The retailer

EYs publication in consumer

products and retail sector

October - December 2016

F orew ord
Dear reader,

We are delighted to present to you the October December 2016 edition of The retailer, our quarterly publication in the
consumer products and retail ( CPR) sector.

On 8 November 2016, the Indian Government demonetized INR5 00 and INR1,000 currency notes. This move impacted
the CPR sector, with consumers spending judiciously and postponing discretionary purchases. The sector, which saw
some signs of recovery in Q 2, has started feeling the pressure on sales and performance again. While the move is
expected to have positive outcomes of negating the parallel economy and reducing tax evasion, its full impact on the CPR
sector is still to be seen.

In light of demonetization s effect in the market place, businesses need to show dexterity to change with the times and
respond to disruptions, whether controlled or uncontrolled.

In this edition, we have outlined how companies face disruptions in this highly competitive sector and the strategies they
adopt, both from an Indian and a global perspective.

Taking a step further, we look into the trade spend of companies to understand whether what they consider as a
necessary evil is delivering t e re uired in uence, especially en costs and revenues are at attle

Finally, we continue our featured section, the Innovation board, where we attempt to present to you snapshots of
recent innovations that have emerged in the Indian and global consumer goods and retail space.

We hope you enjoy reading this issue of the retailer and look forward to your valuable comments and feedback.

We wish you a very happy and prosperous New Year 2017.

Pinakiranjan Mishra

Partner and National leader, Consumer Products and Retail

EY, India

C elebrating eigh t years of Th e retailer

C ontents

I mpact of demonetiz ation

0 4 on th e C PR sector

H ow to respond in a disruptive
0 6 fast- moving consumer goods
( F M C G ) market?

1 6 A re trade spends delivering th e

req uired impact in F M C G ?

2 2 I nnovation board

I nv ol v e your s el f :

We look forward to hearing your feedback and suggestions.

To contribute to editorial content, please contact Riddhi Bhimani
T: + 9 1 22 619 21618
E: riddhi.bhimani@in.ey.com
 1
I mpact of demonetiz ation
on th e C PR sector
The demonetization of INR1,000 and INR5 00 currency notes
is aimed at negating the parallel economy built on unaccounted
cash accumulation. This step should reduce tax evasion and
unaccounted money from circulation, which is currently
estimated by various sources to be 25 % to 30% of the country s
GDP.1
F acts
India has one of the highest levels of currency circulation
in the world: 12.1% of GDP.2
Cash on hand is estimated to be 3.2% of household assets:
approximately US$ 220 billion.3
INR5 00 and INR1,000 currency notes accounted for 86%
of the total INR16.4 2 lakh crore value of bank notes in
circulation ( as on 31 March 2016) .4
The demonetization exercise and subsequent removal of
unaccounted money could have an immediate impact on:
C ash availability: There would be limited supply of
currency, especially of the lower denomination
I mpact on th e C PR sector
B usiness environment
During the temporary cash crunch scenario, consumers are
spending judiciously and postponing discretionary purchases
until the situation improves. As a result, there is an adverse
impact on the immediate demand for consumer goods
especially discretionary products such as ice creams, chocolates
and beverages and gold and other jewelry articles.
Demoneti ation as led to a signicant drop in footfall in
stores, malls, restaurants and showrooms. Small traders and
unorganized retailers are facing the brunt of the situation, as
most of their transactions are in cash. Also, online retailers are
witnessing a drop in cash-on-delivery orders, while restaurants
are seeing lower sales.
The ripple effects of the temporary demand disturbance are
being felt by manufacturers and traders:
Production for some companies has been impacted by
the non-availability of select raw materials ( e.g., agri-
commodities) .
Companies are also cutting down production to adjust for
t e unanticipated ig er levels of unsold nis ed goods
across the supply chain.

Supply chains are further getting affected by the cash

Taxes: Deposit of cash hitherto not disclosed could
widen the tax base and increase tax collection.
e overnment is also e pecting a signicant
collection of unpaid taxes through old notes.
crunch faced by transportation vendors.
Traders and distributors are unable to pick up stock because
of the liquidity crunch, which is leading to manufacturers
extending the credit period.

Inflation: Removal of a signicant amount of cas Demand disturbances are likely to have an impact on the
from t e system ould elp ring in ation do n credit-repayment ability of traders and distributors in the
near future, leading to defaults.

I nterest rates: De ationary trends coupled it a

%
surge in bank deposits could lead to a lowering of
interest rates to boost consumption and
counter- alance t e de ationary trends, as ell as
enable the servicing of the deposits.

1
Source: World Bank reports
2
Source: Credit Lyonnais Securities Asia report as published in Business Standard dated November 9 , 2016
3
Source: Credit Lyonnais Securities Asia report as published in Business Standard dated November 9 , 2016
4
Source: Credit Lyonnais Securities Asia report as published in Business Standard dated November 9 , 2016

