective and efficient with commercial programs and innovation to be successful. In addition, most companies are driving unnecessary costs out of their cost structures. Many have embraced zero-based budgeting, workforce restructures, and supply-chain-network restructuring in addition to base productivity programs to improve their results.”

He also adds, “Zero-based budgeting has allowed companies to take a fresh look at their cost structures from SG&A expenses and cost of goods to trade spend and optimization of trade investments with customers.”

From productivity to profitable growth: Finding the right balance

Al Williams, CFO of Bush Brothers, a leading producer of bean-related products, agrees. “We’re appropriately lean,” he says. “We want to invest in the brand and in product innovation. But from an operational standpoint, we try to be very lean.” In response to a question about the wave of private equity firms initiating stringent cost-cutting measures, Williams said, “It’s a good discussion for us to have, especially being privately held. You want to make sure to do it yourself before somebody else does.”


From productivity to profitability (continued)

Start from your strengths

A PwC analysis of major packaged food and nonalcoholic beverage companies found that their performance falls neatly into two categories—lower performers that are usually mature companies who had failed to drive profitable growth in the face of shifting consumer behaviors, and some higher performers who on average had generated top line growth with margin expansion.2

Over a period of 5½ years, the underperformers had grown just ahead of inflation on average, but at the expense of a significant squeeze on gross margins (320 basis points) and compressed operating income levels (130 basis points). Despite years of cost reduction, margins have deteriorated, and growth has been lacking. A fundamental change in trajectory is required for these companies to create competitive shareholder returns by:

1. Reducing costs sufficiently to offset inherent margin erosion, create enough savings to reinvest, and raise operating margins by, say, some 400 basis points.

2. Simplifying portfolios, retaining only businesses in which core capabilities create unique advantage.

3. Investing in areas of strength to drive meaningful organic and inorganic growth. Need 4-6% sustainable organic growth and 400 bps margin expansion to match the value creation of the leading PE firms.3

The higher performers illustrate that profitable growth is possible, despite challenging settings.

Companies exhibiting consistent long-term growth have followed this path, starting from their strengths rather than responding to short-term market pressures. The challenge is to compensate for the underlying margin erosion while concurrently needing to raise the margin structure.

Need to innovate

“We balance our productivity agenda with the need to innovate and meet consumer demands,” says Dan Redfern, CFO at Ready Pac Foods, which produces fresh, ready-to-eat salads, packaged salads and fresh-cut fruit. “We’re basically trying to strike that balance by growing profits three times faster than the top line. We think of ourselves as a CPG company rather than a produce provider, with a focus on giving consumers the freedom to eat healthier.

“Because a lot of our manufacturing is less automated, we have made productivity investments around yield optimization. We’ve developed a more sophisticated approach to where and how we procure raw ingredients and ultimately drive out yield loss. That’s been one of our big productivity drivers. To that end, a lot of our productivity focus has been around the supply chain.”

2 Tom Hansson and Abhijeet Shekdar, “The Shareholder Value Triple Play,” strategy+business, March 28, 2016.

3 Ibid

One large CPG company divested more than 50 brands in a strategic plan to drive profitability rather than grow revenue.


Revenue growth management (RGM) hinges on the ability to obtain a clear-eyed view of pricing strategy in the context of customer preferences. For example, do we have the right product in the right channel at the right price? Do we have the value proposition shoppers are seeking?

Grocery manufacturers have increasingly relied on trade promotions to drive growth for several years now—with diminishing returns. In fact, more than 65% of trade promotion events fail to break even, according to analysis from Nielsen.4

And they “create a lot of volatility within your supply chain,” says Kellogg’s Dissinger. “So many companies are taking a hard look at trade promotion events. They’re pulling significant tranches of money out of their trade investment or redeploying it to more effective and efficient deals.”

Holistic approach

In fact, 70% of companies told us RGM is one of their top three priorities.5 CPG companies are expanding their focus to encompass a more holistic RGM approach that:

• Begins with a deep understanding of the market and customer.

• Analyzes the product mix, price-pack architecture, pricing and trade promotion, and overall brand portfolio.

