By Taylor Milner
The ongoing price war between Amazon, Walmart, and other consumer goods retailers is great for the consumer, but tough for the Consumer Packaged Goods (CPG) industry. If you are a CPG company, you have already spent the past few decades constantly pushing prices down. And yet the price war will demand even more savings from you in the years to come. There are some more obvious places to look for these savings, as well as a hidden one that you might not initially consider, and which may hold the greatest promise. Let’s go through all the options together, as more opportunities on your plate will give you more options to respond.
How is the Grocery Price War Impacting Manufacturers?
First, let’s look at where the pressure is coming from. A recent article in Recode discusses how Walmart gathered a group of CPG companies to “ask” for price concessions on the order of 15% or more. This is part of their strategy to get to their goal of having the lowest price on 80% of the products they sell. They have some suggestions about where the cuts can come from: both Walmart’s and Amazon’s supply chain and distribution networks are so big that they are claiming that CPG companies don’t need to spend as much on marketing as long as distribution is strong through their channels. However they are also able to make these “requests” as they are aware that CPG companies cannot afford to be excluded from their supply chains--their size gives them massive bargaining power.
Clear Options for Saving Money
The first place many CPG companies will look to reduce costs will be in the marketing and sales functions, even if just for political reasons. If the message from Amazon and Walmart is “these costs are too high,” they will have to be reduced even if significant savings can be found elsewhere.
The broader SG&A (Selling, General, and Administrative) line, where marketing and selling expenses sit, is also likely a good place for CPG companies look for savings. SG&A expenses account for between 25% and 33% of revenue in most CPG companies. As comparison, COGS (Cost of Goods Sold) accounts for between 40% and 60% of revenue (this usually includes all of the costs of producing and distributing the actual products). For example, look at what 3G is doing at Kraft Heinz to see one case of how cutting costs might occur.
When speaking with people on the operations side of CPG businesses (responsible for COGS), most of them hold the opinion that if the same pressures were placed on the SG&A side as have been placed on the operations side, significant savings could be wrung out. True or not, Walmart and Amazon likely know how much it would cost them to create the private brand (generic) product infrastructure to replace the CPG company brand names completely. CPG companies are going to need to continue to be competitive with these costs.
Second, CPG companies are going to go back to the proverbial savings well. They will push suppliers for lower costs, attempting to pass the burden of cutting costs up the chain. If you are a packaging, ingredients, or service provider, you will be asked (again) to lower prices. Likewise, operations will be asked (again) to find savings through automation, headcount reduction, efficiency, and cost take out. Finally, anything that can be vendor managed, outsourced, ZBBed, offshored, 3PLed, or otherwise cost reduced will be. But what happens when those options are maxed out?
Hidden Opportunities to Save More
Most of what has been discussed above are the obvious places to look. Because of this, these areas have already been squeezed in previous efforts to reduce costs. Pushing more out of these areas can start to feel hopeless--which means it’s time to get creative.
From my perspective, the more interesting place to look for savings within operations is in the ability to run processes “beyond theoretical.” What I mean by this is the opportunity to run beyond the benchmark, beyond what the OEM says equipment can do, and beyond the metric of “world-class” performance.
While benchmarking may be the best path to understanding how one is performing relative to your competitors, a “beyond the benchmark” opportunity holds particular value given the current cost pressure. Walmart and Amazon know what product costs could potentially be. These will be based on the benchmark costs for different products and industries. Going beyond these benchmarks means unlocking opportunity that others have not found. By going beyond the theoretical, not only do you beat your competitors, but you create hidden savings that Amazon and Walmart don’t expect and that you can keep.
Crazy as it sounds, but the best place to look for savings given current cost pressures may be where no one believes they exist. From this author’s experience, once one commits to looking beyond the theoretical, one often finds much more opportunity than expected.
Is such an approach realistic for your business? Learn how one chemical manufacturer reduced its best-in-class labor costs by 8% by realizing opportunity beyond accepted benchmarks.
Curious to learn whether we can help you thrive amidst the price war? Send me a note and I’ll be in touch.
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