4 | Th e retailer
Money supply is expected to ease out gradually as the
circulation of new currency picks up pace. As the situation
improves slowly, the demand for essential items and utilities will
revive, liquidity will improve and normalcy will be re-established
across the supply chain. The recovery will probably start with
businesses that are deemed essential e.g., food and
grocery with luxury products expected to take the maximum
time to recover. Over the longer term, demonetization will help
restore real demand.
Demonetization will also have a profound impact on the business
environment over the long term, especially in conjunction
with the implementation of GST. It will raise the cost of doing
business for businesses that are not compliant. In several cases,
it will fundamentally alter their business model, thus giving
compliant businesses an opportunity to gain market share.
ncreased digital payments ill ma e t e nancial supply c ain
transparent and e tremely efcient, cutting transaction time
and cost.
R etail rentals
Removal of a signicant amount of cas from t e system ould
have an impact on retail real estate prices. The retail real estate
market can be bifurcated into high-end malls and mass malls.
Leases in the retail segment are typically a mix of minimum
guarantee and revenue-sharing. The high-end segment is likely
to be affected negatively because of the high usage of cash in
the segment, and hence there could be downward pressure on
rentals for high-end malls. For mass malls, the impact on rentals
due to demonetization would be limited.
M ode of transaction
o counter t e sudden demand disruption, organi ed of ine and
online retailers are now heavily encouraging consumers to move
away from cash and use various digital payment alternatives,
especially debit cards. As of August 2016, there were 712.5
million debit cards and 26.4 million credit cards in operation.5
Retailers are aggressively promoting the use of debit cards in
5
Source: https: //www.rbi.org.in/Scripts/ATMV iew.aspx accessed 18 November 2016
semi-urban and rural areas to offset the impact of lower demand
due to limited cash availability. In urban areas, digital wallets
are witnessing a surge in usage. Retailers have also turned to
electronic transactions to pay traders and regional stockists to
counter the impact of the liquidity crunch to some extent. This
is already seeing results, with several food and grocery retailers
seeing restoration of business levels.
Demonetization and the subsequent cash crunch would help
trigger a change in consumer psychology and propensity to use
cash for transactions. It will help increase the penetration of
cashless transactions among consumers as well as traders and
stockiest across the supply chain.
H ow can companies prepare th emselves to
address th e impact of demonetiz ation?
Assess the value chain for the impact of demonetization
Identify mitigating steps monitor stock levels across
the supply chain, adjust production, extend credit to
distributors, encourage digitization of payments etc.
Ascertain potential business opportunities and list the
necessary steps in that direction
Find partners to support these mitigating efforts ( e.g.,
banks, digital payment service providers such as banks and
digital wallets)
Finalize all actions and implement a strong process and
monitoring mechanism
C onclusion
Although the short-term impact of demonetization
on the sector will be unfavorable, over the medium
to long term it should bode well. It will help restore
real demand, lo er in ation, soften retail rentals and
expedite the adoption of cashless transactions.
Th e retailer | 5
 2
H ow to respond in a disruptive fast- moving
consumer goods ( F M C G ) market?
F M C G A market in disruption The pressure already felt by companies in the sector is evident
in an EY 2016 global survey of 212 consumer product leaders,
The global FMCG industry is facing massive disruption. New supported by CEO and CFO interviews. Of those surveyed,
entrants that are attuned to changing consumer preferences 75 % believe that tried-and-tested ways of creating value are
are providing stiff competition to established brands, with some increasingly getting disrupted and to keep pace, 68% conceded
eating into their market share. t ey need to ma e signicant c anges to usiness operations 6

C onsumer product ( C P) companies know th ey need to ch ange but are struggling to execute

E xh ibit 1 : % of C P leaders w h o say:

7 5 %%
Traditionalmethods
Traditional
ofvalue
methodsof
valuecreation
creationare
increasingly
are
increasinglydisrupted
disrupted
7 7 55 %%
t is muc difcult
t is today
muc difcult today to
to sustain
sustain prota le gro t
prota le gro t
7 7 5 %%
It Ithas
hasbecome
totosustain
harder
become harder
orgrow
sustain or grow
operating margins
operating margins
The only thing that I would
say I want this company to
be better at is speed. To win
you have to be faster than
the others, and sometimes
I think we can be speedier.
There s a tradeoff between
riskier and speedier, but that
balance is shifting slightly
66 8 % 4 4 6 6 %% 7 7 4 4 %% toward speed.

We have attempted to adapt
WeWeneed
need to make
to make We in
have attempted
response toadapt
to disruptive Our actions need
Our actions need
Paul B uicke, C E O of Nestle
signicant cc anges
signicant angestoto in response
change butto disruptive
actions not totobe bolder
business operations be bolder
business operations change but actions
yet effective
not yet effective

Source: EY analysis7

6
Does the thinking you know deliver the results you need? , http: //www.ey.com/gl/en/industries/consumer-products/ey---consumer-products-
sector---balance---getting-back-in-balance? utm_source= Twitter&utm_medium= % 4 0EYConsumerGoods&utm_campaign= 04 /07/2016,accessed
December 10, 2016
7
Does the thinking you know deliver the results you need? , http: //www.ey.com/gl/en/industries/consumer-products/ey---consumer-products-
sector---balance---getting-back-in-balance? utm_source= Twitter&utm_medium= % 4 0EYConsumerGoods&utm_campaign= 04 /07/2016,
accessed December 10, 2016

6 | Th e retailer
A similar trend is being witnessed in the Indian FMCG sector.
Emerging players are disrupting the market with their unique
selling propositions around Ayurveda, affordability, traditional
avors and innovative pac aging, t ere y gaining mass
acceptance.
to existing brands. Also, with faster adoption of digital platforms
such as smartphones, internet and social media, startups
are exploring new sales and marketing channels to reach
consumers.

S ome disruption th emes players are follow ing

W h at is driving disruption?
The rise of disruptor brands can be attributed to a shift in
demographics toward millennials ( those born between 19 80 and
20008) and fast-changing technology. Millennials are demanding
more personalized offerings and are willing to experiment.
Emerging brands are targeting this segment as they lack loyalty
Today s consumer expectations around what they want from
products, how they shop and how they interact with brands
are c anging Disruptors are redening t ese consumer
expectations by following innovative themes around product
development and delivery channels, leading to their success.

