In 2022, the average consumer price inflation in the MENA region reached 6.3%, causing input costs to surge and compressing margins. Supply chain bottlenecks and shortages continue to strain operations. Truckload, less-than-truckload, and specialised transportation costs jumped over the past two years. And widespread labour shortages persist.
As the building pressure of these forces squeezes their profit pools, manufacturers and retailers are fighting to deliver value to consumers. For consumer products companies, these massive macroeconomic disruptions call for a sweeping and dynamic response across several pillars: supply chain resilience, operational productivity, design-to-value programs, and revenue growth management (RGM).
Of these, RGM tends to deliver value the fastest. In this environment, consumer products companies need to proactively develop comprehensive RGM strategies that enlarge the overall profit pool. Those that do will emerge from the current storm with stronger margins, win-win retailer relationships, clearer value for their consumers, and a stronger position for future RGM actions.
The RGM imperative
During the first waves of inflation, most consumer products companies increased prices to partially cover rising input costs. They hoped for a quick return to normal, or at least the ability to cover any remaining pressures by containing costs. However, as high inflation has persisted over the past year, many companies have found their initial increases were insufficient. Some have already made multiple rounds of additional pricing adjustments; others are deliberating more.
In addition to market turbulence, the rules have changed for many categories. The Covid-19 pandemic shook up consumption habits and patterns, prompting shifts in product offerings and channels. Many of those changes have endured, but others are reverting, further muddying the waters for consumer products companies and retailers as they try to meet consumers’ needs.
Today, it’s more important than ever for consumer products companies to build durable and flexible strategies that can withstand continued inflation and supply pressures. With no clear end in sight, programs that address the full suite of RGM elements—including pricing, assortment, price-pack architecture, promotions, and trade terms—will be vital value-creation muscles.
Four steps to sustainable RGM
Winning companies will be those that can seize the current moment with bold, decisive actions to address the near term, while building strategies for the medium and long term. They won’t simply revert to a standard playbook of changing line prices and restarting previous programs. Instead, leaders will take four steps to exhaust the full RGM tool kit and unlock value for both retail customers and consumers.
No. 1: Evaluate the total portfolio mix and prices
Industry leaders will find opportunity in turbulence by optimising portfolio pricing for their companies, retailers, and consumers. They understand this is a chance to take corrective action that can be harder to execute under standard conditions.
Companies can start by reevaluating the entire portfolio and the price gaps against both competitors and private label products. By understanding shifts in consumer behaviour, they can get the price-incentive curve right. They can also use pricing changes to shift their product mix toward their most profitable offerings. Finally, leading companies are mindful of key price points or thresholds, taking the opportunity to break through price stickiness where possible, while leaving headroom for future price increases.
No. 2: Reset promotional investments
As leading companies restart promotions after the pandemic, they’re pausing to reevaluate their promotional strategies. They’re rethinking how they can expand the category and create a win-win-win situation that maximises value for themselves, retailers, and consumers.
Historically, around 80% of promotional investments have failed to contribute to category growth. To avoid the common pitfalls, leadership teams can start by asking themselves several questions: What’s the role of promotion within our category—for instance, to increase household penetration and consumption incrementally, or win share? Is that role different in an inflationary environment? If so, how?
Once they define the role of promotions, they’ll need a deep understanding of promotion performance—one that goes beyond measuring sales increases to collecting granular data on the return on investment (ROI). Best-in-class companies take an unconstrained view, then diligently factor in customer and supply constraints, to limit low-ROI promotional activities.
No. 3: Rebase total customer investments
Industry standouts are completely rebasing their customer investments, including consumer promotions, fulfillment efficiency programs, retailer media, in-store assets, sales rep coverage, and data.
These companies determine the right consumer-back programs for online and in-store, to encourage innovation, push specific activation, and more. Leading consumer products companies also address inefficiencies, lower the cost-to-serve across the system, and allocate investments to the highest-value areas. We’ve seen companies do this through three steps.
- Analysing individual costs by channel and customer at each step of the value curve, to isolate channels and retailers that order higher-cost products.
- Sizing up the total value on the table from best-in-class partnerships, by determining which retailer ordering patterns and inventory management practices lead to the lowest system costs for the company and its partners.
- Rewarding retailers for the right behaviors with the right incentives and giving them teeth, to establish efficient win-win partnerships.
Finally, as companies rethink their investments, they’ll also need to rebalance them between customers and fulfillment models, to put their dollars behind areas of future growth.
No. 4: Capitalise on the present, while planning for the future
Best-in-class consumer goods companies are acting now to capture the opportunity at hand. But they’re also building the right capabilities and strategies for the future, understanding that a strong RGM program requires a long view. With every action they take today, they’re conscious of their next round of actions, ensuring flexibility for the future.
A programmatic approach is critical. Companies can build a two- to three-year integrated RGM roadmap for each channel and customer. They can also invest in the analytic capabilities necessary to unlock more precise insights in areas like the ROI of promotions or the total cost-to-serve. The companies that do this best will also differentially invest in more frequent conversations and planning with key retailers. Pricing is the most critical tool to address consumer products companies’ challenges in the near term. Inflation-based list-price increases won’t be enough to navigate today’s turbulence. Those that come out on top will redefine their RGM strategies now, maximising growth and profitability not only for themselves but also for their retail partners.