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Who will take advantage of disruptive change? Consumer Products Trends September 2014

Traditional capabilities and operating models are no longer sufficient for success

Profit or lose

Source: Disrupt or be disrupted, EY survey, 2012

68% under pressure to reappraise their operating model because of the volatile, uncertain, complex and ambiguous nature of the operating environment

How is the sector performing?

Profit or lose

The fundamentals of consumer products remain attractive

Consumer products will continue to grow Market size (USD$ billions) CAGR %

… driven by economic and population growth in emerging markets Global population (billions)

6,302

8,945

2013 2018

7.3%

Source: Euromonitor, United Nations Department of Economic and Social Affairs

1.2 1.2 1.3 1.3 1.3 1.3

4.9 5.8 6.4 7.0 7.6 8.0

2000 2012 2020 2030 2040 2050

Mature markets Emerging markets

7.1 6.1

7.7 8.3 8.9 9.3

6 5 4 3 2 1 -1 -2 -3 -4 -5

5

-6

45

30

40

35

25

20

15

10

0 0

14 13 12 11 10 9 7

Adidas

J&J (Consumer)

Unilever (total)

Kellogg

Remy Cointreau

L’Oreal

Brown Forman

Pernod Ricard Coca-Cola

Diageo

ABI

Heineken

PMI

BAT

JT

LVMH

Nike

P&G

Kimberly Clark

Avon

Colgate

Henkel

Nestlé

Danone

Carlsberg

Mondelēz PepsiCo (total)

General Mills

Ajinomoto

Kraft

BRF JBS

Tyson Foods

SABMiller

But companies are struggling to grow organically

Q2 2014 Operating Margin (OM) %

Size of bubble represents total sales in Q2 2014 Underlying Sales Growth (USG) vs. Q2 2013, %

See notes for footnote data Source: Company data and EY analysis

Average growth: 3.1%

Average:18.6%

Presenter

Presentation Notes

Note: Heineken- USG and OM for 1H 2014, sales estimated based on 1H 2014 ending June 2014; SABMiller- OM for full year, sales estimated based on figures for full year ending March 2014; Diageo- USG and OM for full year; sales estimated based on figures for full year ending June 2013; Pernod Ricard- OM based on profit from recurring operations for full year ending June 2014; Remy Cointreau- OM for full year ending March 2014; Danone- half year margin, Nestle- half year margin, Kraft Foods- 2Q13 OM ;excludes a $604m benefit from market-based impacts to post-employment; Ajinomoto revenues for food segment only; L'Oreal- H1 2014 OM; Henkel- HPC segment figures only; Colgate- HPC segment figures only; Avon- constant currency growth; BAT- half year OM and USG based on net sales growth at constant currency, sales estimated based on half year figures; PMI - USG based on net sales growth at constant currency; Nike- USG for Q1 2014, Adidas- USG for Q1 2014; LVMH- USG and OM for half year, sales estimated based on half year figures;

Profit or lose

Building tomorrow’s supply chain

Disciplined capital allocation

Delivering consistent shareholder value

Challenge of change Efforts to innovate Containing costs

What truly differentiates the sector’s leading companies?

Consistent messages at CAGNY/CAGE investor conferences

What’s shaping the sector?

Profit or lose

Consumer products is being disrupted

Costs are hard to control

Consumer behaviour

is changing

Growth is challenging

Mondelēz - CP Trends Discussion (July 2014)

Presenter

Presentation Notes

Traditional capabilities and operating models are no longer sufficient for success CP companies are adapting to three fundamental shifts Challenging growth: Limited volume growth in mature markets (polarizing preferences; value seeking) Large but challenging opportunities in emerging markets (diverse markets; intense competition) Costs control: External cost pressure is growing (commodity/fx volatility; cost of talent) Internal cost structures challenged by a changing market (excess capacity in mature markets; impact of omnichannel on the supply chain; impact of digital on SG&A) Changing consumer behaviour: Digital is giving control to the consumer (technology advance; declining effectiveness of traditional media; rise in demand for transparency) Complex route to market (multiple channels to shop; internet; retail pressure)

Growth is challenging


“For the first time in our history, the majority of the increase in profitability has been coming from emerging markets.