Disruptors are redefining consumer expectations by following various themes

Today s consumer expectations S ome disruption th emes S ome disruptor brands

Personaliz ation Utilizing subscription-based Dollar Shave Club

Products and services tailored to individual needs online direct-to-consumer H arry s
and preferences channels Bevel
Graze
Price/ Q uality NatureBox
H igh quality products at reasonable prices The H onest Company

A nyth ing,anytime,anyw h ere

24 /7 access Embarking on social media for Glossier
product development Stowaway
C onvenience
Freedom of choice in products, delivery and
payment options Rediscovering the love for Pulse ( DS Group)
traditional avors consumption Paper Boat ( H ector Beverages)
E xperience habits
Engaging shopping experiences: unique,
informative and interactive

I nformed engagement
nformation on corporate prole, products and
Positioning around value for Patanjali
access to consumer reviews
money
S ocial interaction
Social sharing

Source: EY analysis
FMCG companies must evolve with the consumers to remain relevant

8
Goldman Sachs Global Investment Research, http: //www.goldmansachs.com/our-thinking/pages/millennials/, accessed December 20, 2016

Th e retailer | 7
 S ome of th ese emerging disruption th emes are as follow s:

U tiliz ing subscription- based online direct- to- consumer ch annels: Global FMCG startups such as men s shaving players
( Dollar Shave Club, H arry s and Bevel) , snack-food providers ( NatureBox and Graze) and baby products provider The
H onest Company are utilizing online subscription to directly reach consumers.9 These digital-only companies mostly target
a niche segment of millennials to gain traction and rely heavily on social media for marketing.

E mbarking on social media for product development: Global online beauty and grooming brands such as Glossier and
10
Stowaway are extensively using social media to communicate directly with the millennial consumer. They formulate and
modify products based on customer feedback through blogs and social media platforms.

R ediscovering th e love for traditional: Emerging Indian FMCG brands such as Pulse and Paper Boat are building their
11
products ased on traditional local avors and consumption a its in t e country These brands have been able to bring
about disruption by positioning their products as traditional and natural as well as by creating an emotional connect with
consumers by positioning their products as something they cherished in their childhood or which is part of their culture.

Positioning around value for money: Players such as Patanjali are disrupting the Indian FMCG market and gaining mass
12
acceptance with their unique selling proposition around affordability.

9
These Direct-to-Consumer Brands Are Disrupting the Beauty Industry, http: //www.adweek.com/news/advertising-branding/these-direct-
consumer-brands-are-disrupting-beauty-industry-169 4 35 , accessed December 12, 2016; Disrupting Procter & Gamble: Private Companies
Unbundling P&G and the Consumer Packaged Goods Industry, https: //www.cbinsights.com/blog/disrupting-procter-gamble-cpg-startups/, accessed
December 12, 2016 onsumers on board how to co-pilot the multichannel journey, EY publication, http: //www.ey.com/GL/en/Services/Advisory/
EY-consumers-on-board, accessed 04 November 2015
10
These Direct-to-Consumer Brands Are Disrupting the Beauty Industry, http: //www.adweek.com/news/advertising-branding/these-direct-
consumer-brands-are-disrupting-beauty-industry-169 4 35 , accessed December 12, 2016
11
DS Group s Pulse candy hits Rs 100 crore in 8 months, equals Coke Z ero s record, http: //economictimes.indiatimes.com/articleshow/5 189 089 3.
cms utm source contentonterest utm medium te t utm campaign cppst, accessed Decem er aper oat moot sailing,
ttp nanciale press com industry paper- oat-smoot -sailing , accessed Decem er ,
12
The man who enabled Patanjali disrupt the FMCG space, http: //www.indiaretailing.com/2016/05 /19 /food/the-man-who-enabled-patanjali-
disrupt-the-fmcg-space/, accessed December 12, 2016

8 | Th e retailer
S trategy takeaw ays from some global F M C G disruptors

D isruptor U nderlying need D ifferentiation strategy K ey facts

D ollar S h ave C lub Affordability and Sells through online subscriptions of ~ US$ 1 a Captured 5 4 % of the US
A disruptive innovator convenience in month plus shipping; online subscription channel online shaving market in
that offers low-price purchasing frequently enables affordable pricing 2015 , within three years of
razors through replaced shaving Does not own manufacturing assets; engages business
subscription equipment in contract manufacturing with a South Korean
manufacturer US$ 15 2m sales in 2015 ;
sales growth: 236% CAGR
Uses video marketing and social media for customer 2012 15
engagement
Brand launched with a funny video on YouTube US$ 160m in venture
featuring the founder himself; generated 12k funding ( till J uly 2016)
members in 4 8 hours
Acquired by Unilever in
2016 for ~ US$ 1b

Th e H onest Millennial moms value Launched an online, subscription-based brand in a V alued at US$ 1.7b within
C ompany safety, charitable crowded category four years of business
Provider of socially causes, environment
Leverages the brand name and founder actress
responsible infant, and time J essica Alba s celebrity appeal to build trust of US$ 300m revenue in
personal and homecare being eco-friendly 2015 ; revenue growth:
products 211% CAGR 2012 15
Uses social media and content marketing for
engagement; posts include mom-friendly content Raised US$ 222m from
such as nursery ideas
investors ( till September
Mobile app integrates with customer accounts to 2016)
track orders and renew subscriptions

