emerging markets

Our thanks to the 276 C-suite and senior executives who participated in the study, and in particular to those who shared their insights and personal experience in a series of in-depth interviews:

Edgar Ho CFO, Greater China, adidas Group

Masayoshi Kurosaki General Manager, Overseas Foods & Seasonings Department, Food Products Division, Ajinomoto

Naoki Izumiya

ASAHI GROUP HOLDINGS LTD.

Godfrey Nthunzi CFO, Colgate Palmolive India

Pierre-André Terisse CFO, Danone

Yves Pellegrino Corporate Finance Director, Danone

Anna Manz Global Strategy Director, Diageo

Dr. Daniel Thorniley President, DT-Global Business Consulting

David Steer Managing Director, East.West.SBS Limited, Former President of Kraft Foods Russia

Tarun Khanna Director, South Asia Institute, Harvard University, Jorge Paulo Lemann Professor, Harvard Business School

Vicky Santini Head of Asian Research, IGD

Motoki Ozaki Chairman of the Board, Kao

Senji Miyake President and CEO, Kirin Holdings

Rahul Goyal CFO, Molson Coors Cobra India

Swee Leng Ng Group CFO GroupM China and former CFO of Kraft Foods, China

José Lopez Executive Vice President, Operations GLOBE, Nestlé

Paul Janelle President Director of PT HM Sampoerna Tbk. (Sampoerna)

Tapan Buch CFO India, Procter & Gamble

Jim McCallum CEO of Robinsons and Head of Asia at Al Futtaim Dubai Group

Yoshihiro Iwata Director of Business Strategy Department, Sapporo International

Henry Park

Navi Radjou Fellow at Judge Business School, University of Cambridge

Special thanks toInstitute of Emerging Market Studies (IEMS) at Skolkovo Business School

Seung Ho Park, President, IEMS Gerardo R. Ungson, Senior Research Fellow, IEMS Nan Zhou, Research Fellow, IEMS

1

Foreword 2

Key takeaways 4

The center of gravity has shifted 8

Resolving the contradictions of emerging Asia 12

What do companies need to do to deliver

Empower local leadership to be agile but ensure they are accountable 18

Disrupt traditional approaches for local relevance 22

Create scale by placing bets across categories, price tiers and channels 30

Cluster for synergies based on common characteristics, not just geography 38

Flex the approach as the market develops 42

Create a culture that mandates disciplined execution 46

In this report

In Disrupt or be disrupted1 we suggested that companies must reinvent themselves or they would be disrupted by increasing change and complexity. One of the key drivers is the rising importance of emerging markets. The center of gravity for consumer products has shifted to Asia.

Almost every major consumer products and retail company has already taken

However, we believe that the role of these markets has changed and that

were comfortable with focusing their efforts on driving revenue growth and

Consumer expectations are diverse and changing, competition is intense,

costs, such as labor, are high and rising even further. Overcoming these challenges requires companies to walk a tightrope between a series of apparent

opportunities.

Kristina Rogers Global Consumer Products Emerging Markets Leader kristina.rogers@tr.ey.com

Foreword

1. Disrupt or be disrupted: creating value in the consumer products brand new order, EY, www.ey.com/brandneworder, 2012.

Welcome to , the second in a series of our Brand new order publications, which explore how consumer products and retail companies are addressing

2

Resolving these contradictions is not easy, but it will be essential if companies

a set of eight business imperatives that we believe companies need to implement in order to resolve the contradictions of business in emerging Asia

To help us understand how consumer products companies are managing in emerging Asia, earlier this year we commissioned a survey of more than

products and retail sectors. We also spoke to CEOs, CFOs and other top

with operations in emerging Asia. We are very grateful for the time and valuable insights that these individuals provided.

Kristina Rogers

3

Key takeaways

Emerging markets have

It is no longer enough for consumer products and retail companies to focus on growing revenues and capturing market share in emerging markets. As growth decelerates, these markets must also become

emerging middle class makes it the number one

growth for consumer

By 2017 emerging Asia will account for one-quarter of the global consumer products market and generate 38% of total consumer products growth.

By 2017 emerging Asia will account for one-quarter of the global consumer products market and generate 38% of total consumer products growth.

38%69%believe that emerging markets will be the

4

The global vs. local question has long been debated; we believe that the volatility and

demands an increasing level of autonomy at the local level. This is supported by our research, which found that high performers tend to give local managers greater decision rights across all aspects of the business. However, companies must be disciplined and not permit complexity that destroys value. For this reason, local managers should be accountable for ensuring that decisions are consistent within the overall framework of

requires multinationals to shake off traditional mature-market mindsets and operating models. Simply replicating these in Asian emerging markets is no longer

of market needs as well as consumer and channel expectations. Instead, we believe that companies should disrupt their own offerings and operating models and rebuild themselves around what is needed to be locally relevant.

Markets, channels and consumer segments are at very different stages of development across Asia. Our view is that sustaining

emphasis from a homogenous market share/growth mentality to understanding the real drivers of both growth and

this end, leading companies are using

technology to build supply chain visibility and are investing in data analytics capabilities.

Traditional scaling approaches are increasingly challenged in emerging markets due to higher than expected levels of competition and consumer variance. We believe that companies should instead create scale by adopting a portfolio approach across multiple

segments. This approach should include balancing investments between those

are longer-term bets. High performers are more likely to participate in multiple

channels than low performers, as

the path to growth, but it has a cost.

over providing value for consumers. Our view is that companies should expect and plan for the complexity, demand

characteristics of emerging markets by designing supply chains that have the

adapt quickly.

Of our respondents, 71% of

high performers believe that they need

to manage markets as a cluster in order

companies should transcend geographical lines and instead cluster opportunities (cities, channels, consumer segments,

common characteristics, leveraging best practices across the cluster.

Operating and business models that were appropriate for one stage of development can quickly become obsolete. Our view is that the fast pace of change means that companies should

as the local market develops, such as by moving from a reliance on third-party distribution partners to building the capability in-house.

Talent and execution have always been differentiators, but the new importance

that the ability to execute in Asia is now critical to the long-term health of the overall corporation. Additionally, this shift means that local execution is

some Western multinationals are now establishing a second home in Asia by relocating category leadership to the region. We believe that companies should

execution and places it within a robust framework of repeatable processes and governance models.

consumer products companies and retailers need to address each of the following eight business imperatives:

5

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leading consumer products and retail companies have been operating in this dynamic region for decades. Over time, they have built up substantial knowledge of these economies and become deeply embedded in the consumer and customer psyche.

The scale of the opportunity remains compelling. Despite some concerns of deceleration, growth in emerging Asia has outpaced global CP market growth and is expected to continue, as shown in Chart 1 below:

•

• Between 2012 and 2017, the share of world CP market growth coming from emerging Asia will rise from 29% to 38%.

Chart 1. 3

38% 38%Emerging Asia Emerging Asia

Africa/Middle East10%

10%Eastern Europe

8%Western Europe

9%North America

23%Latin America

Japan1%

1%Australasia

The center of gravity has shifted

2. EY analysis from Euromonitor data, June 2013.

25%In 2007, emerging Asia

global consumer products market. By 2017, it

38%Between 2012 and 2017, the share of world CP market growth coming from emerging Asia will rise from 29% to 38%.2

3. Ibid.

8

4. Seung Ho Park, Gerardo R. Ungson and Nan Zhou, Rough Diamonds: The Four Traits of Successful Breakout Firms in BRIC Countries (Jossey-Bass, 2013).

