In recent decades, the rapid growth of China’s economy has led to an explosion in consumption. In the subsequent golden age for the country’s fast moving consumer goods (FMCG) market, it was less necessary to differentiate marketing and sales approaches substantially from those of competitors. Growing sustainably was not on the radar for many companies. Growth at scale was the primary focus.
This undifferentiated growth has slowed in recent years, however. Consumer packaged goods (CPG) companies were already navigating myriad changes in consumer behavior and channel structure–including the waning influence of traditional advertising, the rise of e-commerce, and increasingly mature consumers demanding higher- quality products. And then COVID-19 changed the landscape again. The pandemic has piled multiple pressures on China’s consumer goods and retail industries, making the short- to mid-term promotion of leaner commercial operations critical. And looking ahead, sharper, more focused strategies to create sustainable, differentiated and profitable growth will be essential to cement a winning position in an increasingly complex and competitive environment.
As such, new thinking across key commercial levers such as pricing and assortment mix will be crucial. CPG companies will need to conduct deep, real- time data-based analysis to take a granular view of their commercial operations and identify smart growth opportunities. This is where revenue growth management (RGM) comes in.
RGM eschews traditional “gut feel” tactics to create value through granular analytics-driven approaches to pricing, promotions, assortment mix, trade investment and new product innovation. For CPG companies in many mature markets, it is increasingly recognized as a necessity to capture the next wave of growth. But in China, RGM is in its relative infancy.
What is RGM?
RGM starts with gaining deep insights into how and why shoppers in China purchase certain products, using these insights to highlight areas in which value can be captured. To achieve this, at-scale data analysis is deployed within key pockets of growth. Here, we explore some of those areas further.
— Pricing: Channel pricing can be adjusted based on product net price elasticities (for both the company and key competitors), historical growth, and the likely response from competitors. The potential impact of these adjustments is also measured. For example, McKinsey helped a leading beverage company realize that a 10 percent price increase of one of its core SKUs would lead to a negligible volume impact (different from what the company originally believed), and even less so if competition followed suit. Instead, overall share from a value perspective would actually increase, making this a worthwhile action to carry out
— Promotions: Advanced analytics, driven by two to three years of SKU and store-level data on baskets and traffic, can assess the effectiveness of promotions and discounts. We helped a large grocery retailer transform its promotions program. This is often done in collaboration with key CPG partners by identifying the SKUs to focus on, the different types of promotions to use (e.g. buy one, get one free versus a percentage discount), and how often to promote. This was done by analyzing more than 200,000 historical transactions. The result? A net sales uplift of 30 percent in pilot stores
— Assortment: Product portfolios for key channels can be optimized by identifying “hidden-gem” SKUs (which have low distribution and high sales velocity) and “long-tail” ones (characterized by low sales volume and low profit). A large snacks player, for example, identified the opportunity to rationalize its assortment portfolio of more than 1,000 SKUs by over 20 percent with minimal sales impact but with much healthier margins. Using point-of-sale data to analyze consumer purchase behavior across its portfolio, as well as that of its key competitors, the snacks player was able to migrate sales to more profitable and higher sales velocity SKUs, as well as unlock supply chain cost savings
— Trade investment: RGM can ensure a healthy ROI for trade investment in key channels and trade partners, by identifying how best to allocate trade spend. During COVID-19, when consumers turned to the internet in droves, L’Oreal China was one player that quickly increased trade investment in online channels (by around 40 percent), and boosted its online advertising and use of key opinion leaders. On top of this, it increased its O2O investment by about 150 percent. This involved expanding its O2O team and ramping up partnerships with O2O players that had a critical role during the pandemic, such as Meituan and Ele.me. Partly due to this swift shift in channel investment, year-on-year L’Oreal China’s first-half sales grew by 18 percent, and by 30 percent in the second quarter
— New product innovation: This involves doubling down on SKUs that meet evolving consumption habits and consumer behaviors, for example, the shift to at-home and “better for you” options during the increased time at home and focus on health engendered by COVID-19. Chando, a Chinese skin-care player, provides one illustration of this. It rapidly launched a line of 75%-alcohol hand sanitizer during the pandemic, taking just one month to move from the product ideation stage to launching the product online
As the above examples show, for companies that get RGM right, the rewards can be significant.A McKinsey survey of markets in which RGM is established shows that sales growth is 3.6 percentage points higher versus peer average. And the ROI of promotional events can rise by up to 15 percent.
