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www.simon-kucher.com
Developments, Challenges and the Outlook for 2016
Pricing 2015
London, November 2015
James Brown
London office3rd Floor, 1 Plough PlaceLondon EC4A 1DE, UKjames.brown@simon-kucher.com
James Brown_Exceedra_2015 2016
Today’s session
▹ Pricing in 2015 – context & experience
▹ Outlook for 2016 – common themes
2
Source: Simon-Kucher
To start with.. Three questions
1. Have you recently experienced higher price pressure?
2. Do you feel able to raise your prices?
3. Do your new products hit their profit targets?
James Brown_Exceedra_2015 2016 3
*Multiple responses possibleSource: Global Pricing Study 2014; + Simon-Kucher experience & audience feedback
Price pressure:Downward pressure on prices at unprecedented levels
Have you experienced higher price pressure in the last two years?
Why?Top 3 reasons*
Low price competition/
new attackers
Greater customer negotiation power
Increased price transparency
James Brown_Exceedra_2015 2016
Yes, 83%
No, 17%
52%
39%
36%
Consumer Goods 2015?+
4
We did – accidentally
5%7%
We did – on purpose
Who started the price war?
88%
Source: Simon-Kucher & Partners Global Pricing Study 2014
58%
Is your company currently engaged in a price war?
19%No – there is a
price war, but we
are not involved
23%No – there is no
price war
James Brown_Exceedra_2015 2016
Price pressure: Majority of companies are engaged in a price war
5
Excluded: Respondents who were unable to track their price realisation or who lowered their pricesSource: Global Pricing Study 2014
Low pricing power:Companies want to raise prices, but most struggle
James Brown_Exceedra_2015 2016
Average realisation rate for price increases (vs. plan)
50%
37%
2012 2014
Companies typically
achieve only 37%of price increase they were seeking.
That is the lowest realisation rate we have ever measured in our Global Pricing Studies.
6
James Brown_Exceedra_2015 2016
And if we ask Consumer Goods companies at the end of 2015?
Average realisation rate for price increases (vs. plan)
50%
37%
2012 2014 2015
?
� Planned increases have been at a record low
� Achieved increases, reported as being negligible in many categories
� Success being defined as “price declining less than category average”
7
James Brown_Exceedra_2015 2016
Aggressively competitive
environment
Price transparency &channel convergence
Macro-economic environment
8
James Brown_Exceedra_2015 2016
Source: www.inflation.eu
Across the EU we felt the impact of a zero inflation environment…
EU Inflation Rate
-1
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
2010 2011 2012 2013 2014 2015
9
James Brown_Exceedra_2015 2016
ONS
… But inflation isn’t uniform and (especially in the UK) we see consumer goods dragging this down…
GOODS (-1.6)
SERVICES (+1.7)
OVERALL(-0.3)
10
James Brown_Exceedra_2015 2016
Source: Nielsen 16th November 2015
…whilst at a European level prices AND volumes have been increasing there are exceptions
Volume up 1.3%
Price up 1.7%
Value growth 3%
Year On Year change across 21 European countries3%
3%
2.30%
2%
1.10%
-0.30%
Nominal growth Year on Year 2015 Q3 v 2014
11
James Brown_Exceedra_2015 2016
Source: Nielsen 16th November 2015
…whilst at a European level prices AND volumes have been increasing there are exceptions
Volume up 1.3%
Price up 1.7%
Value growth 3%
Year On Year change across 21 European countries3%
3%
2.30%
2%
1.10%
-0.30%
Nominal growth Year on Year 2015 Q3 v 2014
12
PRICE WAR!
What Ignites Price Wars?
James Brown_Exceedra_2015 2016
Excess capacities
Unexpected cost reduction
Commoditisation of product
Low market growth
Industry structure
New entrants
Disruptive technology
Irrational behaviour
….