What lies beneath?: the hidden costs of entering rapid-growth markets, EY, www.ey.com/cfo, 2011.

coming from emerging markets.”

Pierre-André Terisse, CFO of Danone

However, the role that the region plays within the overall global corporate portfolio has changed. Five years ago, most

growth opportunity and build market share. They understood that

would follow once investments had reached critical mass.

being the engines of global growth, emerging Asia must also

emerging markets,” says Andrew Cosgrove, Global Lead Analyst for Consumer Products at EY. “Faced with lackluster growth in developed markets, the need to achieve success in Asia has become more pressing than ever.”

supports this shift in focus. Among respondents, 69% believe that emerging markets will be the main engine of growth and

has been coming from emerging markets,” says Pierre-André Terisse, CFO of Danone. “We have driven this by allocating more resources to these markets. We have also rebalanced the growth equation, looking for not only top-line growth and volume growth, but also by starting to be more demanding about productivity.”

Research conducted by the Institute for Emerging Market Studies at Skolkovo Business School4 has found that companies

future than those that pursue an initial sales-growth strategy.

risk losing out to competitors that instill this discipline.

David Steer, Managing Director of East.West.SBS and former

competition and barriers to entry, but at the same time you are being asked to continue to grow. These markets are far harder than just 10 years ago.”

Many companies have underestimated the cost and complexity of building scale in these markets. In an EY survey of CFOs,more than one-third said that the overall costs of investing in rapid-growth markets were higher than they expected. Robust rates of economic growth do not always translate into strong corporate performance, and growth in revenues and market

9

“It is important not to underestimate how hard it is to turn what

the execution of steps that are required in order to deliver that.”

Competition in emerging Asia is intense and becoming more

best source of growth. Markets are fragmented, and gaps in infrastructure remain that add to the cost and complexity. Additionally, the cost of doing business in Asia is rising. Asked

well as competitive pressure as the top barriers (see Chart 2).

“Human capital is lagging behind market growth,” says Paul Janelle, President Director of PT HM Sampoerna Tbk. (Sampoerna), an Indonesian subsidiary of Philip Morris International Inc. “Last year the minimum wage increased

improvement in human capital, so productivity improvements to

“ It is important not to underestimate how hard it is to turn what is an enormous opportunity

monitoring in real detail the execution of steps that are required in order to deliver that.”

Anna Manz, Global Strategy Director, Diageo

Chart 2.

40%

34%Market fragmentation

21%

9%Restrictions on market access

7%Tax burden

1%Others

20%

22%

23%

24%

25%

27%

40%Competitive pressure

10

Over time, rising costs of commodities, in particular, will also go hand in hand with greater scarcity. “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,” says Yves Pellegrino, Corporate Finance Director at Danone. “That is the new paradigm at the moment.”

dealing with complex regulation and bureaucracy compounds the

challenges, a rising cost structure and the cost of capital,” says Rahul Goyal, CFO for India, Molson Coors. “The cost of capital

that you need very aggressive growth in order to make a return on investment.”

In addition to external barriers, companies also face a variety of

their strategy or reallocate resources, particularly from slow-growth developed to rapid-growth emerging markets.

More than 4 in 106 say that inadequate governance prevents

accountability are essential for success in these markets. “Local managers need autonomy to react quickly but within a framework that ensures decisions are consistent with global strategy and overall values and mission,” says Kristina Rogers, Global Consumer Products Emerging Markets Leader at EY.

Chart 3.

Other, please specify

Lack of talent/capabilities

Access to capital

Weak IT system

44% 41%

1%

1%

44%

41%

38%

38%

31%

31%

29%

29% 27%27%

25%

25%

20%

20% 20% 20%

14%

14%

challenges, a rising cost structure and the cost of capital. The cost of capital in particular can be anywhere from 12% to

order to make a return on investment.”

Rahul Goyal, CFO for India, Molson Coors

“ 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. That is the new paradigm at the moment.”

Yves Pellegrino, Corporate Finance Director, Danone

6. global consumer products executive survey, EY, 2013.

11

Resolving the contradictions of emerging Asia

products and retail companies to reconcile a number of apparent contradictions.

And

AndAnd

And

And

And

And And

And

“ You have to think locally. In Indonesia, the islands of the archipelago are different economically and culturally. We look at our brand portfolio and we look at the economy of one city or one area, compared to another city, and taste preferences of adult smokers, and then we target our execution to meet consumer demand.”

Paul Janelle, President Director of Sampoerna

12

and short-term growth Companies must strike a balance between

long term.

“In the early stages, you need to invest more than you can extract margins from these markets, but our view is that we need

Once you have reached that stage, then you can reinvest at the speed with which you generate margin — that is the most sustainable way. If you grow just for the sake of growing then

replicate that everywhere on earth. Your resources are always going to be limited, and you have to allocate them carefully. The pay-as-you-go system means that you give markets the ammunition and fuel for the business to grow by itself.” — Yves Pellegrino, Corporate Finance Director at Danone.

They must deliver against local consumer needs and leverage global capabilities. Companies need a deep understanding of what local consumers want, often down to the city level, and must build their offering around those needs. But a singular

is duplicated and economies of scale are not captured.

“You have to think locally. In Indonesia, the islands of the archipelago are different economically and culturally. We look at our brand portfolio, and we look at the economy of one city or one area, compared to another city and taste preferences of adult smokers, preferences, and then we target our execution to meet consumer demand.” — Paul Janelle, President Director of PT HM Sampoerna Tbk. (Sampoerna).

They must be entrepreneurial and operate within a global corporate culture. Emerging Asia is a dynamic, fast-moving market that rewards an entrepreneurial approach to risk-taking

empower this entrepreneurial mindset, while at the same time embedding it within a global corporate culture and set of values.

“With the stagnation in mature markets, emerging markets are under pressure to drive growth and make up for the shortfalls of Europe. Having good compliance is important, but the bureaucracy around it should not be unnecessarily burdensome.” David Steer, Managing Director, East.West.SBS, and former President of Kraft Foods Russia.

13

They must diversify to manage risk and drive scale. Across emerging Asia, countries, regions and cities are all at different stages of development and emerging at different rates.

therefore essential to match the inherent diversity of the region. Yet at the same time, companies need to drive economies of scale and scope in order to reduce complexity and drive

things at the top of the pyramid, the middle of the pyramid,

the business at the bottom of the pyramid or in the traditional trade.” — Gregory Stemler, Consumer Products Transactions, EY.

They must focus on affordable, mass-market products and target the traditional trade and high-end products and modern trade and e-commerce. Companies need a portfolio of products that target different consumer segments and price points, from premium down to the bottom of the pyramid. They also need to ensure that they can access the full range of the market through a highly diverse range of channels.

in India is how to serve our diverse consumers who are

our product to the consumer in a manner that actually makes

Colgate Palmolive India.