The landscape for RGM in China
So how can CPG players in China develop the RGM capabilities that will help them traverse the challenges they face? There are three areas in which core changes need to be made. These are:
— Analytics: Internal and external data must be collected with discipline, and analyzed for macro-consumption trends, consumer segmentation, and behaviors by key channels. This will provide a holistic view of the operating environment to identify and provide in-depth detail on growth and cost-control opportunities. Data analytics are often required in three areas:
• Consumer behavior insights: Understanding key existing consumption occasions, identifying emerging ones, and determining how they differ by consumer segment and across regions, to help appropriately fulfil consumer needs
• Points of sale: Focusing on transaction data, such as volume, price and promotion at SKU level and by key channel (e.g., traditional trade, modern trade and e-commerce) enables the analysis of pricing trends, basket size and consumer stickiness
• Trade investment: Tracking expenditure and revenue at each key channel and with key channel partners (e.g., national customers and offline/offline distributors) gives a granular understanding of investment effectiveness across the value chain. In a rapidly evolving channel landscape, this establishes a more accurate view of ROI
All of this comes with certain challenges in China, which historically has lacked tailoreddata–especially in traditional trade channels. But there are a variety of approaches companies can use to “build” their own. These include analyses of household consumption segmentation, store- map data, large-scale price surveys and more. Such data collection and analysis is crucial in China, given the country has diverging patterns of consumption behavior due to differences across city tiers, channels, regions and income levels. Arguably, this is getting ever easier in China with the help of more freely available and transparent retail data–including that from points of sale and loyalty cards–as well as demographic insights from mobile- service providers. Increasingly, in fact, the issue may be too much data–in these instances, defining specific RGM use cases and working backwards to be clear on which data sets to use can be extremely valuable
— Collaboration: Companies must remove departmental barriers and foster a highly collaborative culture, and everyone within the same organization should work towards targeted financial and strategic growth goals. RGM helps to align the overarching strategy and forge strong collaboration on all fronts, from data sharing and human capital to incentives and costs. In this way, CPG companies avoid the typical trap of over-indexing on growth in a specific area at the expense of overall growth (for example, online growing but offline declining when both channels could be growing simultaneously)
— Mindset: CPG companies in China have traditionally viewed growth in terms of market share and scale, and they have made commercial decisions on that basis. For example, a fear of losing market share has created a general resistance to price increases or SKU elimination, resulting in ineffective usage of shelf-space, stagnation of pricing and profit- margin growth, and an unfocused product portfolio strategy. RGM helps replace this mindset with an analytics-based, holistic growth approach–it is not share gain at all costs, but profitable and sustainable share gain that is important. This new mindset must permeate throughout the organization: from identifying opportunities to quantifying impact and executing strategy
The path to future growth
For CPG companies embarking on their RGM journey in China, there are some short- and longer- term measures to be considered.
Due to the pandemic, most companies have suffered heavy losses for at least one quarter of this year. The impact is notably most serious for product categories sold during the Spring Festival. With this in mind, we suggest consumer companies in China should start with short-term tactics to accelerate the implementation of RGM.
These tactics include establishing a cross- department RGM team to assess the financial impacts on the company; tweaking product mix to better reflect the current key demands of consumers, such as healthier products and basic daily necessities; and embracing channel structure changes, such as the shift to online.
Looking further ahead, there are a series of measures that should be implemented gradually to establish a more complete, precise, and large-scale RGM capability. These are:
— Introducing targeted pricing adjustments and promotional plans to further stimulate consumption
— Carrying out a greater number and variety of omnichannel promotions (online, O2O, social DTC). To keep pace with the rapid increase in online demand, data analysis and consumer management capabilities will also need to be improved
— Cooperating with retailers and distributors more effectively. At the same time, ROI must be accurately analyzed to improve the cost- effectiveness of joint investments
— Conducting a full evaluation and revamp of product portfolios as needed to ensure they meet changes in consumer preferences post- crisis over and above the short-term tweaks in product mix mentioned above
— Embedding RGM discipline into corporate DNA to ensure the effective implementation of an RGM mindset and strategy. For instance, this could include establishing an “RGM academy” to regularly train new talents on core RGM skillsets and methodology, and incorporating RGM-driven growth as a key agenda item during business planning
The COVID-19 pandemic has accelerated trends that were already emerging for China’s CPG players. Growth in consumer goods and retail markets has slowed, consumers are becoming increasingly mature, business models have diversified, and competition has become increasingly fierce.
It’s clear that for CPG companies in China, a transformation from scale-driven growth to more granular management of commercial operations has never been more urgent. High-quality, sustainable, and innovative growth is needed to move past the pandemic and lay solid foundations for future success. The time to act is now.