Dynamic Margin Management
By Rich Nanda, Deloitte Consulting
Most consumer goods executives confirm that the rapid onset of commodity inflation, combined with a fragile consumer, resulted in intense margin pressures. Executives also agree that offsetting inflationary pressures via list price increases has become an increasingly risky proposition. This makes post-recession margin management a daunting undertaking due to:
- A rapid and unexpected onset of commodity inflation
- Tepid and increasingly price-sensitive consumers
- Cautious and increasingly sophisticated retailers looking to protect fragile margins
- Aggressive and irrational competitors seeking share at any cost
Despite these pressures, protecting and growing margins is possible using a differentiated approach to margin management.
1. Manage Margins Holistically
- Price: The path to profit needn’t only be a list price increase. For years, marketers mitigated inflation by decreasing pack sizes but maintaining shelf prices. Leaders now combine pack-size changes with innovation in areas like convenience, sustainability and cause-based marketing. Others are introducing sizes at new price points in alternate channels to further segment the market. These strategies offset input cost increases with higher per unit pricing.
- Discounts and Promotions: Sales can play a significant role in managing cost pressures. Leading manufacturers drive more efficiency in trade spend (Hi-Lo and EDLP), and more closely monitor commercial terms to reduce leakage in areas such as bracket pricing and other discounts.
- Costs: Supply chain and manufacturing play central roles in managing input costs through financial and operational hedges and recipe reformulations.
2. Empower the Entire Organization
- Managing increasingly volatile commodity markets requires synchronized pricing and margin management actions from sales, marketing and operations. Leaders can combine commodity manager insights into traditional marketing and sales promotional plans to truly integrate a commercial planning process.
- Dynamic modeling, planning and forecasting need to be the basis by which pricing decisions are informed. One-time or annual reviews are insufficient in a world where inflation patterns ebb and flow dramatically through the year.
- Manufacturers should incorporate retailer and supplier perspectives into their strategic plans. Win-win margin improvement opportunities are abundant with the right commitment to strategic collaboration and joint business planning.
3. Use a Brand-by-Brand Differentiated Strategy
- For a few fortunate brands, absolute list price increases are the answer. Marketers with dominant brands in growing categories, with little consumer price sensitivity, can afford to forge ahead with list price increases.
- For most brands, however, categories have low-to-modest growth and intense competition. Marketers must deploy multiple unique strategies for each brand. The strategies should be founded in nuanced evaluation of the available tactics versus the category landscape, the company’s capabilities and strategic and financial objectives.
Consumer goods executives widely agree that the stakes are high. Margin pressures will continue as input costs approach double-digit inflation and consumer demand remains soft. Getting it right will generate profitable growth, create win-win benefits with retail, and put in place sustaining capabilities that pay dividends into the future.