In dynamic, fast-paced markets, agility and adaptability must be core competencies. Companies need to respond quickly to new

“You have to take a market-by-market view. If you look at

need several factories there, otherwise your logistics costs are too high. Whereas if you look at a market like Thailand, you could have a mega-factory and reduce your costs dramatically. Geography matters in terms of getting that balance right.” — Henry Park, Suntory CEO of Suntory Beverage & Food Asia.

Godfrey Nthunzi, CFO, Colgate Palmolive India

14

“ In the early stages, you need to invest more than you can extract margins from these markets, but our view is that we need to move fairly quickly to what we call

reached that stage, then you can reinvest at the speed with which you generate margin — that is the most sustainable way.” Yves Pellegrino, Corporate Finance Director at Danone

15

What do companies need to do to

unsurprising that many companies struggle

surveyed for this report, just 20% are currently able to both generate accretive margins and

than their peers.

These high-performing companies share a number of common characteristics that make them stand out from the crowd. Drawing on the lessons from these high performers, and combining this with our own experience and

in emerging Asia requires companies to address the eight imperatives.

“ Consumer products and retail companies

face requires them to address all eight of

Implementing some of them will not be enough.”

Andrew Cosgrove, EY

01

04

08

05

02

0306

07

Empower local leadership to be agile

Disrupt traditional approaches for local relevance

Be granular in understanding current and

pools

Create scale by placing bets across categories, price tiers and channels

Balance

with consumer immediacy

Cluster for synergies based on common characteristics

Flex approach as the local market develops

Create a culture that mandates disciplined execution

growth

17

Striking the balance between global and local accountability has been a perennial challenge for many multinational companies. Research from our report Disrupt or be disrupted7 found that just 16% of companies say they are very good at balancing global

means that regional or global managers sit too far away from local consumers and customers and that local relevance is

The pace of change and intensity of competition in emerging

competitors are frequently owner-operated and able to make swift decisions. “Speed of decision-making is critical,” says Senji Miyake, President and CEO of Kirin, “especially in rapidly emerging markets such as Vietnam and Indonesia, where there

We believe that companies need to give local management autonomy over key business decisions but within a carefully

and global has swung from one side to the other, and companies have chosen their approach based on their situation, culture and objectives,” says Kristina Rogers of EY. “The right balance will always depend on context, but there is no question that the importance and diversity of Asian markets means that some degree of local decision-making is critical.”

This helps companies to get closer to the local market and ensures that decisions are consistent with both the local market and broader corporate strategy. Our research supports this view. For example, 63% of high-performing companies in our survey say that they give local managers decision-making power over choosing suppliers, compared with 21% of low performers (see Chart 4).

1. Empower local leadership to be agile but ensure they are accountable

Questions for management• Which decisions need to be taken centrally, and which can

• Is our decision-making fast enough to take advantage of

• Do we have a suitable governance structure to enable our

• Who has the oversight for the new, emerging fast-growth markets and can manage the portfolio of risks and

7. Disrupt or be disrupted: creating value in the consumer products brand new order, EY, www.ey.com/brandneworder, 2012.

18

At Ajinomoto, a Japanese food company, there is a strong emphasis on local accountability. “Although governance remains

to local operations,” says Masayoshi Kurosaki, General Manager of Overseas Food & Seasonings Department in the Food Products

business is local, so leave decisions in local hands whenever

employees are heading in the same direction.”

Chart 4.

21%35%M&A

29%40%Headcount changes

38%44%Supply chain investment

25%47%Forming local partnerships and alliances

50%49%Setting targets and KPIs

29%51%Product range

42%51%Choice of channels/route-to-market decisions

50%54%Branding decisions

38%58%Product development

21%63%Choosing suppliers

High performers Low performers

local and global called “glocal.” “Four years ago, we started a portfolio review and came to a decision to focus our strategy on nine power brands,” says Swee Leng Ng, former CFO of

in the turnaround. All the power brands leverage the global brands. That decision comes from the regions, but the decisions

the decision on our regional distribution center, all these decisions are being made locally.”

The need to make decisions quickly can be particularly challenging in a joint venture, according to Mike Sills, Consumer Products Assurance at EY. “Both sides need to refer back to corporate headquarters and reach agreement. This highlights the importance of a governance framework that enables quick

Giving local managers autonomy is not always easy, particularly

just 18% say they are very effective at empowering employees to make decisions, although among low performers this

decisions usually being more suited to the local context. However, since local contexts vary, this variation is not always easy to

Jorge Paulo Lemann Professor at Harvard Business School.

63% of high-performing companies in our survey say that they give local managers decision-making power over choosing suppliers

Empower local leadership to be agile

19

Anticipating and responding to market volatility

20% 4%

Low performerHigh performer

Empowering employees to make decisions

18% 11%

Local autonomy can also impose unwanted costs if it not handled correctly. Giving local managers the ability to execute their own strategies can lead to duplication of effort because the same basic activities are replicated in multiple markets, even if the content of that execution differs slightly. It can also erode the brand values of the company if autonomy is given without putting it in the

making accountability and agility at the market level. But we need to do this in a way that remains true to the brand and is consistent with how we want to be perceived as a company globally.”

Anna Manz, Global Strategy Director at Diageo

chain, but the roles and responsibilities are carefully stipulated. “Regarding the overall corporate mission, quality control, human

and Representative Director of Asahi. “I discuss extensively our objectives with our market leaders during the planning stage of each year. However, once we agree upon goals for the year, the markets basically make decisions autonomously.”

decision-making authority to local managers but ensures that this

operating model puts as much decision-making accountability

Director at Diageo. “But we need to do this in a way that remains true to the brand and is consistent with how we want to be perceived as a company globally.”

Local accountability does not have to mean local execution.

manager in Vietnam spending all his time trying to recruit a new accounting and control team when we can do that centrally,”

business that are really driving performance.”

20

Choosing the right operating model for ChinaXiaoping ZhangAdvisory Strategy and Operations Practice Leader, Greater China, EY

As you approach the balance between global and local, there are four areas where it is crucial to get this trade-off right. First, companies need to have the right processes in place. These must be consistent with the global standard but also

the local market.

Second, companies need the right incentives. Key performance indicators should encourage local managers to develop the business but also take into consideration that they are part of a global network. So, for example, part of the

part on global performance.

Third, companies must pay attention to the governance model, in terms of how it works on a geographic basis. How much freedom do you want to give to local managers, and do

to make local CEOs — the head of the business in China, for example — part of the global executive or to allow them to operate as a separate business. The governance must be

Finally, there is the question of building high-performance teams. Companies need to work out how to build teams that take into account the context of emerging markets, including the cultural components. That will be a big issue for leadership development as companies expand and become established in these markets.

Empower local leadership to be agile

21

multinationals must shake off traditional mature-market mindsets and operating models. Simply replicating these in Asian emerging

market needs as well as consumer and channel expectations. Instead, they should disrupt their own offerings and operating models and rebuild themselves around what is needed to be locally relevant. “The key word in emerging markets is diversity,” says Navi Radjou, Fellow at Judge Business School, University of Cambridge, who is an innovation and leadership strategist and co-author of Jugaad Innovation. “Multinationals often think they can take a single product and roll it out across multiple markets, but understanding the nuances and barriers even within the same country requires a different mindset.”

than three-quarters of high performers agree that, to succeed in emerging markets, they need to adapt their products to meet the

who hold the same view (see Chart 6). “We have a design team in Shanghai with designers who are living and breathing Chinese trends,” says Edgar Ho, CFO for Greater China at adidas Group.