G lossier Gap for a beauty H ighly curated product line includes go-to items such Raised US$ 24 m in funding
The online makeup brand geared toward as priming moisturizer that was formulated based in 2016
brand using social specic needs of on consumer feedback from the founder s popular
media for product millennials beauty community Into the Gloss H ad raised US$ 10.4 m
formulation Utilized Instagram for brand pre-launch; solicited earlier
customer feedback on product packaging, branding,
etc. by snapping pictures during the Over 200,000 followers on
product-development process Instagram within two years
of launch
Utilizes feedback on blogs and social media for
product development

13
Unilever makes play to become a consumer services brand with Dollar Shave Club deal, https: //www.marketingweek.com/2016/07/20/unilever-
makes-play-to-become-a-consumer-services-brand-with-dollar-shave-club-deal/, accessed December 10, 2016; Unilever takes on Gillette with $ 1
billion Dollar Shave deal, https: //www.bloomberg.com/news/articles/2016-07-20/unilever-buys-dollar-shave-club-with-15 2m-in-sales, accessed
December 10, 2016

Conrmed onest Company in tal s to sell, ttps tec crunc com conrmed- onest-company-in-tal s-to-sell , accessed
December 10, 2016; H ow J essica Alba Built A $ 1 Billion Company, And $ 200 Million Fortune, Selling Parents Peace Of Mind, http: //www.
forbes.com/sites/clareoconnor/2015 /05 /27/how-jessica-alba-built-a-1-billion-company-and-200-million-fortune-selling-parents-peace-of-
mind/# 5 e4 fd9 01f0cc, accessed December 10, 2016;

H ow We Raised Our Latest Round Of Funding, https: //intothegloss.com/2016/11/glossier-series-b-funding-announcement/, accessed December

10, 2016

Th e retailer | 9
S trategy takeaw ays from some I ndian F M C G disruptors
D isruptor U nderlying need

Pulse ( D S G roup) ac of mi and old avors in t e ndian ard- oiled candy

mar et segment, ic is dominated y single avors
The brand that has disrupted the
candy market in India with
its uni ue avor

Paper B oat ( H ector B everages) Less availability of traditional/ home-made Indian drinks in a
packaged form
The beverage brand that quenches thirst by
reviving memories

Patanj ali Need for high quality value-for-money natural products across
categories such as personal care and food
The provider of affordable natural and
ayurvedic products

Source: News14 , EY analysis

H ow sh ould players respond? A gility crucial for success

Against this backdrop of disruption caused by emerging players, companies need to re-align their business strategies to stay
competitive. They need to be agile to alter their product offerings and engagement channels, keeping in mind the changing
consumer preferences.

14
DS Group s Pulse candy hits Rs 100 crore in 8 months, equals Coke Z ero s record, http: //economictimes.indiatimes.com/articleshow/5 189 089 3.
cms utm source contentonterest utm medium te t utm campaign cppst, accessed Decem er aper oat moot sailing,
ttp nanciale press com industry paper- oat-smoot -sailing , accessed Decem er , reality c ec on atan ali, ttp
www.thehindubusinessline.com/opinion/columns/a-reality-check-on-patanjali/article87104 29 .ece, accessed December 11, 2016; Euromonitor;
India Consumer Sector - Patanjali s success not a zero sum game, J une 2016, Credit Suisse, via Thomson One; Make in India! H ow Patanjali is
brewing a storm in FMCG sector, http: //www.indiainfoline.com/article/news-top-story/make-in-india-how-patanjali-is-brewing-a-storm-in-fmcg-
sector-11601130029 1_1.html, accessed November 30 2016

1 0 | Th e retailer
 D ifferentiation strategy K ey facts

Offered product experience similar to the traditional Indian eating habit of INR1b sales within eight months of launch
consuming raw mango with salt/spice with zero marketing cost

Priced at INR1 with increased grammage to give consumers a full mouth feel for a
heightened eating experience that peaks later

Leveraged the extensive distribution reach of DS Group in making the product

available at local cigarette shops

Extensive word of mouth publicity, leading to huge brand success

Created a ne category of randed et nic- avored drin s t at ere earlier Sells more than 1.5 m packs every month
consumed at home or local vendor shops
V alued at US$ 100m within three years of
Innovative packaging; offered in a sleek, single-serving crushable plastic form that business
is environment-friendly

Extensive digital marketing; strong emotional connect through social media by

inviting customers to share their childhood stories

Word-of-mouth publicity is the key driver; steers clear of high-cost celebrity INR5 0b net sales in FY16; net sales growth:
endorsements, culminating into lower advertising spends 83% CAGR FY12 FY16

Majorly sells products through over 15 ,000 exclusive formats, which reduces > 10% market share in the Indian ghee and
distributor margin honey market
Not focused on margins; operates on low-cost models to promote product
affordability 4 th largest player in the Indian toothpaste
and shampoo market, with a share of ~ 5 %