“We have driven this by allocating more resources to these markets. We have also rebalanced the growth equation, looking for not only growth, but also by starting to be more demanding about productivity.” CP CFO, 2013

Emerging markets have reached the tipping point

Profit or lose

The center of gravity has shifted

Share of world CP market growth 2014 to 2018

Source: Euromonitor

9% North America

9% Eastern Europe

7% Western Europe

12% Africa/ Middle East

1% Japan

1% Australasia

21% Latin America

40% Emerging Asia

Profit or lose

And CP companies have invested significantly

Profit or lose

77% 73%

65% 57%

54% 54%

52% 50%

45% 45%

43% 43% 43%

BATSABMiller

PMIUnilever

ABICoca-Cola

ColgateCarlsbergHeineken

NestléImperialHenkelLVMH

42% 42% 41% 40% 39% 38% 38%

36% 35%

24% 14%

11% 3%

DiageoPernod Ricard

DanoneMondelēz

ReckittP&G

L'OréalKimberly-Clark

PepsiCoHeinz

KelloggGeneral Mills

Campbell Soup

Est. percentage of company revenues from emerging markets LFY%

Source: Company data, analyst reports and EY analysis; Profit or Lose, EY survey, 2013

69% believe emerging markets will be the main engine of both growth and profits

Volatile demand Increasing competition Rising input costs

Currency risk War for talent Growing complexity

But more than two-thirds of high performers say emerging markets are increasingly challenging

Profit or lose

Source: Profit or lose, EY survey, 2013

Emerging market volatility is not new… but is rarely forecast accurately

-15

-10

-5

0

5

10

15

GDP growth rate y-o-y (%), 1991–2020

Source: Global Insight

China India Brazil Russia Indonesia Turkey Thailand

Historical Forecasts

Profit or lose

Emerging market expansion has exposed companies to currency volatility

Currency impact on reported sales (%), Q2 2014

Source: Company data and EY analysis

Nestlé*

Danone

Unilever*

Mondelēz

General Mills

Kellogg Kraft Foods

Diageo*

Carlsberg

Pernod Ricard

ABI Heineken*

PepsiCo

Coca-Cola

Brown Forman

Unilever (group)*

Henkel (group)

L'Oréal*

Colgate (group)

Kimberly Clark

P&G

J&J (group)

BAT

PMI

JT

Adidas

LVMH*

Nike

-15

-13

-11

-9

-7

-5

-3

-1

1

3Food Beverage HPC Tobacco Other

Note: Nestlé -1H14 currency impact; Unilever (food) - average impact for Unilever Food and Refreshments only; Heineken - 1H14 currency impact; Diageo- full year currency impact; L’Oreal- 1H14 currency impact; Unilever (HPC)- group level; 1H14 currency impact; BAT- half year; J&J- total; Unilever (HPC)- group level, H1 2014; L’Oreal- H114 currency impact; LVMH- 1H14 currency impact

Is MINT ‘fresher’ than BRIC?

7.7

4.6

2.1 1.3

6.9

5.8

3.9

1.3

► MINT median age is under 30 years, lower than China, Russia and Brazil.

► MINT will surpass BRIC in the race for millionaires.

► By 2050, economies of Mexico and Indonesia will be bigger than UK, France and Germany; Nigeria and Turkey to surpass Canada and Italy.

Profit or lose

GDP growth rate y-o-y 2013, %

Source: Global Insight

Presenter

Presentation Notes

Sources: http://www.forbes.com/sites/doliaestevez/2014/01/27/the-2014-millionaire-race-goodbye-brics-hello-mints/ http://www.bbc.com/news/magazine-25548060 http://blogs.wsj.com/moneybeat/2013/12/09/oneill-man-who-coined-brics-still-likes-brics-but-likes-mints-too/ http://www.idgdirect.com/emerging-markets-mint-overview/ https://www.cia.gov/library/publications/the-world-factbook/fields/print_2177.html

Just 20% of firms currently deliver both high growth and accretive margins in emerging markets

► Biggest external barriers to profitable growth in emerging Asia:

1= Labor and input cost inflation 1= Competitive pressure 3 Market fragmentation 4 Exchange rate fluctuation 5 Poor physical infrastructure 6 Inadequate marketing channels 7 Cost and availability of distribution

channels

► Percentage of respondents who believe their firm is very effective at:

Profit or lose

Source: Profit or Lose, EY survey, 2013

31%

26%

20%

18%

Addressing localconsumer needs

Tailoringoperating model

to needsAnticipating andresponding to

market volatility

Developing localtalent

High performers Low performers

High performers balance a number of apparent contradictions

Profit or lose

AND

How are companies responding?