Chinese consumer actually wants.”

2. Disrupt traditional approaches for local relevance

Questions for management• Which aspects of our product portfolio and go-to-market

approach do we need to change to meet the needs of the

• Do we have the appetite to change as well as the ability to

22

They also need to adapt their entry strategies. For example, when the Japanese brewer Sapporo entered Vietnam, it formed a joint venture with Vinataba, a government-owned Vietnamese tobacco company. This is in contrast to its entry strategy for North America, which involved the acquisition of Sleeman. “Opportunities for acquisition are limited in emerging Asia since the beer markets are dominated by oligopolies of family-run companies,” explains Yoshihiro Iwata, Director of the Business Strategy Department at Sapporo. “A joint venture with a local company gave us access to the market, as well as support in registration and licensing procedures of the new JV company.”

In highly heterogeneous Asian emerging markets, execution

point. “You really cannot run a national marketing campaign in

the consumer in the north and the consumer in the south of the country will receive your message the same way. One of the ways we deal with this complexity is to ensure that our marketing group is as diverse as the country is. So the marketing folks need to represent the mix of the country and not just come from one part of the country. We also insist that marketing teams go out into the market and interact with the consumers, so that they stay close to what the consumers really want.”

“ Multinationals often think they can take a single product and roll it out across multiple markets, but understanding the nuances and barriers even within the same country requires a different mindset.”

Navi Radjou, Fellow at Judge Business School, University of Cambridge

Chart 6.

Strongly agree Somewhat agree

High performers

29% 49%

Low performers

18% 47%

But this is clearly an area where many companies struggle. Even among the high performers, just 31% of companies say that they are very effective at addressing local consumer needs; among the

Disrupt tra

ditional approaches for local relevance

23

Chart 7.

Low performerHigh performer

Addressing local consumer needs

31% 11%

Tailoring operating model to needs

26% 9%

Often, companies take too narrow a view of what adaptation

marketing mix when adapting products to local consumers: price, place and promotion, as well as product,” says Mr. Radjou, Judge

strategy in emerging markets; your approach needs to be much more holistic.”

grown tenfold. This growth has come as a result of a highly focused strategy. “We have leveraged our global brands but adapted them to suit local preferences,” explains Mr. Ng, GroupM China, formerly of Kraft Foods China. “For example, we have made Oreo less sweet in China because the Chinese believe that it is not good for their health. We have also introduced local

supported with heavy investment in advertising and consumer promotions, together with our sales execution.”

Throwing off mature-market mindsets also requires companies to know where their relative strengths and weaknesses lie. Multinationals often have key strengths, such as rigorous internal structures and processes, but they may lack certain advantages held by domestic companies, such as a strong distribution footprint or consumer understanding. This explains why Nestlé recently formed a partnership with Yinlu,8 a Chinese dairy company. While Nestlé brings strong processes, R&D and supply chain management capabilities, Yinlu brings deep local understanding, along with an established footprint in rural China.

8. “Nestlé continues to grow its business in China with opening of two new factories,” Thomson Reuters, 11 July 2013.

24

Over the past few years, global sports manufacturer and retailer adidas has pursued a strategy in China of deeper penetration

stores, most of which are operated by franchisees. The focused nature of this retail environment, which differs from the developed-market strategy of selling in general department or sportswear stores, has helped to make China one of the

and lower-tier cities means that adidas must adapt their retail

sees and expects in Shanghai, for example, is very different from what a consumer expects in a lower-tier city. Nevertheless, adidas is careful to ensure that the brand experience in its retail stores remains consistent. “We have to be responsive to local market needs but, at the same time, there has to be consistency,” says Edgar Ho, CFO for Greater China at adidas Group. “There has to be a reason for differentiation — it should not just be for the sake

From control to collaborationBy Yew Poh MakTransaction Advisory Services, China, EYyew-poh.mak@cn.ey.com

attract large numbers of Western multinationals to the region. A decade ago, most would have sought full or majority-ownership acquisitions to build the right product portfolio or depth of distribution required to succeed. Few would have considered forming a joint venture in which they did not have control.

local companies are now more reluctant to sell up, and they

technologies than in the past. For many multinationals, this often leaves a minority joint venture stake as the only viable entry strategy.There is also a shift in the balance of power around the relative contribution of both parties to the JV. Multinationals believe that they bring strong management capabilities, systems and processes to the arrangement. But local companies may not value these assets as much as the multinational would expect. They would therefore expect to see a contribution of cash in addition to the other capabilities the multinational brings.Both sides need to think carefully about governance and where accountability lies. Western multinationals should aim to retain control of the CFO role, along with quality and compliance. The local company is often more interested in holding the CEO position, along with key marketing and sales roles.Reaching agreement on the structure, governance and

arrangements work, both sides need to take a long-term view and an active approach to managing the entity. The multinational needs to invest in local talent and know-how and must educate its board and senior management about the nuances of the local market. It must also resist the temptation to try to change the DNA of its local partner. Often, the best approach is to ring-fence the JV. This helps to protect what

that it does not become bogged down with cumbersome and bureaucratic processes.

Disrupt tra

ditional approaches for local relevance

25

Markets, channels and consumer segments within emerging Asia are diverse, at different stages of development, and experiencing different growth rates. Understanding these dynamics is an

to compete, and to ensuring their portfolio meets both short-term

a shift of emphasis from a homogenous market share/growth mentality to understanding the real drivers of both growth and

granular in the way that they target investment opportunities, often down to individual channels and consumer segments within different cities. This is particularly true in China, where the number of cities with populations of greater than 10m is forecast to be 13 by 2020.9

For high performers, focus is an important part of success. Almost three-quarters agree that their company can succeed only if it focuses its emerging-market investments in a few priority markets, while 60% of low performers agree with the same statement (see Chart 8).

3. Be granular in understanding

Questions for management• Have we invested enough in understanding the local market

• Are our data and analytics capabilities powerful enough to

• How will increasing competition and cost of natural

9. “13 megalopolises to emerge in China by 2020,” Economist Intelligence Unit, www.eiumedia.com/index.php/component/k2/item/627-13-megalopolises-to-emerge-in-china-by-2020, 9 July 2012.

26

Chart 8.

High performers

60%74%

Low performers

The scale of India and China, in particular, demands clear focus. “You need to think of China as a continent rather than a country and focus on cities where you can secure a competitive advantage for your brand,” says Mr. Pellegrino of Danone. “If you start from scratch in China, even with a partner, and try to invest across the whole continent, then the level of investment required is simply too high. Your resources are always going to be limited, and you have to allocate them carefully.”

For Procter & Gamble, a focused approach meant adapting its

Chinese cities were divided into a grid, and a salesperson with a three-wheel bicycle was assigned to each square. For the smaller cities, P&G partnered with a logistics provider to manage the distribution network and the warehouses. In rural areas, the company collaborated in government projects aimed at expanding distribution networks and hired students to contact retailers and educate them about products and nearest warehouses.

tier cities. We are expanding our penetration down to seventh-tier cities and, as more and more of the population shifts from rural to urban centers, that creates an underlying source of growth of the company. As these lower-tier cities evolve, they are more able to support our model.”