14
53.7%
33.9%
21.4%19.3%
14.3%
58.4%
32.2%
19.6% 20.6%
8.6%
0%
10%
20%
30%
40%
50%
60%
70%
UK Italy Spain France Germany
Food Non-food
*Sources: Symphony IRI; “Pricing and Promotion in Western Economies: Special report October 2015
The price war is fought on base and promo:These can’t be delinked, especially true in the UK market
Average 28.6%
James Brown_Exceedra_2015 2016
Volume % sold on promotion
15
James Brown_Exceedra_2015 2016
Pressure on suppliers has increased
� In many cases Consumer Goods suppliers are stuck in a retailer lead price war
� Whether driven by fear of discounters in UK’s FMCG market, or the international transparency of Amazon
� Retailers use price war and price deflation to hold down prices and re-enforce negotiation
� The threat of de-listing used to push requirements for “simplified” pricing structures (folding)
� Increasingly buyers look to control average price– limiting room for suppliers to control base and promo price structures
16
James Brown_Exceedra_2015 2016
Looking at the year ahead – focus areas for 2016
� Pressure on international harmonisation
� Pricing for NPD to improve hit rates
� Continued price wars and growth of the discounters (UK)
� Pricing in a low (no) inflation environment
� Growth of analytics and revenue management organisations
Focus tailored to UK FMCG audience
17
James Brown_Exceedra_2015 2016
Looking at the year ahead – focus areas for 2016
� Pressure on international harmonisation
� Pricing for NPD to improve hit rates
� Continued price wars and growth of the discounters (UK)
� Pricing in a low (no) inflation environment
� Growth of analytics and revenue management organisations
18
James Brown_Exceedra_2015 2016
Looking internationally, pressure to harmonise pricing continues to grow
� Longstanding problem for durables
� Consumer electronics probably best positioned on this
� 2015’s dramatic shifts in exchange rates
� Some other sectors heavily exposed
� Goal: maintain justifiable differentiation
� Requires clear migration strategy, implementation of defensible terms structure, strong key account management and product / value differentiation management
€0
€200
€400
€600
€800
€1,000
€1,200
€1,400
19
James Brown_Exceedra_2015 2016
Looking at the year ahead – focus areas for 2016
� Pressure on international harmonisation
� Pricing for NPD to improve hit rates
� Continued price wars and growth of the discounters (UK)
� Pricing in a low (no) inflation environment
� Growth of analytics and revenue management organisations
20
Source: Global Pricing Study 2014; Kantar press release November 2015
NPD will remain a focus - and in many cases won’t deliver the expected outcomes!
On average only 28% of new products meet their profit targets
One-fourth of all respondents confirmed that not a single one of their new products met profit expectations
Are your new products meeting their profit targets?
James Brown_Exceedra_2015 2016
No, 72%
Yes, 28%
Food for thoughtKantar monitor 30k NP launches per year
- Significant portion cut within 12 weeks
- 16% will reach sales > £1m,- just 3% will achieve >£5m.
21
* Less than five years oldSource: Global Pricing Study 2014
Pricing and promo considered far too late in the NPD process
The share of successful product launches
doubles when a company takes pricing into account continually rather than neglecting or ignoring them until the launch
James Brown_Exceedra_2015 2016
20%
40%
Pricing considered only at time oflaunch
Pricing considered throughout thedevelopment process
Share of new products* that meet profit targets
Target price architecture and promo price points considered too late in the CG NPD process
22
James Brown_Exceedra_2015 2016
Looking at the year ahead – focus areas for 2016
� Pressure on international harmonisation
� Pricing for NPD to improve hit rates
� Continued price wars and growth of the discounters (UK)
� Pricing in a low (no) inflation environment
� Growth of analytics and revenue management organisations
23
James Brown_Exceedra_2015 2016
“The UK marketplace is changing
faster than at any time in the past 30
years”
Mike CoupeCEO Sainsbury’s
24
James Brown_Exceedra_2015 2016 25
James Brown_Exceedra_2015 2016
Aldi and Lidl are clearly perceived as delivering low, low prices….
