Here is an excerpt from an article written by Kevin Bright, Josef Kouba, Sheldon Lyn, and Pieter Reynders for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out others, learn more about the firm, and sign up for email alerts, please click here.
* * *
1. Strategic RGM: A longer-term and more integrated approach
Traditionally, core RGM interventions have been tactical in nature (for example, adjusting prices based on consumer price elasticities or reallocating trade investments toward higher-growth categories and accounts). One path toward greater RGM impact is to elevate RGM to shape the company’s commercial strategy rather than just enable it. We call this path strategic RGM.
Strategic RGM is built on a foundation of deep insights, enabling a CPG company to derive more granular choices about where to play (Exhibit 2) and how to win. The insights come from sophisticated analyses of data from primary and secondary sources, which provide companies with a more complete picture of available opportunities. Improved insights are generated in each of the following areas:
- Category: how it’s structured, what the most attractive revenue and profit pools are, and how they’re evolving
- Competitors: which brands are playing—and winning—in each channel, how they’re positioned, and what their economic objectives and potential strategic moves are
- Consumers and shoppers: who they are (including size and growth of key consumer segments), how they make purchasing decisions and trade-offs, how sensitive they are to prices, and how much they are drawn to other products
- Occasions: what usage or consumption occasions there are, which needs relate to each occasion, and how current products and propositions fulfill those needs
- Channels and customers: what current and future growth and profitability are and the quality of execution in each channel
With regard to consumers and shoppers, for instance, strategic RGM calls for an in-depth understanding of “purchase structures”—how a shopper navigates the category, what occasions the product is used for, and how the shopper makes trade-offs. If the specific item isn’t in the store, will the shopper buy a substitute, or will he or she leave the store without buying anything?
With these insights, a company can design and execute a full portfolio of both short- and long-term initiatives to drive above-market growth. These initiatives might include innovation options and M&A to fill “white spaces” in the market, changes in pack-price architecture to better address consumer and shopper needs, and channel-specific moves. The insights can also help a CPG company prioritize investments in capital expenditures and operating expenditures.
Strategic RGM thoroughly equips the company for joint business planning and negotiations with retailers by clearly demonstrating and quantifying business and shopper benefits to the retailer.\
What strategic RGM looks like in action
A food-and-beverage manufacturer, despite having a strong RGM capability, was seeing steep sales declines in one of its larger markets. It decided to invest in strategic RGM. Much of the impact came from three main components, carefully planned and executed over a three-year period:
- A more detailed pricing strategy. By developing a nuanced understanding of how consumers shop the category, the company was able to create highly specific short- and mid-term pricing strategies by region, channel, and stock-keeping unit (SKU). It simulated pricing scenarios based on insights into shoppers’ switching behavior and their shopping missions. Over time, the company increased prices above the rate of inflation for certain SKUs, introduced smaller price increases for other SKUs, and maintained prices for still other SKUs.
- A shift toward higher-growth revenue and profit pools. With detailed insights into what types of consumers were buying its products, where, and why, and when they consumed them, the manufacturer was able to introduce new brands, packs, and products that better aligned with consumer needs. It also identified underserved opportunities that were complementary to its current portfolio. For instance, the company saw a trend in consumer willingness to pay more for natural and organic food products. In an already crowded market for organic brands, the company’s thorough analysis found white spaces in two specific subsegments: distinct snack flavors and small pack sizes for on-the-go consumption.
- Tailored shopper activation. The company discovered that shoppers who bought one of its brands in convenience and discount stores typically enjoyed the product during the occasion of relaxing at home. This insight led the company to pursue partnerships with media providers to offer joint discounts, increasing the brand’s association with watching movies at home.
After implementing strategic RGM, the company reversed its downward trajectory and is on track for a 10 percent revenue increase over three years.
Success factors for strategic RGM
A CPG company should consider pursuing strategic RGM if it has strong RGM fundamentals but its gains from RGM are starting to plateau, or if it plays in stagnant categories and needs a shift away from tactical actions.
The key success factors for strategic RGM include a shared vision and cross-functional ownership across the sales, marketing, supply-chain, and RGM teams, as well as support from top management. There should be a shared set of incentives focused on long-term value creation. This is particularly important for a portfolio of initiatives to drive both short- and long-term impact. In addition, an agile test-and-learn mind-set is needed: all functions should be aligned on the philosophy of bringing innovations to market quickly and refining them based on real-time consumer feedback.
* * *
Here is a direct link to the complete article.
Kevin Bright is a partner in McKinsey’s Denver office, Josef Kouba is a partner in the Vienna office, Sheldon Lyn is a partner in the Southern California office, and Pieter Reynders is an associate partner in the Brussels office.
The authors wish to thank Marc Frederick, Simon Land, Stefan Rickert, and René Schmutzler for their contributions to this article.