Edgar Ho, CFO for Greater China at adidas Group

Be granular in understanding current and future pro t pools

27

In addition to tailoring the distribution approach to different areas of a market, companies also need to adapt their focus as the market evolves. “We want to capture a greater growth

are expanding our penetration down to seventh-tier cities and, as more and more of the population shifts from rural to urban centers, that creates an underlying source of growth of the company. As these lower-tier cities evolve, they are more able to support our model.”

Companies must also be willing to invest ahead of the market, or create category awareness, in the knowledge that this will

must then be balanced with other investments that may have a quicker payoff, enabling companies to meet both short-term and long-term performance goals. “Knowing whether something

or a cash cow, allows us to be very clear about the right level

seeding for the future while delivering current performance.”

requires up-to-date information about this dynamic, fast-moving market. Companies need to combine internal and external data

insight. Once the right data has been collected, they then need to be able to separate signal from noise and apply analytical insight to guide decision-making.

The traditional trade still comprises around 80% of the retail market in India, and it can be very challenging to understand the

this highly fragmented retail infrastructure. Colgate addresses this channel with a network of distributors, or stockists, who each

a smart handheld device that is updated as they visit individual retailers, the company is able to build a strong dataset it can use to understand and address the local opportunity.

“The handheld device provides valuable information such as stock levels at each outlet and which products the outlet is carrying, so as the stockist salesman walks in he knows which products he

CFO, Colgate Palmolive India. “And, once he makes a sale, that

28

Making the supply chain visibleKimjin Gan Executive Director, EYkimjin.gan@sg.ey.com

Effective data analytics can enable CP companies to understand the true drivers of business performance and therefore

quality, and that they have the systems and processes in place to effectively store and leverage the data. The intransigence of

Companies need to ensure that data can be collected in a consistent way and with a common data hierarchy. However, the

around customer codes and market segments. In dynamic markets you need to have the ability to overlay test indices and recodes to evaluate consumer behavior and adapt your channel strategy to match it. This is commonly achieved using analytics tools outside the ERP system.

fragmented traditional trade. However, as soon as you sell

happening in the market. To get access to daily sales throughput, companies need to link their systems with those of their distributors. This is dependent on whether the company can

customers they are selling to, often regarded as the foundation of their negotiating power.

However, sales throughput and inventory data alone are

beyond recent data to review seasonal variations and regional differences. This should be overlaid with external intelligence of competitor price positions, share of shelf and promotional activity. By complementing distributor data with systematic and

companies can identify the drivers behind trends. For example, is

Be granular in understanding current and future pro t pools

29

Many companies still have the mindset of trying to serve all customers all the time with all products and services with the highest level of quality. However, the traditional scaling approaches are increasingly challenged in emerging markets due to higher than expected levels of competition and consumer variance.

things for all people all of the time,” says Andrew Cosgrove of EY. “You will end up being uncompetitive compared to more focused

In India, for example, the growth opportunity exists across every

that one can say is saturated,” says Tapan Buch, CFO India

have the best right to win with consumers and shareholders. You

We believe that companies should instead create scale by adopting a portfolio approach across multiple market niches

retain a clear focus and careful selection of market opportunities. “Instead of obsessing about economies of scale, companies need to think creatively about economies of scope,” says Mr. Radjou of Judge Business School. “So how do they broaden the scope of

4. Create scale by placing bets across categories, price tiers and channels

Questions for management• Do we have a portfolio that combines products that can

• How do we determine the right width, depth and quality of

• Are we managing trade terms effectively and proactively

30

A clear focus is essential, but companies must make sure that they do not become solely niche players. “We have deliberately adopted a narrow approach and not tried to go after the whole market, whole category and all segments,” says Rahul Goyal, CFO for India, Molson Coors. “Yet at the same time, to be meaningful

to participate in multiple categories than low performers (see

choices about where to compete. When necessary, they also create local brands. For example, Hershey recently launched its

Lancaster candy brand in China.10

sugar confectionery market, Hershey hopes that it can build scale and a platform through which it can grow its chocolate business.High performers also sell nationally, rather than focusing only on priority territories within a market.

Chart 9.

Low performersHigh performers

Selling nationally

72% 42%

Creating local brands

70% 50%

Participating in multiple product categories

67% 58%

“ Instead of obsessing about economies of scale, companies need to think creatively about economies of scope.”

Navi Radjou, Fellow at Judge Business School, University of Cambridge

Create scale by placing bets across categories, price tiers and channels

10. “Hershey to Launch Innovative Lancaster Brand in China,” China Weekly News, 4 June 2013.

31

To serve these different demographics, consumer products companies must navigate a highly complex customer landscape of traditional trade, modern trade and e-commerce, which might be at different stages of development even within a single market.

capability to evolve their positioning as the market develops. In general, high-performing companies spread themselves more widely than low performers across multiple channels, and this

over another (see Chart 10).

“We see the growth of modern trade, in places such as Thailand, Indonesia or even in India, where it now accounts for around 10% of the business,” says Richard Taylor, Consumer Products Advisory, EY. “The ability to understand and manage trade terms between traditional and modern trade is essential. You need to bring a rigorous approach to understanding and focusing your spend by channel in each market.”

to target different consumer segments with different distribution strategies. In China, luxury brands, such as Lancôme, Helena Rubinstein and Biotherm, are distributed through specialty

boutiques. Mid-range global brands, such as Kerastase or

pharmacies and hair salons. Finally, mass-market brands, such

supermarkets. To reach the emerging middle-class consumer in

Paris, enabling consumers to sample the product at mass prices and then getting them to upgrade.

Chart 10.

High performers Low performers

63%33%Own/exclusive retail outlets

47%25%Modern trade (e.g., chain supermarkets)

28%21%Direct to consumer: door-to-door

26%4%Traditional trade (e.g., mom and pops, market stalls)

23%25%Direct to consumer: digital (own)

9%42%Digital (third-party e-commerce)

17%9%Vending machines

32

“ Companies without a broad portfolio will often

partners in order to make an investment work. Choice of partner and robust sales effectiveness processes and training are therefore critical elements.”

Ashish Nanda, Consumer Products Advisory — Performance Improvement, EY

By Ashish NandaConsumer Products Advisory — Performance Improvement, EYashish.nanda@in.ey.com

companies to develop substantial route-to-market capabilities, both internally and with channel partners. A portfolio-based approach offers distinct advantages because once the basic infrastructure to get products to market is in place, the marginal increase in cost to take forward additional products is

to trade partners, the more you attract a higher share of their investment, and their dependence on you increases.

an investment work. These companies often end up seeking opportunities to combine with companies that offer non-competing products when working with distributors. But this is far from ideal, because the company has limited control on how much the distributor is focusing on their products versus those of the other company. Choice of partner and robust sales effectiveness processes and training are therefore critical elements.