Source: EY Analysis
Th e retailer | 1 1
C ompanies can adopt th e follow ing strategies to respond to competition by
emerging players
C ontinuous
product innovation
Offer differentiated product offerings in line
with unique preferences of consumers: organic,
health and wellness, and value for money. For
example, Colgate, which has limited presence in
the natural space, launched a herbal toothpaste
brand Cibaca V edshakti in 2016
Focus on personalization. For example, Mars
allows customers to create their own M&M s
on its website and Ferrero allows customers to
create a personalized label for their Nutella jar
Localization. For example, PepsiCo India
launched Nimbooz Masala Soda to give an
authentic Indian taste
Target niche segments. For example, Unilever
acquired Seventh Generation, a US sustainable
cleaning products company in 2016
Source: News15 , EY analysis
Source: News15 , EY analysis
To sum up, consumer preferences are rapidly changing. New
entrants and technologies have disrupted the industry. Amid
ongoing disruption, companies will need to relook at their
business models keeping the consumer at the forefront to
sustain prota le gro t peed and agility ill e crucial for
success. Companies will need to customize and deliver relevant
1 2 | Th e retailer
E xpand into
new sales ch annels
Adopt an integrated multi-channel approach that includes
investments across other emerging sales channels in addition to
traditional retail and wholesale channels. Some of these are:
Direct-to-consumer channels:
Self-branded stores. For example, Nespresso, Nestle s coffee
rand, is sold t roug over of ine coffee outi ues
globally. Wagh Bakri tea, an Indian tea brand, also reaches
consumers directly through its tea lounges
Online. For example, the P&G Shop is a digital channel selling
a wide assortment of P&G brands. It has also launched
subscription-based Gillette Shave Club and online subscription
for its premium laundry brand Tide Pods
Mobile. For example, Dollar Shave Club has its own mobile
application to enable purchase of its razors and blades
e enets of direct-to-consumer include greater customer
engagement, expanded market reach, improved margins and
access to customer data
E-commerce marketplace. For example, Unilever partnered with
Alibaba to expand its distribution to rural consumers in China and
use data from Alibaba s online marketing unit and cloud business to
improve its digital advertising strategy
products across all the markets and channels in which they
operate. This will require better management tools, and new
capabilities in innovation, marketing, sales and commercial
analytics.
B uild personaliz ed
communication w ith consumers
Integrate digital into the overall
marketing communication approach,
which includes other touch-points
such as TV , print and radio
Digital marketing provides various
enets suc as personali ation,
lower cost, wider reach and insights
into buying behavior
Utilize social media for crowd
sourcing, ask for customer
preferences around product and
branding, and run contests and polls.
For example, PepsiCo s Frito-Lay Do
Us A Flavor contest asks customers
to submit their ideas for the next
potato c ip avor
Use content marketing and leverage
digital avenues to run videos and
campaigns. For example, Cadbury s
Chocolate Charmer online
advertising campaign for its Dairy
Milk brand provided ROI 4 times
higher than its TV campaign
D evise an effective
pricing strategy
Devise product pricing as per the
target segment. For example,
Patanjali s products are priced at a
discount to the competition, which
gives them a mass appeal. Paper
Boat has positioned its beverages
at the premium end to target more
urban-centric youth
Depending on the pricing strategy,
there could be pressure on margins.
To keep margins healthy, focus on
cost control
Look at cost reduction by channel
optimization: options such as the
online direct to consumer model
( provided the cost of delivery is
controlled fcient sourcing,
asset-light model and targeted yet
low cost advertising can be explored
H owever, companies should not cut
costs aggressively under pressure
to maintain returns. They must cut
costs while re-investing for growth
L everage analytics for
deeper consumer insigh ts
Leverage digital technology, data
and analytics to gain consumer
insights such as personal
preferences and shopping
pattern to be able to customize
product offerings
Utilize analytics to make effective
pricing, promotions and product
placement decisions. It will also
give insights into the products
consumers are buying per
retail channel and the optimum
marketing mix per channel
For example, Nestle Waters
North America, in partnership
with Salesforce, has launched a
digital consumer engagement
center to monitor and analyze
ot online and of ine data
about Nestle Water brands

15
Colgate to battle Patanjali s Dant Kanti with herbal toothpaste V edshakti, http: //economictimes.indiatimes.com/industry/cons-products/fmcg/
colgate-to-battle-patanjalis-dant-kanti-with-herbal-toothpaste-vedshakti/articleshow/5 34 8224 9 .cms, accessed December 10, 2016;

ersonali ed - y s com, ttps mymms com congurator do, accessed Decem er , ersonali ed a els utella,
ttps nutella com en ca la el, accessed Decem er , o , epsiCo plans to go traditional in ndia, ttp usiness-standard
com/article/companies/now-pepsico-plans-to-go-traditional-in-india-115 031800614 _1.html, accessed December 12, 2016; Unilever Buying
Seventh Generation, http: //fortune.com/2016/09 /19 /unilever-buying-seventh-generation/, accessed December 12, 2016; Our Stores | Store
Locator Page | Nespresso, https: //www.nespresso.com/fr/en/storeLocator, accessed December 12, 2016; Tea lounge to bolster Wagh Bakri brand
e uity, ttp timesondia indiatimes com usiness india- usiness ea-lounge-to- olster- ag - a ri- rand-e uity articles o cms,
accessed December 12, 2016; Procter & Gamble launches direct-to-consumer subscription business, http: //www.businessinsider.com/procter-and-
gamble-launches-direct-to-consumer-subscription-business-2016-7? IR= T, accessed December 12, 2016; Alibaba, Unilever announce partnership
to reach Chinese consumers, http: //www.reuters.com/article/us-alibaba-unilever-idUSKCN0PU0322015 0720, accessed December 12, 2016; 4
Examples of Clever Crowdsourcing Campaigns, http: //www.mainstreethost.com/blog/four-examples-of-clever-crowdsourcing-campaigns/, accessed
December 13, 2016; Digital V s TV spend: Cadbury s online video advertising gets 4 times more ROI than TV , http: //www.digitaltrainingacademy.
com/casestudies/2012/03/digital_vs_tv_spend_cadburys_o.php, accessed December 13, 2016; Nestl Waters Teams Up with Salesforce to Launch
Consumer Engagement Center, http: //investor.salesforce.com/about-us/investor/investor-news/investor-news-details/2016/Nestl-Waters-Teams-
Up-with-Salesforce-to-Launch-Consumer-Engagement-Center/default.aspx, accessed December 13, 2016