• Tracks progress against objectives with real-time course corrections, including flexibility for individual markets.

They are assessing their price-pack architecture, which offers consumers a variety of offerings at different price points for different settings. From every-day low prices to pricing strategies by channel, promotion, and region. As well as pricing based on brand equity. Research illustrates, for example, that objective taste ratings don’t always correlate with price, suggesting that brand perception for reasons such as luxury and associations with glamour can affect consumer purchasing decisions.

Invest in winning customers

While overall rates of return on trade promotion are anemic, PwC analysis finds that best-in-class manufacturers achieve five times the return on trade promotions as their least efficient peers—because they begin with a keen analysis of consumer preferences, layered with analytics on market trends, sales data, and price points. They invest in winning customers by motivating them and rewarding the behavior they seek.

At approximately 20 percent of revenue, trade spending requires a disciplined focus on customer analytics. This is why companies are increasingly investing in post-event analysis tools, which provide a rapid assessment of which promotions are working and which are not.

Double or triple the return

One promising development is the use of customer analytics to drive digital trade spending, a

Revenue growth management: Advantages of a consistent, holistic approach

burgeoning discipline that can offer double or triple the return on investment of traditional trade spend after iterative test-and-learn to optimize targeting and content. In fact, one CPG company partnered with a retailer to offer a digital promotion that drove a 10-to-1 return on its initial pilot test—which it then moved to rapidly scale up.

Says Kellogg’s Dissinger, “We have consistently been shifting funds from traditional investments in TV and print media into digital year after year. We’re also partnering with our customers or digital providers to ensure we are making the right investments in this space.”

Successful strategies

Ready Pac Foods’ Redfern agrees, “We’re really looking at expanding our digital and social presence. We certainly intend to overweight our investments in this area in the next two years.” He adds that traditional trade spending is relatively low at Ready Pac Foods because “in the fresh refrigerated space, you don’t really have an ability to expand your inventory at the store level, so you generally don’t do large promotions. So a lot of our trade spend is just to drive awareness, trial and repeat.”

Several food and beverage manufacturers have implemented successful revenue management strategies, including one who has achieved category growth with a targeted brand portfolio at market level, another who has leveraged advanced analytics to develop differentiated pricing levels, and yet another who has realigned channel strategies with a tiered approach to its product portfolio.

4 Nielsen, Cracking the Trade Promotion Code, November 6, 2014.

5 PwC analysis of CPG customer planning and trade spend management, 2016.


High-performing CPG companies bring an urgency to deciphering and understanding consumer data in order to better anticipate customer needs and preferences. In fact, 64% of CPG CEOs rated data and analytics as likely to generate strong returns on customer engagement, according to PwC’s 19th Annual Global CEO Survey.6

High-performing companies are deliberate in their overall digital strategy, innovation, and execution. They are more likely to have CEO commitment, strategic clarity, and shared understanding. They are more apt to take a broad view when applying technology and identifying sources of innovation. And they are more efficient at turning their data into insight, more proactive in cybersecurity, and more consistent in measuring outcomes from digital investments. In fact, PwC cross-sector analysis has found that companies displaying these attributes are twice as likely to achieve more rapid revenue and profit growth.7

However, some challenges exist for CPG companies: The path to ROI in data analytics is not as clear as it is in other industries, which accounts for a lag in what companies are able to achieve in terms of investments. In fact, many technology tools used to understand customer behavior in food manufacturing is some two- or three-decades

old, resulting in the inability to use advanced data analytics and, hence, a dearth of accurate forecasting. CPG companies clearly do believe in the value of data analytics even though they sometimes struggle with translating that belief into action.

Blend of art and science

Some have made progress developing initial capabilities around high-leverage use cases that will help fund investments in other applications. One beverage company, for example, analyzes store-level insights to execute custom assortment, custom marketing, and custom displays. Another brought back a discontinued product after testing it exclusively online for a year as sales data proved there was a market for it. And a household products company leveraged data analytics in real time to reduce raw material tracking time by 80%. Another has improved inventory accuracy forecasts up to 25%.