Route-to-market design is made more complex due to the incremental tax liabilities currently incurred if products are

between stocking locations and local market-servicing needs. However, in India a tax-optimal supply chain requires companies to work with a larger number of stocking locations and invoice

Should India move to a more common GST regime, companies will need to revisit their overall network structure. For now, however, companies must ensure their route to market is

Create scale by placing bets across categories, price tiers and channels

33

more a company adapts its products to cater to local tastes, the greater the investment and duplication of roles and resources, limiting economies of scale. However, although a focus on

consumers.

When asked about the cost reduction measures they consider most important to improve margins, they point to two seemingly

11). “By bringing manufacturing closer to the market, companies can not only avoid import duties, which makes prices more competitive; they can also tailor products more effectively to local

International Supply Chain Strategy at EY.

consumer immediacy

“ The critical thing for us is to understand what value means to our consumers and customers. That is the number one priority. If we start

reducing costs, then we compromise that value. It is my belief that economies of scale are overrated.”

José Lopez, Executive Vice President, Operations, Nestlé

Questions for management• How do we ensure that we manage complexity, while not

• Are we taking into account all costs — including distribution and logistics — when considering where and how to locate

34

Companies need to consider a range of factors apart from

manufacturing. “You could have a very big factory somewhere

factored in the cost of distribution, it may well offset those

scale is not everything — you also need to take into account

Of course, you need to be very strong around cost control and margin management, but you cannot make that your priority at the expense of identifying and activating growth opportunities.”

and local adaptation. “The critical thing for us is to understand what value means to our consumers and customers,” says José

the number one priority. If we start by focusing on ways of driving

It is my belief that economies of scale are overrated.”

Chart 11.

High performer Low performer

29%23%Use of lean/Six Sigma and other techniques

46%26%Outsourcing of non-core competencies

29%28%Standardization of manufacturing

technologies/processes

13%35%

21%35%

58%42%Strategic sourcing and centralization of

procurement

33%51%Centralization and the creation of shared

50%54%Localizing manufacturing

Edgar Ho, CFO for Greater China at adidas Group

Balance ef ciency with consumer immediacy

35

Companies should expect and plan for the complexity, demand

emerging markets by designing supply chains that have the

changing demand.

“Consumer trends and customer developments can happen very suddenly, and we need to be on guard for when they occur,” says

always that easy to navigate.”

stores across China, mostly through a franchise model. When unexpected demand for a particular product emerges in one part of the market, the company needs to react quickly and be able to transfer stock from one store to another to ensure availability.

To anticipate this kind of demand, adidas has invested in technology that provides a data hookup to its retail outlets. “We get daily transaction-level data from our stores, and this tells us what are the trends that are happening right now,” says Mr. Ho,

then we can work with our franchise customers to move product from one store to another. This allows us to understand trends, plan better for the future and, if we are running short of product, order additional product from the global supply team.”

36

aligned itself with luxury brands, opening premium cafés in high-end real estate areas populated by Western luxury goods companies to give a feeling of exclusivity to its customers. Given the need for product quality, and the challenges of maintaining

chain internally by importing products from its US and European factories rather than manufacture locally.

Shipments from overseas are brought to warehouses in Shanghai and Beijing and then these are sent to retail outlets across China in specially designed refrigerated trucks. Although it involves huge transport costs and import duties as high as 93%, it ensures good quality of products. This has helped the company to achieve

11

Mark Yeomans International Supply Chain Strategy, EYmyeomans@uk.ey.com

In the rush to secure revenue growth in Asia, many consumer products companies have not paid enough care and attention to channel management. Today, the need to grow means that these companies must develop a more targeted approach to each channel or risk seeing reduced margins by channel. This means understanding the fundamental differences between channels and, in many cases, undertaking the challenging task of renegotiating contracts with distributors, agents and wholesalers.

Companies need to develop a clear understanding of the

segmentation beyond modern and traditional trade channels and considering the consumer shopping habits in rural traditional, urban traditional, urban modern and the high-end boutique segments, as well as rapidly emerging digital opportunities.

Channel discipline is a priority. Companies must ensure that they are targeting the right products, in the right packaging, at the right price, at the appropriate channel. For example, high-end personal care products might go through the boutique network, whereas single-use sachets of shampoo should be distributed to traditional trade.

A key risk facing many consumer goods and retail companies in Asia is allowing crossover between the different routes to market. Traditional trade products, for example, should not be distributed in the modern trade channels or vice versa. Companies need to choose their route to market based on

packaging accordingly.

Because of the historical stampede for growth — at any cost — in Asia, there is a legacy of loose licensing and distribution agreements. Companies now need to address this. Annual or

deals — and all contracts should be renewable, subject to audited annual performance.

Balance ef ciency with consumer immediacy

11. EY analysis from Euromonitor data.

37

companies should still seek to take advantage of the wider network economics that global scale provides. A city, channel or consumer segment opportunity within a market may have several unique characteristics, but it may also have much in common with other, similar opportunities in other parts of the world. By grouping opportunities that have similar demographics, income distributions and transport infrastructures into clusters, we believe that companies can ensure that best practices are shared

execution.

“We place strong emphasis on leveraging best practices across the whole region, whether in terms of cost saving, productivity or innovation,” says Mr. Ng, Group CFO of GroupM China and former CFO of Kraft Foods China. “We should not have to reinvent the wheel. Anything that we can share between countries and adapt for the local market is a good thing. It makes our execution into the marketplace faster and cheaper.”

These clusters do not need to be within the same geographical

markets in Asia, Latin America and Africa may have certain characteristics in common. Among high-performing companies, 71% agree that they need to identify similar markets and manage

(see Chart 12).

6. Cluster for synergies based on common characteristics, not just geography

Questions for management

time and resources on the most important issues and

• Are we leveraging market similarities, rather than just

• Do we have the processes in place to identify best practices

38

“Geography is not always the most important factor when forming clusters,” says Kristina Rogers of EY. “For example, high-end consumer segments in cities such as Shanghai may have more in common with high-end consumers in London or Paris rather than other Chinese consumer segments.”

Chart 12.

High performers

26% 45%

Strongly agree Somewhat agree

Low performers

9% 56%

“ We should not have to reinvent the wheel. Anything that we can share between countries and adapt for the local market is a good thing. It makes our execution into the marketplace faster and cheaper.”

Swee Leng Ng, Group CFO of GroupM China and former CFO of Kraft Foods China

Cluster for synergies based on common characteristics

39

A channel in Latin America can often have similar attributes in terms of route to market, shopper behavior and how you might think about joint business planning to the same channel in Asia. Companies need to understand each of the markets and then

into repeatable models that can be applied everywhere. Privately

establishing the pet food category in Mexico and in China and Southeast Asia. In Mexico, Mars had successfully persuaded traditional wet-market spice stall owners to sell loose, dry pet food. By leveraging these “chili channel” learnings, the company was able to introduce Asian pet owners to commercial pet food when they made their daily ritual of shopping for fresh and dried produce.

Companies can take this a step further and rethink the way they structure themselves to drive synergies and focus management

themselves into developed- and emerging-market divisions, rather than the traditional geographical approach. Reckitt Benckiser, for example, has moved away from a traditional EMEA, Asia and Americas approach and divided its markets according to customer needs. Because they have similar consumer habits, Europe and North America are grouped into a single ENA region, while the

LAPAC, and Russia, the Middle East and Africa into RUMEA.