Thinking about everyday shopping, which supermarket would you say is likely to be the cheapest?
0 5 10 15 20 25 30 35
Aldi
Lidl
Asda
Tesco
Morrisons
Sainsbury's
Waitrose
Percentage
Simon-Kucher & Partners, survey of 2086 consumers; split sample, May 2015, weighted to reflect average online demographic
26
James Brown_Exceedra_2015 2016
Simon-Kucher & Partners, survey of 2086 consumers; split sample, May 2015, weighted to reflect average online demographic
… But Price ≠ Value...
Thinking about everyday shopping - bearing in mind quality, availability and service -which supermarket would you say offers best value for money?
0 5 10 15 20 25
Waitrose
Morrisons
Sainsbury's
Lidl
Tesco
Asda
Aldi
Percentage
27
James Brown_Exceedra_2015 2016
“They try and fight us on
price but they won’t win,
because they define our
margin. And we will be 15% cheaper”
Matthew BarnesCEO Aldi UK &
Ireland
28
James Brown_Exceedra_2015 2016
Source: Kantar Worldpanel
Supermarket market shares have been relatively stable over the last decade…
Supermarket sales share by value
Tesco Asda Sainsbury’s Morrisons
Aldi & Lidl Co-operative Waitrose
0%
5%
10%
15%
20%
25%
30%
35%
01-Jan-94 01-Jan-98 01-Jan-02 01-Jan-06 01-Jan-10 01-Jan-14
29
James Brown_Exceedra_2015 2016
Source: Kantar Worldpanel; Simon-Kucher analysis
…but the combined discounter position is expected to grow dramatically over the next 5 years
Supermarket sales share by value
Tesco Asda Sainsbury’s Morrisons
Aldi & Lidl Co-operative Waitrose
0%
5%
10%
15%
20%
25%
30%
35%
01-Jan-94 01-Jan-98 01-Jan-02 01-Jan-06 01-Jan-10 01-Jan-14
0%
5%
10%
15%
20%
25%
01
/04
/20
10
01
/10
/20
10
01
/04
/20
11
01
/10
/20
11
01
/04
/20
12
01
/10
/20
12
01
/04
/20
13
01
/10
/20
13
01
/04
/20
14
01
/10
/20
14
01
/04
/20
15
01
/10
/20
15
01
/04
/20
16
01
/10
/20
16
01
/04
/20
17
01
/10
/20
17
01
/04
/20
18
01
/10
/20
18
01
/04
/20
19
01
/10
/20
19
01
/04
/20
20
2010 2015 2020
Outlook for the next 5 years?
30
James Brown_Exceedra_2015 2016
Beaten by a simple business model?
Up to 90,000 product lines
Full range of quality points covered
Cutting edge marketing and customer insight
Leading loyalty schemes
Sophisticated promotions
Variable pricing
….
1,000 to 3,000 product lines
“Good enough” quality
(Relatively) stable pricing
Low pricing
….