Th e retailer | 1 3
 V iv ette D cr uz , S enior M a na g er , C ons umer P r od ucts a nd R eta il
V ivette has over 10 years of experience in the CPR space. She has worked with a diverse set of clients across
apparel and lifestyle, consumer durables and consumer products. She has helped clients in their strategy
formulation, consumer studies and implementation assistance.
T : + 9 122619 215 30
E : V ivette.Dcruz@in.ey.com

I s h a G up ta , K now l ed g e Ana l ys t, C ons umer P r od uct a nd R eta il

Isha is a senior analyst in the EY Knowledge organization with focus on CPR sector. She has six-plus years of
experience in research, analytics and knowledge, having worked on industry reports, thought leaderships and
strategy riengs across diverse sectors suc as C R and life sciences
T: + 9 1 124 677 9 336
E: isha.gupta1@in.ey.com

1 4 | Th e retailer
Th e retailer | 1 5
 3
A re trade spends delivering th e
req uired impact in F M C G ? 1 6
In business and marketing, trade refers to the relationship
between manufacturers and general/traditional trade and/or
modern retailers. Trade promotion refers to marketing activities
that are executed in retail between these two business partners
and the end consumers.
value-conscious and evolving. H owever, these urban consumers
account for US$ 25 billion of the overall US$ 37 billion Indian
FMCG market, presenting an opportunity for FMCG companies.
The Indian consumer psyche is evolving at breakneck speed and
the Indian marketer needs to keep up with the high stakes.17

Trade promotions form part of below-the-line marketing
initiatives largely targeted toward general trade and modern
trade by FMCG companies. H owever, consumers in India are
vast and varied, making marketing a multifaceted task.
India has one of the most complex trade structures: 8.8 million
FMCG retail outlets and consumers that are demanding,
Globally, consumer goods companies spend over US$ 25 0
billion a year on trade promotion, such as discounts, displays
and special offers e.g., buy one/get one free offers ( BOGOs) .
or many, it is t e largest item on t eir prot and loss
statements, exceeded only by cost of goods sold. Yet, their
investments in t is area do not necessarily deliver t e prota le
volume expected, and have not done so for decades.

Revenue growth and operating margin for top 5 0 consumer

products goods companies over the last 10 years

18.6% 18.9 % 19 .3% 19 .1% 19 .2% 19 .1%

18.2% 18.6% 18.1% 18.3%
20%

15 %

10% 14 .0%

10.0%
5 %
6.7% 7.1% 6.6% 6.0%
5 .5 %
0% 2.3%
-1.0%
-3.0%
-5 %
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Opergating margin Revenue growth

Source: S&P Capital IQ . Chart shows weighted revenue growth and EBITDA margin performance of the top 5 0 CPG ( food, beverage, H PC and tobacco)
companies as ranked by revenues in 2014

Over the last 20 years, trade spend has grown from 13% of gross revenues to nearly 20% , on average, while margins have remained
relatively at e trend cannot continue indenitely

16
The content of this article has been excerpted from EY sources and an EY publication on optimizing trade promotion investments while achieving
prota le gro t , y ary inger, rincipal, dvisory ervices
17
http: //www.nielsen.com/in/en/insights/news/2014 /keeping-up-with-indias-urban-fmcg-consumer.html

1 6 | Th e retailer

7 5 %
of CP executives believe it
has been harder to sustain
their operating margins
over the past three years
Source EY s margin unlocked: integrated margin management to deliver
breakthrough performance in consumer products
Challenges to profitable growth for CP companies
Shifts in consumer preferences, increasing complexity in routes to market, slowing growth and pressures on margin from retailers
are c allenging prota le gro t
C h allenges
D ig ita l s h if ting contr ol to th e
cons umer
I ncr ea s ing l y comp l ex r outes
to ma r k et
L imited v ol ume g r ow th in
ma tur e ma r k ets
C h a l l eng ing op p or tunities in
emer g ing ma r k ets
V ol a til ity in inp ut cos ts ,
r eta il er p r es s ur es & cons umer
d ema nd f or v a l ue- f or - money
s q ueez e ma r g in
P r es s ur e to imp r ov e cons umer
bus ines s ma r g in
Source: EY Balance Survey CPG And Retail Companies
Our insights reveal that around half of all trade promotion
7 4 %
initiatives actually lose money, yet companies persist with the
practice nonetheless. Reliance on trade promotion has become
an ingrained part of how the industry works.
of CP executives agree
t at signicant c anges to To make their trade promotions more effective, companies have
their business model is invested in better processes, resources, and tools/software to
needed to sustain historic
manage spends. But this has had little sustainable impact on
margin levels
the core problem. Across the industry, trade spend continues
to rise, ile volume and prot margins are ecoming arder to
sustain or grow.
C ommercial imperatives
Deliver engaging shopping experiences and develop new ways to interact with consumers based
on changing behavior
Collect the right data and interpret the most valuable consumer/shopper insights
Give the choice of how, where and when they buy the products to the consumers, expanding
successfully into new channels
Establish ubiquity and consistency across channels and touch points
Move away from short-term volume growth driven by pricing/promotion, focusing instead on
margin and sustainable growth
Focus on optimizing the performance of the brand/product portfolio
Innovate to remain relevant to the consumer, with compelling products that meet the needs of
individual markets/channels withstand market volatility
Expand successfully into new markets
Invest in revenue growth management capabilities that help devise granular strategies for
brands, portfolio, pricing and promotions
Develop an effective price architecture strategy aligned with the overall brand and category, and
channel strategy to optimize margin capture
Simplify organization, processes and SKUs
ransform t e commercial operating model for agility and efciency, deploying t e necessary
marketing and sales capabilities to outperform the market
Eliminate costs and complexity that do not provide consumer value
Th e retailer | 1 7
Trade promotion ch allenges
Trade promotion has become a US$ 25 0 billion+ conundrum with global companies struggling to avoid using it to enable an
articially lo ase price it little to no incremental ase volume gro t