The decisions around where to locate the operational entity responsible for a cluster will be driven by a number of factors, including availability of talent, proximity to markets and the political and regulatory environment. Tax should also be an important consideration. With tax rates varying widely across the region, and governments competing to provide tax incentives and other measures to attract multinationals, tax can have a

Lisa Vines, Consumer Products Tax at EY, advises companies to consider tax issues as early as possible and ensure that the tax function has a voice in key investment decisions related to operations. “All too often, companies consider tax as an afterthought when making investment decisions,” she says. “Although tax should never be the primary factor driving

companies need to ensure that tax has a seat at the table as early as possible in the process, particularly when choosing locations.”

40

Paul Mitchell

paul.mitchell@cn.ey.com

Over the past two decades, companies have been establishing shared service centers in emerging markets to help them achieve network scale economies and leverage cheaper labor

than just cost savings. With the right approach, shared service centers can also help companies become faster, more agile

success factors in dynamic emerging markets.

Shared services operations have traditionally focused on the

can be repeated and automated. Finance led the way, followed by IT, HR and procurement. Now this is expanding to include all non-core activities of a company. Supply chain, R&D, strategic analysis and market research, and even parts of sales and marketing, such as training sales staff or customer relationship management, are under consideration. This leaves customer-facing parts of the business free to concentrate on delivering higher-value work that requires proximity to the customer or local knowledge.

When choosing the location of a shared service center, companies must ensure the location is appropriate both for the short and long term. Is there a suitable pool of talent with the

reliable enough to ensure the center can operate every day,

In the next stage of their evolution, shared service centers are becoming multifunctional and handle end-to-end processes

requires companies to reframe traditional concepts of function and think instead about the nature of the processes that

shared service center, companies are able to eliminate repetitive or duplicative processes, leverage and share knowledge, and

Cluster for synergies based on common characteristics

41

We believe that the fast pace of change in Asia means that

local market evolves. This means having a portfolio of different business and operating models to suit different markets at any point and being ready to change these before they become obsolete.

Tapan Buch, CFO for India at Procter & Gamble, says that the

consumer and customer trends. “We need feet on the street,” he says. “We cannot outsource this work, so we try to have people

process. We gather them periodically in different hub locations and try to really make sure that we are on top of evolving consumer and customer trends.”

As the emerging middle class grows, companies must become accustomed to changes in consumer behavior. “As the modern trade becomes more established and as consumers have more disposable income, shoppers in Asia are shifting allegiance away from traditional trade — or even leapfrogging modern trade entirely to embrace e-commerce,” explains Xiaoping Zhang, Advisory, Strategy and Operations Practice Leader, Greater China, EY. “This highlights the importance of having the capabilities to manage a wide variety of different channels.”

7. Flex the approach as the market develops

Questions for management• Do we have suitable processes in place to determine

whether our current operating or business model remains

• What are likely to be the biggest barriers to change, and can

42

way. We must devise strategies for various cultural levels and economic development stages and adapt to the rapid change of the market. This requires

in Asia.” Motoki Ozaki, Chairman of the Board, Kao

Flex approach as the local market develops

43

Chairman of the Board, argues that Asia cannot be approached as

for various cultural levels and economic development stages and adapt to the rapid change of the market,” he says. “This requires

individual market clusters in Asia.”

may make sense to rely on an external distributor who has the local knowledge and contacts to ensure on-the-shelf availability. “We recruit strong and knowledgeable distributors and then build a partnership with them, training them so that they understand our business and category,” says Mr. Ng, Group CFO of GroupM China and former CFO of Kraft Foods China. “They recruit a sales team and, at the same time, we request that our distributor share part of the P&L burden. This means that we spread our risk, and at the same time we help them to grow the business, so we have really a win-win partnership. We also reduce our burden of working capital.”

However, once the market has matured and the company has achieved scale, an in-house sales model with control over distribution can provide competitive advantage. “Partnering with thirdparties can make sense from a tactical, short-term standpoint, but I would be surprised that any company can sustain good-quality growth over the long term when relying on someone else,” says Xiaoping Zhang of EY.

investment matures. This may mean moving to a joint venture or alliance-based approach if the need arises. In October 2013, Tesco agreed to enter into a joint venture with state-owned China Resources Enterprise, to combine their Chinese retail operations to form the leading multi-format retailer in China with more than 3,000 stores.12 Tesco should achieve a more disciplined use of capital while at the same time enabling it to retain a presence in the market.

12. “Tesco PLC Signing of agreement between Tesco and CRE,” Regulatory News Service, 2 October 2013.

44

The evolution of retail in China demonstrates how companies need to change their approach as the market develops. China is now by far the largest market for shopping mall development in the world. According to a report by CBRE, more than half of all new retail development projects under construction globally are in China.13

This breakneck pace of construction has raised concerns of

every Chinese developer and local government wants to build

says Jim McCallum, CEO of the Robinsons Group.

However, not only is China seeing a fast-growing retail expansion but also the rapid development of e-commerce, which accounted for 6.3% of retail sales and 247 million online shoppers in 2012.14 This has raised the prospect that, rather than embracing a bricks-and-mortar retail experience, Chinese shoppers will leapfrog straight to e-commerce, leaving many of the shopping malls currently being built empty.

Walmart has adapted to the rapid growth in online by investing

in online grocery revenues. The company is growing rapidly and

SKUs, including fresh grocery items, and offers same-day delivery

delivery to customers in over 100 cities in China.

Richard Essigs, Principal, Retail and Consumer Products, US, EYrichard.essigs@ey.com

The speed of effective decision-making is a key differentiator between winners and losers in emerging markets. However, CP companies can ensure they are prepared for market change by anticipating the decisions.

development, are evolving at different rates, and have characteristics that make each unique. But despite this diversity, emerging markets all tend to follow the same broad development trajectory — and the same trigger points that force a transition from one stage to another. Whether they are

markets will all face broadly similar challenges and issues as part of their evolution.

that are bound to come up as a market matures. To succeed, companies need to consider these scenarios in depth — and prepare responses to them before they arise. Although the answers in each market are likely to be different, the broad questions that emerging market executives need to consider are the same, and they will have likely been asked before

The evolution from traditional to modern trade is one example. As any market matures, and as modern trade eclipses traditional trade, companies will need to ask themselves a number of key questions, including how this shift impacts retail coverage models, pricing tiers and routes to market, as well as the importance of transparency in terms and conditions. It might not be possible to say exactly when these scenarios will arise, or in which order, but they will come up. Planning

the one from traditional to modern trade, and understanding similar questions faced in other markets gives local managers a powerful governance framework and helps them make quicker and better decisions.

Flex approach as the local market develops

13. “CBRE Global ViewPoint”, CBRE Ltd., http://www.cbre.com/AssetLibrary/APRIL%202013%20SHOPPING%20CENTRE%20PIPELINE%20VIEWPOINT%20V1%20(FINAL).pdf, April 2013.

Xinhua’s China Economic Information Service, 29 January 2013.

45

8. Create a culture that mandates disciplined execution

Talent and execution have always been differentiators, but the

to execute in Asia is now critical to the long-term health of the overall corporation.