31
James Brown_Exceedra_2015 2016
Our advice to grocery suppliers – 5 things you can do
Quantify your position: brand premium, gap closure impacts, loss and potential gain1
Agree strategy for discounters at C-Level: and communicate across the organisation. This can’t be dealt with at account manager level, or on a one-off basis2
Revisit pack , price and promo architecture across your portfolio: is it fit for purpose today and for the mid term? Where is the route to value – via volume or price?3
Defend your position with established retailers: don’t cede your margin simply to allow them to fight a price war between themselves4
Ensure commercial policy to discounters vs. traditional retail is defensible:discounters buy high volumes of single SKUs, but “super” deals antagonise key customers5
32
James Brown_Exceedra_2015 2016
Looking at the year ahead – focus areas for 2016
� Pressure on international harmonisation
� Pricing for NPD to improve hit rates
� Continued price wars and growth of the discounters (UK)
� Pricing in a low (no) inflation environment
� Growth of analytics and revenue management organisations
33
James Brown_Exceedra_2015 2016
In a low (or no) inflation environment we need to go back to basics on the price & promotion…
� Simple annual price increase process under threat - focus shifts to price decrease defence
� Value growth and margin management through focus on average price
− Strategies to de-escalate promotions being re-thought
− Increasing focus on promotional analytics with aim to:
� Reduce promotional frequency & depth
� Improve targeting of promotion
� In many categories, focus on developing base price with promotional price points and mechanics in mind
− Establish existence of key thresholds in today’s environment
− Target distance from promotional price points
− Pack size engineering is a key weapon but needs to be used sparingly
34
James Brown_Exceedra_2015 2016
…And accept that selling changes to retail partners is going to be tougher
� Changes will be tough to sell to trade unless they clearly drive category value growth OR defend against value erosion
� Price and promo plans will still need to be sold as a package to avoid retailer cherry-picking
� Retailers are under pressure to improve the sophistication of their own pricing – and increasingly enabled by technology to run optimisations even when strategies have not been set
� 2016 will be a challenging year to rebalance trade terms with limited room for price growth, and increased pressure to fold terms into price
� We can expect demands for increasingly high burdens of proof for changing price & promo plans – backed with analytics and robust market insight
35
James Brown_Exceedra_2015 2016
Summary: Expected focus areas for CG Pricing in 2016
� Back to basics for many consumer goods players:
− Re-linking of price strategy to brand strategy
− Re-establishing price architecture flattened or badly damaged by excessive promo/value range intro
− Earlier incorporation of pricing into NPD
− Setting out clear channel strategies – especially around growing Discounters in UK
� Managing the complexity of introducing simplicity!
− Dealing with increased price transparency & international harmonisation
− Growing personalisation of promos and offers
− Accelerated cadence – more price change more often in the retail environment
� Growth of professional Revenue Management Function
− with a focus on interlinked price & promo strategies
36
www.simon-kucher.com
About Simon-Kucher
Source: Simon-Kucher & Partners; manager magazin, August 2011/IMB, survey among German top managers
We are pricing experts: Simon-Kucher & Partners at a glance
World leader in giving
advice to companies on how
to price their products
Pricing strategy
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The world’s leading
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In pricing you offer
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� Growth and competitive strategies
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World leader in pricing
Global presence >3,200 projects in the last 3 years
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2 Boston Consulting Group
3 McKinsey & Company
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Marketing and sales
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Marketing and pricing Sales and CRM
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Source: manager magazin survey of top managers in Germany, August 2007 and 2011/IMB
Source: brand eins Thema/Statista survey of 1,426 partners and project leaders from consulting firms and 1,300 C-level managers from German companies, May 2014
Best consultancy in marketing and sales
Atlanta
James Brown_Exceedra_2015 2016 38
We work side by side with industry leaders across all sectors
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James Brown_Exceedra_2015 2016 39
Source: Simon-Kucher; * Selection due to client confidentiality
Our Global Consumer & Retail Practice has extensive experience across all sub-sectors
Fashion, Apparel & Luxury