Trade promotion spend has doubled since 2000 and reached nearly US$ 25 0 billion annually
anufacturers are see ing to increase volume and prot it less trade investment
Promotion volume is increasing at the expense of base volume
T r a d e s p end es ca l a tion
t is increasingly difcult for manufacturers to return to t e desired price levels

Retailers are requesting more margin support and resources from manufacturers to help improve
category performance
Pre- and post-promotion analytics
Shopper/consumer insights
R is ing r eta il er /tr a d e ex p ecta tions Demand planning/forecasting
Manufacturers are expected to participate in joint business planning with retailers

Managing trade promotion spend is becoming more labor-intensive

tandardi ation and synergies are re uired to sustain manufacturer prota ility
Retailers are growing and maturing their private label brand performance ( at the expense of
I ncr ea s ing cos t p r es s ur es national brand performance)
o er retail prices are forcing manufacturers to nd operating efciencies

Data availability is exploding: T-log, POS, loyalty, inventory, social media and syndicated
Manufacturers are struggling to synchronize all the data for analytics: aggregate, prepare and
I nf or ma tion ov er l oa d analyze data

Th e trade spend paradox

Companies need to address trade promotion spend so that
it ma es serious improvements to ottom line prots ey
need to move beyond trying to better manage trade spend and
instead nd ays to optimi e t e return on t eir investment
Trade promotion spend has grown at a time when companies
have been cutting other costs aggressively. Most cost
cutting as focused on corporate over ead, ac ofce and
administrative e penses, and supply c ain efciencies is as
yielded improved operating margins but has not done much to
address growth and in most cases revenues have actually
declined.
Many companies have increased the list prices of their products
in the hope of stemming falling revenues. H owever, such moves
tend to result in a corresponding loss of volume and/or market
s are o ll t at gap, companies ave resorted to even greater
spending on trade promotion.
This creates a paradox: companies would like to cut their
spending on trade promotion, but their strategies are actually
forcing them to spend more on trade promotion.

1 8 | Th e retailer
D elivering trade promotion R O I
o drive improved R , manufacturers and retailers need to address ey uestions around trade promotion efciency and
effectiveness.
Trade promotion R O I
Ef f ectiv enes s
H ow to segment channels/customers and build promotion
strategies that align with segmentation?
What is the optimal SKU portfolio/assortment and how do
trade promotion strategies align?
What is the pricing strategy and how is promotion used as
a lever?
H ow much should be spent on trade promotion and how
should it be allocated optimally across brands, channels
and accounts?
What are the optimal price/promotion strategies, tactics
and spending levels ( by product/customer) ?
H ow to ensure appropriate control/visibility to trade spend
and corresponding results?
A balanced transition to optimiz ed trade spend demands th e follow ing:
Find and manage the right balance between cost savings/
margin improvement and any consequent fall in sales
volume/market share
Move beyond tactical pilots to fully embrace the ongoing
use of analytics to optimize trade promotion spend
Be disciplined enough to make tough decisions about
cutting trade spend that does not improve bottom line
prots, and do so y or ing it trading partners
Efficiency
H ow to ensure simplicity in the trade funds management/
accrual processes while funding performance-driving
behaviors?
o to ensure payment deduction processes are efcient
yet pay-based on the appropriate level of proof-of-
performance?
H ow to ensure sales and support teams spend time on value-
added planning/analysis vs. non-value added administrative
activities?
What sales and support structure, roles, skills and measures
should be in place to adequately capture value?
What processes and tools should be deployed to support
trade promotion management ( TPM) and trade promotion
optimization ( TPO) ?
H ow can promotion planning be integrated with demand
forecasting to improve accuracy, inventory levels, etc.?
Think about trade spending more widely, to include payment
terms, volume rebates etc.
dentify a etter alance et een s ort-term prota ility
and the long-term capabilities needed to sustain results
Th e retailer | 1 9
Leading-class companies deploy a foundational, closed-loop methodology enabled by top-down governance, bottom-up planning,
aligned organization structures, and business and people performance metrics tied to brand, channel and account strategies.