In today’s increasingly data-driven environment, an optimal blend of art and science provides opportunities to leverage algorithms and crunch data to make more informed decisions about customer behavior. A few leading CPG companies go further. With attention to data quality and analytic techniques, they invest in advanced analytics to extract business and consumer insights that allow smarter, faster business decisions. And they partner with analytics firms while also shoring up their own IT infrastructure.

Data analytics: Generating insights to engage consumers and manage supply chains

A household products company leveraged data analytics in real time to reduce raw material tracking time by 80%.

6 PwC, 19th Annual Global CEO Survey, 2016.

7 PwC, 2015 Global Digital IQ® Survey, September 2015.

Conjoint analysis, predictive modeling, and competitive market simulations can help companies understand the market impact of pricing and product changes—as well as guide decisions about product design, trade, marketing, and pricing strategies.


Portfolio coherence in M&A: Finding the right fit of mainstay brands

Deal activity in the retail and consumer sector has accelerated in recent years, driven largely by deals in the food, beverage, and alcohol sector. For disclosed deals greater than $50 million, deal activity in the food, beverage, and alcohol sector has had more than 300 announced US deals in the last five years, totalling about $295 billion, according to PwC analysis of Thomson Reuters data. Deal volume continues to build as shareholder activists, private equity investors, low interest rates, strong balance sheets, and competition for targets spur additional M&A.

Food manufacturers embark on M&A for a variety of reasons: to expand portfolios of products, capabilities, and innovation; enter new markets; or achieve economies of scale, as described in Table 1 below.

PwC analysis of deals over the course of more than a decade found that companies that conduct a thorough investigation of how the target’s core capabilities correspond with their own strengths realize better returns. The biggest premiums generally resulted from deals that leveraged the acquiring company’s already well-established core strengths and capabilities.8

Portfolio coherence mindset

In fact, a portfolio coherence mindset toward M&A is what sets top performers apart, allowing them to build a robust portfolio of mainstay brands. One beverage company, for example, has acquired niche players in energy drinks, non-dairy plant-based protein drinks, and vitamin water. Another has sold major interests in wine and spirits to refine its core portfolio of brands. The starting point is ongoing portfolio evaluation to determine which assets are cost-effective to value-creation and which may prove valuable in the hands of a different owner.

Portfolio coherence necessitates proactively identifying these businesses and positioning them for the optimal buyer before entering into a formal sale process. When focused on the capabilities that drive value in the business, companies can improve their chances to command the best price, increase speed to market, extract their expected value, and refocus on the core business. Conversely, this analysis also serves as the foundation for prioritizing which brands should be added to beef up the overall portfolio—and then assessing build versus buy options.

A leading snack food company has built up an efficient, cost-effective, direct-to-store delivery system that can burrow into the smallest channels using small trucks to take smaller orders to outlets like gas stations and convenience stores.

Table 1: Common M&A strategies for food manufacturers

Rationale Description

Product or category adjacency Company acquires a business that sells a product, service, or brand related to, but not identical to, one of its own business categories.

Geographic adjacency Expansion into a new location rather than a new sector or category. May be US companies wanting to expand into emerging markets or international players wishing to move into the US.

Consolidation Takes advantage of synergies and economies of scale, usually be-tween two companies with similar businesses. Also increases clout with large food retailers.

Innovation acquisition Large companies purchase smaller enterprises with proven innova-tion in order to realize immediate benefits.

Accessing capabilities Company acquires a target that either leverages or builds on its own capabilities system. It may also sell a unit that does not benefit from these capabilities.

8 J. Neely and John D. Potter, “An Appetite for M&A: How Food Companies Can Buy and Sell Their Way to Competitive Advantage,” Strategy&, March 13, 2015.


Portfolio coherence in M&A: Finding the right fit of mainstay brands (continued)

Its ability to serve channels of this size gives the company vast control over shelf space and choices versus competitors who take a more generic approach. This company focuses very intentionally on its strong core capability—instead of expanding into beverages or heavy products that would create delivery bottlenecks in the supply chain.

“M&A remains a very important part of a food company’s strategy,” says Kellogg’s Dissinger. “And low interest rates provide support for transactions. But at this point in time, many large and small food companies command high valuations both domestically and internationally. So finding a quality asset at the right price can be more challenging.”