Consumer Durables
Food & Beverage FMCG
Non-Food FMCG Retailers
� Michelin
� Nikon
� Nokia
� Olympus
� Tesa
� Texas Instruments
� Warner Music Group
� Xbox Live
� Avon
� Coty
� Dr. Scheller Cosmetics
� Johnson & Johnson
� Kimberly Clark
� NeoStrata
� Nivea
� Procter & Gamble
� Reckitt Benckiser
� Schwarzkopf & Henkel
� Shiseido
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� Delhaize
� Deli XL
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� Ferrero
� Haribo
� Molson Coors
� PepsiCo
� Pernod Ricard
� Unilever
� Weetabix
Selection*
James Brown_Exceedra_2015 2016 40
Pillars of Pricing Excellence for FMCG companies all centers around optimally executing your brand strategy
Source: Simon-Kucher
Portfolio Architecture:� Clearly defined portfolio roles for brands
� Needs-based target consumer segments
� Value-based pack-price architecture
� White space innovation planning
� Distribution and SKU prioritization
Commercial Policy:
� Performance-based and defendable commercial terms and conditions
Trade Promotion:
� Retailer-specific promotion planning and guidelines (depth, frequency, vehicle, promotional product mix)
Consumer Pricing:� Price-value positioning, based on relative
competitive advantages and disadvantages
� Alignment with key price thresholds
Brand Strategy
� Purposeful discount curve
� New product pricing and launch
� Shopper-driven channel strategy
� Harmonized list and triple net prices
� Established importance and role of trade promotion
� Tools and analytics
� Organization and processes
� Performance tracking and reporting
� Capabilities and skill developmentInfrastructure
James Brown_Exceedra_2015 201641
Source: Simon-Kucher; *ROS = Return on Sales impact seen on average across >500 projects
Capturing these common missed opportunities (growth or loss avoidance) could translate into 2-5% ROS* impact
Portfolio Architecture:
� New skus (sub-brand, pack size, variant, format) mostly cannibalize existing portfolio vs. capturing incremental consumer segments or occasions
Commercial Policy:Trade Promotion:
Consumer Pricing:
� Misaligned value-price positioning for innovations due to cost-plus approach
2-5% ROS*
� Profit leakage through over-discounting
� Over-invest in price discounting (trade and coupon) due to heavy focus on event ROI vs. accounting for cross-portfolio, cross-channel and cross-time effects
� Uniform price cuts that trigger price wars vs. surgical price adjustments
� Price, margin erosion by enabling disruptive retailers to price aggressively via trade terms
Infrastructure� Lack of C-level commitment to drive changes through execution� Underdeveloped Revenue Management organisation� Lack of systematic processes for pricing analytics
James Brown_Exceedra_2015 201642
Source: Simon-Kucher
Your UK contacts at Simon-Kucher
James Brown
Partner, London
phone: +44 (0)207 832 6700
e-mail: james.brown@simon-kucher.com
James Brown is a Partner with Simon-Kucher
& Partners in London and has 11 years
experience in industry roles prior to joining
Simon-Kucher.
He leads the Consumer Goods practice in the
UK, and his work at Simon-Kucher has
covered UK and international clients, including
leading FMCG companies and a number of
Private Equity firms where he works across
their portfolios.
He specialises in commercial strategy, with a
particular focus on pricing in the Retail &
Consumer Goods and B2B services sectors.
Prior to joining Simon-Kucher, James was
Head of International Pricing at Hertz Europe.
Before this he held the role of Senior Pricing
Manager in the global services division of
Ricoh, a leading IT hardware and services
provider.
David Smith
Senior Director, London
phone: +44 (0)207 832 6700
e-mail: david.smith@simon-kucher.com
David is a Senior Director at Simon-Kucher &
Partners in the London office.
Since joining Simon-Kucher & Partners in
2007, David has worked for both the London
and San Francisco offices, and has conducted
projects across the UK, Europe and the USA.
David has a wide range of experience in
marketing and strategy, having worked with
clients in various sectors, predominantly with a
B2C focus including leading retailers and
FMCG producers. .
David is a regular conference speaker on
topics including customer loyalty and pricing
strategy.
Ivan Šegrt
Director, London
phone: +44 (0)207 832 6700
e-mail: ivan.segrt@simon-kucher.com
Ivan is a Director at Simon-Kucher & Partners
in the London office.
His areas of specialisation are promotional
effectiveness, price modelling and structured
pricing / trade terms in consumer goods and
retail sectors in particular.
Ivan joined Simon-Kucher with seven years of
industry experience. He worked for Anheuser
Busch - InBev, where in addition to Sales and
Category Management he worked as a
Pricing Manager for On-Trade covering UK &
Ireland.
He subsequently joined Dunnhumby
(subsidiary of Tesco) as a Senior Price and
Promotion Lead where he led a team of
experts assessing promotional effectiveness
and working on projects with leading FMCG
companies.
James Brown_Exceedra_2015 2016 43
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