► Reframe strategic choices and optimize the portfolio

► Be granular ► Flex business model to local

needs and empower local decisions

► Realign the value chain to maximize consumer immediacy

► Re-evaluate approach to risk

Profit or lose

Challenges Imperatives ► Enduring volatility, uncertainty,

complexity and ambiguity ► Continued volume declines and

overcapacity despite fragile recovery in mature markets

► Diverse emerging markets now have a significant impact on both top and bottom lines

Costs are hard to control


What’s happened to margins over the last decade?

Profit or lose

Despite cost saving efforts, CP margins have stagnated over the past decade

19.2% 18.2% 18.6% 18.6% 18.1% 18.3% 18.9% 19.3% 19.1% 19.2%

0%

5%

10%

15%

20%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Capital IQ. Chart shows weighted EBITDA margin performance of the top 50 CP (food, beverage, HPC and tobacco) companies as ranked by revenues in 2013; EY Margin Unlocked Survey, 2013.

Operating margin performance of the top 50 CP companies over 10 years

75% say that it has become harder to sustain or grow operating margins

Significant cost pressure is likely to continue

Primary commodity prices: 1993-2013 Index, 2005 = 100

Profit or lose

Source: IMF

0

50

100

150

200

250

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Food/beverage +90%

Metal +193%

Fuel +242%

“We need to adapt to a new reality where demand on commodities will increase in emerging markets but at the same time their availability will decrease.” – CP CFO

How much water do you consume each day? Resource scarcity is seen as the #1 risk

► 1 kilo of rice = 3,500 litres ► 1 kilo of beef = 15,000 litres ► By 2030, food demand will rise by

50% (70% by 2050) ► ~ 30% of food is lost or wasted ► 25% of world food production may

become “lost” in the 21st century

We drink 2-4 liters per day but it takes 2,000 to 5,000 liters to produce our daily food.

Profit or lose

Source: Disrupt or be disrupted, EY survey, 2012

But have companies really done all they can to boost the bottom line?

Profit or lose

20%22%24%26%28%30%32%34%36%38%40%

Global brewer

Premium spiritsplayer

Standardized EBITDA margin FY2003-12

Source: Capital IQ: Disrupt or be Disrupted, EY survey, 2012

74% say they need to make a significant change to maintain margins


► Drive operational efficiency with an integrated approach that puts margin at the core of the op. model

► Analyze the true drivers of margin across the value chain

► Simplify organization, processes, suppliers and SKUs

► Tackle infrastructure and mature market operating model sacred cows

Profit or lose

Challenges Imperatives ► Impact of negative volumes on

fixed costs in mature markets ► Escalating but volatile input and

energy costs ► Volatile currencies ► Increasing cost of compliance

and regulation ► Rising cost of talent

Consumer behaviour

is changing


Which businesses risk disintermediation in the digital age?

Profit or lose

Technology and demographic changes

… are impacting consumer expectations …

… compelling enterprises to adapt

Greater transparency

Choice and control

Improved and personalized experiences

24/7 access

Advocacy and social sharing

Anywhere, anytime

Social

Big data

Mobile and

digital

Innovation New business models Content creation Omnichannel

What does this mean for the future of shopping?

Profit or lose

Reports of the death of the store are premature

Profit or lose

of revenues are via bricks and mortar stores today

93% In five years

80%

Percentage of global sales (US$) generated from bricks and mortar stores Source : EY Omni-channel supply chain survey preliminary results

Omni-channel is where the growth is

Profit or lose

World USA China UK Germany Nigeria

5% 3%

11%

2% 2%

16%

29% 29%

14% 16% 16%

2013-2018 retail sales by channel CAGR %

7%

Store-based

Internet

Source: Euromonitor

Logistics rather than location is the new differentiator

► DHL becoming a pharmacy supplier ► UK grocers opening click-and-collect

facilities at Underground stations ► Asos offers 15-minute delivery slots

and real-time delivery tracking ► Google testing same-day delivery

► Amazon testing unmanned drones to deliver within half-hour.

► Amazon’s ‘anticipatory shipping’ system will predict items customers will want, delivering to local hubs, where they can be quickly dispatched once ordered.