What are you trying to do?

The key is to have a clear objective in mind, according to Bush Brothers’ Williams. “We look at M&A more as a tactic than a strategy,” he says. “What are you trying to do? And then you ask yourself, ‘Is M&A the way to do it?’ As opposed to, ‘Our strategy is to do M&A’ and then figure out what that is going to do for the business.”

He adds, “You’ve got a lot of people looking to buy right now. You can get caught up in the deal. There’s a lot of bravado. I don’t know what kind of long-term ROI people are going to get. For us it would have to start with strategy, then seek out acquisition as a tactical option to reach a consumer or an occasion or a platform or a category. And it may not even be our first option.”

For now, Ready Pac Foods is focused on what the company does best, which is “providing the fresh and healthy options for consumers.” Redfern added that center-store CPG companies are making bigger and bigger plays for fresh and on-the-perimeter options, given consumer preferences for a combination of health, wellness, and convenience. “We think that’s going to create a lot of M&A activity down the road.”

With a clear view of how capabilities will likely support the future portfolio of mainstay brands, companies can have a comprehensive map for

what to sell over time, what targets they will pursue for acquisition, and what organic activities to put in motion in the meantime. Capabilities-building—having a deep understanding of the three to six things the company does extremely well that comprise its system of capabilities—should be central to an M&A strategy, regardless of whether it is the rationale for every transaction. Companies need an understanding of what kinds of opportunities will leverage or enhance their capabilities systems. This means thinking about capabilities at the earliest stage of the process.


Innovation: Agility to correct course rather than perfection out of the gate

Innovative manufacturers are responding to consumer preferences with everything from meat bars to natural-colored cereal (no more eye-popping artificial colors). And they’re doing it in record time to respond effectively to continually changing tastes. As more consumers live in dense population hubs, they drive less, shop more often, and want smaller package sizes. Top performers are responding by tailoring product packaging, pricing, and promotion by channel.

Meanwhile, to better appeal to older millennial and Gen X consumers’ preferences for healthy, artisanal options, one beverage manufacturer is complementing large well-known brands with small-batch craft drinks and spirits as well as adding a low-calorie line extension.

Emerging market muscle

Another has introduced a dispenser to sell chilled soft drinks in more affordable serving sizes to consumers in emerging markets—given that emerging markets will account for 40% of the world’s GDP in 2018, more than the G7’s 35%. The simple, lightweight dispenser requires no electricity and can be transported to remote locations.

As consumers voice their opinions for environmentally conscious products, the beverage manufacturer has also introduced bottles made entirely of plant materials. And a household products company, in keeping with its goal of halving its environmental footprint, has introduced soap that kills germs more quickly using less water.

Partnerships with suppliers, business networks, trade groups—even competitors—are gaining ground with CPG manufacturers, including one that produced scented garbage bags with odor-neutralization technology in the plastics and another that reduces water by 25% in liquid laundry detergent. Consumers, meanwhile, are increasingly invited to participate by CPG companies in crowdsourcing initiatives that have led to new flavors of food and beverage products, new ways to preserve foods, and packaging innovations.

Diverse preferences

In response to evolving food preferences that reflect changing demographics, food companies have introduced new flavors and ingredients—ranging from lemongrass and quinoa to coconut milk and condensed milk—of appeal to diverse appetites. As shoppers increasingly use packaging to discern a company’s values, top performers are finding ways to leverage packaging to communicate key messages reflecting their identity.

According to Redfern, new products from the innovation pipeline drive approximately 15% of annual sales for Ready Pac Foods, a company whose origin story begins with product packaging innovation to keep produce fresh. An executive chef in R&D at the company experiments with new recipes composed of ingredients popular with millennials —“natural, organic, non-GMO, gluten-free, healthy, and fresh.”

Redfern says, “R&D, marketing, and sales all collaborate so that when a customer has an innovative idea, for example, we can add it to our process. It’s a big part of our culture relative to our size. We think it’s key to attracting consumers to the category. Consumers today want variety. They want new, interesting, and unique. The challenge is to get new products launched and managing your product portfolio to prevent SKU over-proliferation.”

