UK retail and consumer products companies will continue to face inevitable unsavoury strategic headwinds. These will inhibit earnings growth and prohibit the achievement of adequate returns, on decades of ill-considered investment in extra physical selling capacity. Easy to say in hindsight, but there will be just too many shops and too much depot space.
Headwinds for consumer products vendors and retail
So what are these key headwinds?
Commodity prices rise much faster than inflation over the medium term as growers and distributors become more sophisticated in exploiting ever-growing levels of demand from the developing world
Retail prices are suppressed by greater competitive transparency and ever more aware (and hence increasingly disloyal) consumers
Tiny segmented micro-markets will continually emerge. But they will demand huge accelerations in product innovation, quality and interest. Sustaining profitability to meet these needs will become impossible without major slimming-down of processes and significant operating cost reduction.
Vertical collaboration in a "Web-Run Enterprise"
In the longer term consumers will hunt the fastest fulfilment at the best price through information and fulfilment aggregators, with brand loyalties to retailers (multi-channel or otherwise) completely eroded.
So, after 50 years of dominance in the information age, retailers behind the curve have never had it so bad. The days of withholding critical trading information between a retailer and his vendor are over. Both sides need to move to a new level of collaboration. For a consumer products vendor, simply purchasing re-distributed EPOS information assets, mainly through third parties, will become far too slow and unproductive.
We are fast approaching the world of the demand-sensitive, "Web Run Enterprise". This applies to any size of enterprise, whether you are in a $50billion global company, or you are a national SME.
The larger the business, then the more efficient it will be to out-source the whole back-office and accounting functions to a shared service centre, somewhere in the eponymous "Cloud". Most conventional enterprise systems could eventually be run off-premise, as internal IT functions are rationalized. With the fast acceleration of reliability in areas such as In-Memory Databases and Advanced Predictive Analytics, running these applications from the Cloud is also becoming a reality.
The consequences are clear. This means that the Web Run Enterprise will effectively run itself. Customer Relationship Management, Order Processing, Supply Chain, Cash Management and Accounting can all now be run, on- or off-premise, using in-memory technology. This will often facilitate entirely new and radically more efficient business processes, based on vertical collaboration that allows instant response to demand, right through the supply chain.
Adaptive business intelligence from vertical collaboration
With the right access to demand signals and trading information, a new generation of "Adaptive Business Intelligence" will soon allow management boards to change their focus on short-term operational review. Senior management will re-structure to focus on the biggest decisions. Invariably this entails how to allocate the largest budgets, such as tactical expenditure and long-term strategic investment - whether it is in new capacity or new products. The science is there already. The algorithms are proven. In-Memory speed from using this regression science can give unbelievable powers to manipulate data from granular levels, in order to simulate detailed scenarios and options. In order to retain profitability for both consumer products vendors and retailers, a new level of joint collaboration is needed for both sides to optimise margins, in the face of these industry headwinds. Or even better to be on the same side, with a one-team-approach to exploiting the web-run enterprise through the whole supply chain.
Alan Taylor is Industry Principal for Consumer Products and Pharmaceuticals at SAP. He is very familiar with the strategic and tactical drivers of gross margin from technology-led change, having worked in:
Senior Finance roles with Birds Eye, Barilla and Allied Bakeries
Five years in Safeway as Commercial Director running Trading and developing Vendor Partnering Programs
Three years as Managing Director of THE, providing outsourced logistics and merchandising services for various global brands, to all UK national accounts
Three years with GUS integrating Homebase with Argos and, as interim CEO, divesting GUS Home Shopping (now Shop Direct)and Reality Distribution (now Yodel)
Six years consulting on profit improvement and technology integration projects with Private Equity
In his current role at SAP he recently led the first UK Retail Profit Optimization prototype on SAP HANA, delivering insights on grocery trade promotions optimization.
Disclaimer: The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of Bluefin Solutions Ltd.