► Amazon’s “vendor flex” initiative ships orders directly to the customer from supplier’s warehouses.

Profit or lose

The traditional advantage in retail was location – the ability to place goods on the consumer’s journey. The new frontier is the know-how to bring goods to people – as quickly and conveniently as possible.

Although omni-channel is expected to increase sales, it risks being a drag on corporate profits

Key benefits of operating an omni-channel strategy

Source : EY Omni-channel supply chain survey preliminary results

Chart shows % of respondents citing

Few companies are making money

Increased sales Increased profit

78 37

36% 29%

35%

Impact on margins of respondents’ omni-channel* initiatives

*Excludes store sales

Accretive

Neutral

Dilutive

To succeed companies must improve their execution against three key enablers

Omni-channel is embedded in the overall company strategy

Having a responsive combined omni and traditional supply chain infrastructure

IT Systems and capabilities to enable seamless visibility and fulfilment to end consumers

Top 3 enablers of a successful omni-channel supply chain strategy

Shows percentage of respondents rating their performance as effective

C.

B.

A.

30%

33%

25% 0 100 50 25 75

Source : EY Omni-channel supply chain survey preliminary results


► Consumer power is shifting CP from B2C to C2B

► Hard for companies to keep up with rapid pace of change

► Difficulty in measuring the cost and effectiveness of consumer engagement

► Transparency a must

► Adopt and deliver consumer-centric omnichannel strategy

► Build step change in “big data” capabilities

► Develop a new innovation playbook and ecosystem of entrepreneurial partners

► Demonstrate positive impact on society

Profit or lose

Challenges Imperatives

Profit or lose

It is important not to underestimate how hard it is to turn what is an enormous opportunity into profitable growth. You need to be very, very focused about where you’re investing and what you expect from those investments and monitor in real detail the execution of steps that are required in order to deliver that.”

A leading consumer products company, 2013

“

Questions, comments, concerns?

► Do you have a suitable governance structure to enable local markets whilst protecting the global business?

► Is your decision-making fast enough to take advantage of market change?

► Are you leveraging market similarities, rather than just allowing for differences?

► Do you have the right metrics in place to track and measure execution performance, and are they sufficiently granular?

Profit or lose

Thank you Thank you

Appendix 1: Single frame summary

Profit or Lose

Who can take advantage of disruptive change? G

row

th is

ch

alle

ngin

g

Con

sum

er

beha

viou

r is

ch

angi

ng

Cos

ts a

re

hard

to

cont

rol

Internal cost structures challenged by market changes

Challenges Drivers

External cost pressures growing

► Excess capacity in mature markets ► Impact of omnichannel on supply chain ► Impact of digital on SG&A

Imperatives

► Rising & volatile input costs ► Increasing cost of compliance

& regulation ► Rising cost of talent

Large but challenging opportunities in emerging markets

Limited volume growth in mature markets

► Diverse, volatile markets ► Undeveloped categories ► Intense competition

► Value seeking consumers ► Polarizing preferences ► Populations demographics

Increasingly complex routes to market

Digital is shifting control to the consumer

► Consumers utilizing multiple channels with limited loyalty

► Direct to consumer ► Increasing retailer pressure

► Rapid pace of technology change ► Declining traditional marketing effectiveness ► Transparency is compulsory

► Transforming operating model for agility & efficiency

► Flexing governance, product portfolio and supply chain to the needs of individual markets

► Establishing ubiquity and consistency across channels & touch points

► Simplifying organization, processes, suppliers & SKU’s

► Innovating to remain relevant to the consumer

► Focusing market spend & optimising brand/product portfolio

Appendix 2: State of play

Profit or Lose

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

Food Beverage HPC Tobacco

Companies continue to optimise portfolios in search of volume growth

Best –in–Class Nestlé

Henkel BAT

Heineken, SABM

Worst BRF Avon

JT

Remy Cointreau

PMI

Underlying volume growth Q2 2014

ABI, Brown Forman, PepsiCo (total)

Diageo*

Kimberly Clark

Avon

JT*

Danone

Carlsberg, Pernod Ricard*

Unilever

Note: Rankings subject to availability of data Remy Cointreau - volumes growth for the Cognac segments only; Diageo- full year volumes growth; Pernod Ricard - full year volumes growth for top 14 brands only, Heineken- half year volumes growth; JT- calculated from volume growth per JTI and JT, BAT- half year, based on sum of revenue changes from cigarette volume changes per region; L'Oreal-1H 14 figures, refers to Cosmetics Divisions only Source: Company data and EY analysis