We believe that companies need to create a culture that mandates

strategic lenses, and then focus on getting the execution right.

execute.”

Yet despite its apparent simplicity, this is also a capability that

our execution every day of our lives in this market,” says

getting more and more explicit.”

The importance of Asia to the overall health of the corporation has led to more scrutiny, and companies are also increasingly relocating category leadership or key functions, such as procurement, to the region. For example, P&G has moved the headquarters of its skin care, cosmetics and personal care business from Cincinnati to Singapore in order to be at “the center of the greatest growth opportunity for these categories

Execution must be granular and built around constant

store-level execution plans and track performance at that level,

need clear KPIs with senior-level oversight to embed those into

Questions for management• Do we have the right metrics in place to track and measure

• Can we respond quickly enough when changes in the external environment require a different approach to

• Do we have the right oversight at a senior level to embed a

Household & Personal Products Industry, http://www.happi.com/contents/view_breaking-news/2012-06-04/pg-will-move-beautypersonal-care-hq-to-asia, 4 June 2012.

46

to draw together best practices that exist across the company in activities including innovation, distribution, supply chain, working capital, packaging, pricing and productivity. A project team compiled them into a “playbook” that could be accessed by executives around the world.

The best-practice playbook has now been rolled out around the world and provides executives with a quick and easy way

problems and solved them. “The challenge will be to keep it updated, include new ideas and make it a living document

GroupM China and formerly of Kraft Foods China. “If that culture continues, I see that it will be one of the competitive strengths of the company.”

Recruiting and retaining the right talent is key to successful execution, but many consumer products and retailers struggle with this. In many markets, companies face high staff turnover, rising labor costs and skills shortages. Even among high performers, just 18% say that they are very effective at developing local talent, while among the low performers this falls to 13% (see Chart 13 overleaf).

“ We need to improve our execution every day of our lives in this market. It literally is store by

on execution, but we just have to keep getting more and more explicit.”

Anna Manz, Global Strategy Director, Diageo

Create a culture that mandates disciplined execution

47

Chart 14. Chart 13.

Cultivating a performance-oriented corporate culture

31% 9%

Low performerHigh performer

Developing local talent

18% 13%

multinationals to go the extra mile in creating an attractive working environment and recruiting the brightest and best. This means focusing not only on recruiting from outside the company, but investing in the development of existing human resources. It is striking that high-performing companies are more

management team than low performers. They build from within,

expatriates from the parent company (see Chart 14).

“ If you want the right local talent, you have to pay for it, secondly, once you have recruited them you have to retain them. This is something that many companies do not understand.”

A senior executive from a major jewelry retailer

Low performerHigh performer

Build from within the local company

84% 47%

Hire expatriates from other organizations

77% 42%

Use expatriates from parent company

69% 38%

Hire local talent from other organizations

73% 40%

48

emerging markets as having a low-cost labor force. “If you want the right local talent, you have to pay for it,” says a senior executive from a major jewelry retailer. “Secondly, once you have recruited them you have to retain them. This is something that many companies do not understand.”

Bill LeisyGlobal Talent & Reward Leader, EYwilliam.leisy@ey.com

talent model is becoming critical. We believe companies must

The right mix among these three approaches will vary from company to company and on the stage of market development.

existing talent assets: what is available, the costs, and the issues associated with sending managers on assignments and repatriating them.

Next, companies need to come to grips with the external environment and how that affects their talent strategy. This means looking at such areas as the availability and quality of labor in different markets, local laws and regulations, and issues associated with quality of life. Once companies have this internal and external perspective in place, they can start to explore links between their current business strategy and the talent capabilities that are able to support it.

analytics. This involves taking a holistic view of the entire global

strategy over the long term in each market. For example, is it more sustainable to build talent locally, or should a company

is a key part of delivering strategy and enabling disciplined execution. Being able to attract, retain and develop the right people will be fundamental to success.

Create a culture that mandates disciplined execution

49

Faced with long-term sluggish growth in developed economies, all major consumer products and retail companies are increasing the attention and resources that they are allocating to emerging markets. In this study,

Asia, but the principles we have discussed apply equally to other emerging regions of the world, including Latin America and Africa. Only the local execution will need to differ.

In emerging markets, simply endeavoring to capture market share and secure top-line growth is no longer enough. These markets are now at a tipping point at which

lose out to more focused competitors. But,

complexity, intense competition and a rapid pace of change are all creating formidable challenges for even the most experienced companies in the sector.

Overcoming these challenges requires companies to resolve seemingly irreconcilable tensions. This is undoubtedly daunting but can be achieved by addressing the eight business imperatives we have described in this report. Although many companies are following some of the imperatives, few are executing well against all of them. As economic weight shifts to

growth in these markets has become essential to the long-term growth, and even survival.

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50

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consumer products and retail industries

India

24%Food

42%

Mainland China

20%

Vietnam8%

Indonesia8%

Singapore8%

Malaysia6%

Thailand6%

Hong Kong

10%Taiwan

10%

Grocery retail

25%

Other retail

1%

Apparel

6%Tobacco

5%

Home and personal care

13%Beverage

8%

President6%

Senior director28%

11%

Head of marketing14%

Company secretary15%

Country manager19%

Vice president8%

Between US$100m and US$500m

Greater thanUS$10b

51%

Between US$500m and US$1b

10%

Between US$1band US$10b

38%

1%

Participant demographics

Job titles of respondents Location in which respondentswere based out of

Subsector in which respondent’s company operates

About this report

The external research was supplemented with 23 in-depth interviews with C-suite and senior executives from the leading companies in the consumer products and retail sectors.

Base: all respondents (253)

52

“ The growth opportunity exists across every

not a single category or tier that one can

a systematic category investment plan and

shareholders. You have to strike a balance —

Tapan Buch, CFO India, Procter & Gamble

53

Global Consumer Products CenterGlobal Consumer Products LeaderMark Beischel mark.beischel@ey.com

Global Consumer Products Emerging Markets LeaderKristina Rogers kristina.rogers@tr.ey.com

Global Consumer Products Markets LeaderEmmanuelle Roman eroman@uk.ey.com

Global Consumer Products Lead AnalystAndrew Cosgrove acosgrove@uk.ey.com

Global Consumer Products Brand new order Program LeaderNicki Gates ngates@uk.ey.com

Contacts

54

AcknowledgmentsSpecial thanks to Andrew Cosgrove, Rob Mitchell, Mariko Asao, Sky Gránia Young and teams for their analysis and compilation of this study.

Notes

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How EY’s Global Consumer Products Center can help your businessConsumer products companies are operating in a brand new order, achallenging environment of spiraling complexity and unprecedentedchange. Demand is shifting to rapid-growth markets, costs are rising,consumer behavior and expectations are evolving, and stakeholders arebecoming more demanding. To succeed, companies now need to be leanerand more agile, with a relentless focus on execution. Our Global ConsumerProducts Center enables our worldwide network of more than 18,000sector-focused assurance, tax, transaction and advisory professionalsto share powerful insights and deep sector knowledge with businesseslike yours. This intelligence, combined with our technical experience, canassist you in making more informed strategic choices and help you execute better and faster.

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