As consumers voice their opinions for environmentally conscious products, a beverage manufacturer has introduced bottles made entirely of plant materials.


Innovation: Agility to correct course rather than perfection out of the gate (continued)

Trial and error

Given the new product failure rate of 85% within two years of launch, food manufacturers are understandably cautious.9 Says Bush Brothers’ Williams, “I think sometimes we go a little too far trying to get it perfect on the front end when you probably need trial and error a little bit more.”

In an effort to target Hispanic consumers, for example, Bush introduced a line of bean products with Hispanic flavorings that could be used in Mexican food recipes—in 40-ounce cans designed for larger families. It did so well with suburban moms that Bush reintroduced it in 16-ounce cans and adjusted its advertising to include English-language commercials.

Innovation represents more than a set of practices; it refers to a company’s entire ecosystem of processes and structures underlying its approach to solving problems, whittling down the best new ideas, and implementing the ones that withstand rigorous testing. Without this ecosystem built into its DNA, a company cannot make the choices necessary to advance innovation.

9 Nielsen, Breakthrough Innovation Report, 2015.


Consumers today have an increasing array of consumer packaged goods choices available where and when they want from a variety of physical and digital channels. Their loyalty can be as fleeting as their attention span. Providing the right product at the right price at the right time is an ongoing challenge for CPG manufacturers. Especially since the definition of right product, right price, and right time are all subject to change at a moment’s notice. Listening to customer preferences, offering them curated choices, focusing on core capabilities—these are what top performers do best. And what propels them to the top.

Looking ahead

© 2016 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. PwC helps organisations and individuals create the value they’re looking for. We’re a network of firms in 157 countries with more than 195,000 people who are committed to delivering quality in assurance, tax and advisory services. Find out more and tell us what matters to you by visiting us at www.pwc.com.

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The Grocery Manufacturers Association (GMA) is the trade organization representing the world’s leading food, beverage and consumer products companies and associated partners. The U.S. food, beverage and consumer packaged goods industry has facilities in 30,000 communities, generates $1 trillion in sales annually, contributes $415 billion in added value to the economy every year and is the single largest U.S. manufacturing industry with 1.7 million manufacturing workers. Founded in 1908, GMA has a primary focus on product safety, science-based public policies and industry initiatives that seek to empower people with the tools and information they need to make informed choices and lead healthier lives. For more information, visit gmaonline.org.

PricewaterhouseCoopers has exercised reasonable care in the collecting, processing, and reporting of this information but has not independently verified, validated, or audited the data to verify the accuracy or completeness of the information. PricewaterhouseCoopers gives no express or implied warranties, including but not limited to any warranties of merchantability or fitness for a particular purpose or use, and shall not be liable to any entity or person using this document or have any liability with respect to this document. This report is intended for internal use only by the recipient and should not be provided in writing or otherwise to any other third party without PricewaterhouseCoopers express written consent.

Acknowledgments

We would like to thank a number of people for their contributions and for providing their input. Through their collaborative efforts, the following team members have been instrumental in the success and completion of the Retail & Consumer Insights: 2016 Financial Benchmarking and Industry Trends publication.

Joseph Bedenbaugh

Tamara Beresky

Brian Crane

Thomas Hansson

Richard Kauffeld

Brychan Manry

David Meer

Asha Nathan

Roberto Rojas

Jon Sackstein

Samrat Sharma

Eduardas Valaitis

Krystin Weseman

Patrick Yost

We would also like to thank the following executives, who participated in our interview process and whose insights appear throughout this report:

Ron Dissinger, Kellogg Company

Dan Redfern, Ready Pac Foods, Inc.

Al Williams, Bush Brothers & Company

ContactsGMA and PwC professionals are available to discuss the data, analysis, and commentary in this report, and to help you address the opportunities discussed within.

For further information, please contact:

Patty StocktonSenior Director Industry Affairs & Collaboration Grocery Manufacturers Association 202 295 3949 [email protected]

Steven J. Barr US Retail and Consumer Leader PwC 415 498 5190 [email protected]

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retail & consumer insights 2016 financial … (global and domestic) can be found via the...

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