Best-in-class

Others

Worst

Kellogg

General Mills

Kraft Foods

Henkel Nestlé

BRF

Unilever Coca-Cola

Heineken*, SABMiller

Mondelēz

BAT*

Remy Cointreau*

P&G

L’Oreal*

Colgate

-13

-8

-3

2

7

12

17

Food Beverage HPC Tobacco

Best –in–Class BRF

Avon, Unilever JT

Carlsberg

Worst Kraft Foods Henkel

BAT

Pernod Ricard

PMI

ABI

Kimberly Clark, P&G

JT*

Best-in-class

Others

Worst

Pernod Ricard* Henkel

Colgate

Avon, Unilever

Heineken*

Kraft Foods

BRF

Mondelēz

Unilever

Danone

General Mills, Kellogg

How sustainable is higher pricing?

Underlying growth from price-mix Q2 2014

Nestle

Carlsberg

Diageo*

Note: Rankings subject to availability of data Remy Cointreau- price-mix growth for Cognac segment only, Pernod Ricard- full year price-mix for top 14 brands only, Heineken- half year price-mix growth, Diageo- full year price-mix growth, BAT- half year price-mix growth, JT- calculated from price growth per JTI and JT; L'Oreal-1H 14 data, refers to Cosmetics Divisions only Source: Company data and EY analysis

Pepsi (total), SABMiller

Brown Forman,Coca-Cola BAT*

Remy Cointreau*

L’Oreal

Pricing gains undermined by FX led cost pressures and commodities

Gross margin Q2 2014

05

101520253035404550556065707580

Food Beverage HPC Tobacco Other

Kellogg

Coca-Cola

Carlsberg

L’Oreal*

P&G

Kimberly Clark

Best-in-class

Others

Worst

Mondelēz

Unilever*

ABI

General Mills Heineken*

Henkel (total)

Best –in–Class

Worst

Kraft Foods

J&J (Consumer)

PMI

BAT

Nestlé L’Oreal BAT

Brown Forman

Tyson Foods Kimberly Clark

PMI

Heineken

Adidas

Note: Unilever (food) - half-year margin ; Danone- half-year margin; Nestlé - half-year margin; Heineken- half year margin; Diageo- full year margin, based on operating profit before exceptional items; Pernod Ricard - full year margin, based on gross margin after logistics costs; Unilever (HPC)- half-year margin; L'Oréal- half year margin Source: Company data and EY analysis

Nike

BRF

Adidas

Nike

JBS

Nestlé* PepsiCo (total)

Pernod Ricard*

Diageo*

Brown Forman

Tyson Foods

Danone*

Ajinomoto

Avon

Colgate (total)

Unilever (total)*

Cost management still a priority as companies seek to meet investor expectations

Operating margin Q2 2014

0

5

10

15

20

25

30

35

40

45

Food Beverage HPC Tobacco Other

Kellogg

Coca-Cola

Carlsberg

Colgate

P&G Kimberly Clark

LVMH

JT*

Best-in-class

Others

Worst

Danone*, Mondelēz

Unilever

Avon

ABI

General Mills Heineken* Henkel

Best –in–Class

Worst

Kraft Foods J&J (Consumer)

PMI

BAT*

Kraft Foods Colgate PMI

ABI

JBS Avon

JT

Heineken

LVMH

Note: Danone- half-year margin; Unilever (food)- half-year margins, core operating margin (adjusted) for Unilever Food; Nestlé - half-year margin; Kraft Foods- 2Q13 operating margin excludes a $604m benefit from market-based impacts to post-employment; Heineken – half year margin; Pernod Ricard- full year margin, based on profit from recurring operations; Diageo- full year margin; JT- Japanese domestic & International tobacco as reported (International = prior quarter); BAT- half year margin; Unilever (HPC)-half year margin; L'Oréal- half-year margin Source: Company data and EY analysis

Adidas

BRF

Adidas

Nike

JBS

Nestlé PepsiCo (total)

Pernod Ricard*

Diageo* Brown Forman

Tyson Foods

Ajinomoto

Unilever*

L’Oreal*

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