Target setting and planning

Dene account-specic volume, prot and
business objectives
Roll up to a category, region and national
level promotion budget

Trade promotion planning Allocate funds across products and

customers
Develop promotion strategy
Develop targets & allocate Release funds to customer/ category
funds checkbooks
Develop promotion plans & Create customer plans
events

Promotion effectiveness Negotiation, execution and

tracking and measurement payments reconciliation
Track actuals vs. planned Capture commitments at
at the fund and customer/ event level
customer/event level Trade promotion measurement Trade promotion execution Review event performance
Evaluate the effectiveness Measure promotion Negotiate promotion plans vs. commitments
of promotions effectivess Authorize payments/ resolve
Manage fund accruals/ -
Monitor plan versus actual deductions
Review performance checkbooks
metrics and determine the
root causes of under and
Collect proof-of-performance
over performance Match open deductions to
Document and review promotion commitments

Trade promotion enablement

learnings with customers Send payment authorization
to identify impacts on
Date | System | Tools

Organisation | Roles | Responsibilities | to accounts payable in trade

future plans system
Accountabilities | Skills | KPIs

Some companies have tried to break out of this vicious circle, by This is a refreshingly new approach and the kind of strategy that
piloting new analytical tools, developing centers of excellence in is needed. The challenge is to implement it with the insights and
analytics, and simplifying closed-loop planning, execution and clarity needed to condently tip t e scales a ay from ope and
analysis. toward expectation.

These are all steps in the right direction. They have helped Ultimately, it is about moving beyond the desire to manage trade
companies nd ays to plan promotions etter, to ave greater promotion spend better and, instead, enter a position where you
visibility and control, and to make people more productive. can optimize your return on trade spend investment in other
ords, nding a sustaina le alance et een cost, volume,
More recently, companies are making the bold choice to cut
revenue and prot margins
trade spend and accept the risk that sales volumes may fall.
Their expectation is that the sales they maintain will be more
prota le

2 0 | Th e retailer
 Nitesh M eh rotra
Partner, Advisory, Consumer Products &
Retail ( CPR)

T : + 9 1 22 619 2 3787
E : nitesh.mehrotra@in.ey.com

Nitesh is a Partner with EY s Advisory practice focusing on manufacturing, consumer products and retail
clients. Nitesh has 14 years of work experience advising clients on key business processes, enterprise risk
management ( ERM) , governance risk and compliance ( GRC) , data analytics and business transformation.
Nitesh has assisted leading companies across the CPR sector in India, South Africa, China, Russia, the UK and
the US in the area of business processes and operations transformation.

Th e retailer | 2 1
 I nnovation
board

Ama z on G O : N o ca s h ier s , no r eg is ter s H ea l th y ch ocol a tes ( w ith 4 0 % l es s s ug a r

a nd no l ines
Amazon Go has recreated the ease of online shopping in
a physical store and is disrupting traditional retail with its
innovative technology ( using machine learning, sensors and
articial intelligence to trac items t at customers pic up and
smart merchandizing ( e.g., exclusive chef-designed Amazon
Meal Kits, with all the ingredients needed to make a quick
meal) . It is a 1,800 square-foot convenience store located in
Seattle, where customers can check in via a mobile app, pick the
products they want and walk out of the store while paying for
their purchase via the app. It automatically charges customers
for the selected items upon leaving the store, hence there are
no cashiers, no registers and no checkout lines. The store is
currently open to Amazon employees only and will be open to
the public in early 2017.
content) by N es tl e
Given the growing health and wellness awareness among
consumers and increasing pressure from governments, leading
food companies such as Mondelez International Inc. and
PepsiCo. are altering their portfolios to offer healthier products
while also reducing the sugar/salt content in their offerings.
Nestle has developed a process to alter the structure of sugar to
make it taste sweeter in smaller amounts, enabling it to cut the
sugar content in chocolates by 4 0% .To avoid sudden changes in
the taste of chocolates, the company will gradually reduce the
sugar content and will start selling them in 2018.
Link used https: //www.bloomberg.com/news/
articles - - nestle-scientists-nd-met od-to-cut-sugar-
in-chocolate-by-4 0 Link accessed on 13 December 2016

Link used http: //www.businessinsider.in/This-is-Amazons-

grocery-store-of-the-future-No-cashiers-no-registers-and-
no-lines/articleshow/5 5 8174 33.cms Link accessed on 13
December 2016

2 2 | Th e retailer
V end ing ma ch ine s ens ing bod y h ea t Juice with a fizz
bef or e d is p ens ing
Coca-Cola India recently launched Fanta Green Mango, a juice
it a , in ndia as a pilot e everage is specically made
atorade ndia, a sports everage rand and an afliate
as per the taste of Indian consumers, at Coca-Cola India s R&D
of PepsiCo., has recently started an innovative marketing
center in Gurugram with help from the R&D centers in Atlanta
campaign Sweat It to Get It. It installed a vending machine
and Shanghai. The drink is composed of fruits procured directly
at t e itness irst ym, Del i, ic encourages users to rst
from local farms and local pulp processors. As part of the
work out and sweat and then stand in front of the machine. If a
pilot launch, it will be available in Delhi NCR and will initially be
user is sweating enough, the machine automatically dispenses
retailed through the e-grocery platform Grofers, eventually
a atorade, resonating its proposition of restoring lost uids
expanding to modern trade as well.
and electrolytes while also providing carbohydrate energy. This
concept explains the simple science behind the product in a more Link used https: //www.coca-colaindia.com/coca-cola-india-
relevant way and creates real-time human responses. pilots-rst- uice- -innovation-fanta-green-mango-ma e-india-
summit-mumbai/ Link accessed on 12 December 2016
Link used http: //brandequity.economictimes.indiatimes.com/
news/marketing/gatorade-wants-its-customers-to-sweat-it-to-
get-it/5 5 869 024 Link accessed on 12 December 2016

Th e retailer | 2 3
 Notes

2 4 | Th e retailer
Notes

Th e retailer | 2 5
2 6 | Th e retailer
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Th e retailer | 2 7
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