Winning Indonesia's Consumer Goods Market: Best Practices in Customer and Channel Management


Within 2013 - 2015, Research held by McKinsey and Nielsen in Indonesia. The objective of this research is mapping the winning strategy that has been applied and done by sixteen respective companies who owned several winning categories, brands or products.

Data from the report has been tabulated and translated into seven points of conclusions as below:

  1. Winners prioritize and invest in modern trade channels with strong growth potential.
  2. Winners view fragmented trade as a continued source of growth and thus invest more in distributor management.
  3. Winners manage distributor performance more closely.
  4. Winners proactively manage out-of-stocks and display compliance to optimize in-store execution.
  5. Winners track advanced pricing metrics more frequently.
  6. Winners use more activity-based metrics and more highly differentiated trade rates.
  7. Winners conduct event-level post promotion analysis more frequently, using more advanced metrics.


Here, the detailed explanation of every conclusion.

Winners prioritize and invest in modern trade channels with strong growth potential.


Channels with the greatest growth opportunities in 2014:
1. Mini-mart chains (convenience store) - 100
2. Supermarket / hypermarket chains - 85
3. Traditional / fragmented chains - 77
4. Drugstore / beauty store chains - 23
5. Online - 0

The action was taken to drive growth in modern trade:
  1. Increased trade investment in non-price store activation levers (eg, secondary displays, in-store demonstration, free samples)
  2. Greater and more creative use of end caps, out of aisle placement, end cross merchandising
  3. Development of tailored product or packaging (eg, formats, sizes, case count)
  4. Monitoring and reporting of channel-specific performance
  5. Increased headcount of customer aligned resources

How to win? Here are the detailed findings through Sales Strategy. Winners in sales strategy are able to serve both modern and traditional retailers well by following best practices as below:

  1. Tailor assortment and promotions to key account in modern trade. They develop tailored products or packaging for modern trade, they use sophisticated metrics, they rely on both economic and strategic variables.
  2. Collaborate with the key account. Boost willingness to collaborate as one of the top criteria.
  3. In fragmented trade, prioritize resources, such as allocating a greater proportion of their trade investment to high-volume accounts.


Winners view fragmented trade as a continued source of growth and thus invest more in distributor management.


Growth mentality regarding fragmented trade owned by some winners can be sorted by three categories, namely:
• Aggressive
• Positive: clear growth targets and a focus on opportunities (what we choose to explore)
• Defensive

Critical capabilities to drive growth in fragmented trade:
• Distributor management
• Assortment optimization (eg, tailoring assortment based on consumer segment or channel)
• Tailored channel and regional strategies.

Build sales capabilities: strengthening the capabilities of their sales-force by investing in-house training, rather than leaving the training to distributors. Winners are more than twice as likely to use a CRM system. Every winner who has a CRM system uses it to share data across various function in the organization and to track the sales pipeline. Many winners develop a customized CRM platform in-house to meet their specific business needs.

Route-To-Market (RTM) Performance:

  • Tailor the RTM model to the channel: 45% of modern trade is served through distributors or 3rd-party providers, the rest are served through direct-sales. This coverage model allows winners to exert fuller control over their relationships with the key account.  Winners treat their retail customers differently depending on the cost to serve: knowing the cost of serving each customer segment helps winners determine optimal delivery sizes in modern trade and adjust the frequency of their visits in fragmented trade. Three-quarters of winners refresh their outlet segmentation at least annually.
  • Manage distributor performance rigorously: winners believe distributor management is the most crucial capability for driving growth in fragmented trade. They therefore manage their distributors more closely than others do and conduct performance review more frequently. Winners use several criteria to evaluate distributor performance, including financial returns, sales performance, and outlet coverage. Winners keep track of whether distributors are actively expanding outlet coverage and improving the quality and efficiency of deliveries. Winners conduct joint sales planning with their distributors.


Winners manage distributor performance more closely.


Top criteria for distributor performance assessments:
• Financial performance (ROI)
• Sales performance
• Coverage

Importance of activities for top distributors:
• Focus on actively expanding outlet coverage
• Improve efficiency and quality of sales visits
• Improve efficiency and quality of deliveries

Furthermore, winners differentiate pricing guidelines and discount policies for their distributors, use clear mark-up guidelines by channel / store segment, with adjustments based on historical performance. They also have rules that establish discount policies for distributors based on their performance, efficiency, and adherence to planned store execution. Some of them also offer the same discount rate to al distributors regardless of performance.

Keep a close watch on in-store execution, winners manage in-store activities at a more detailed level than others do. They pay particular attention to replenishing out-of-stock items, which they typically control at the SKU level, and ensuring the optimal positioning of displays.

Winners proactively manage out-of-stocks and display compliance to optimize in-store execution.

In-store activities most important to business:
• Replenishing out-of-stocks
• Ensuring positioning of displays
• Boosting sales of products through promotions
• Setting up POS material visiblyimpactful displays
• Ensuring positioning on shelves
• Ensuring share of shelves

Level at which out-of-stock is controlled:
• Individual SKU
• Brand
• Store

Pricing


Againts a backdrop of currency instability and significant cost pressures, pricing excellence is crucial to Indonesia's CPG companies. Most of the company have to raise their list prices due to the rising internal cost of sales operations, volatile comodity and input costs, and competitor actions. Pricing winners were actually able to raise unit prices above the category average while also increasing sales - dispelling the myth that low pricing is necessary to win in indonesia. The following practices appear to be what winners apart from others:

Use analytics to set and execute pricing strategy. Winners use the basic pricing tools and track the basic metrics (such as net revenue per unit and market share) but also adopt more-advanced analytical techniques (such as conjoint analysis) to inform their price setting strategy for everyday shelf prices. Winners also more likely to measure price elasticity by the customer, by channel, and pack size, and to use advanced pricing metrics such as net profit per unit, sales velocity, and product mix.

Winners track advanced pricing metrics more frequently.


Share respondents that track these key performance indicators (KPIs) at least monthly.

Advanced metrics: net profit per unit, velocity, product mix
Basic metrics: price gap to competition, net revenue per unit, market share.

Review and change prices more frequently. Most winners conduct pricing reviews at least quarterly for tier 1 and 2 products (their large and profitable brands), whereas others tend to conduct pricing reviews only every sic months or even less frequently. Winners develop margin guidelines for each category, brand, SKU, and winners conduct cross-functional reviews for pricing that doesn't conform to the margin guidelines.

Enforcing price changes isn't easy, and desired prices are not always reflected at the point of sale. The primary reasons are retailers' reluctance to increase prices for fear of declines in sales volume, lack of coordination of pricing changes among channels (allowing retailers to purchase products more cheaply from another channel), and a multitiered RTM structure that makes it difficult to monitor price changes.

Of course, a CPG company's store-level pricing strategy should differentiate between modern and fragmented trade. While tracking and reviewing pricing are a must-do in modern trade, these activities are considerably more challenging in the fragmented trade where products typically are not price-marked.

Trade / Promotion


Companies that do best in trade/promotion are those that take a disciplined and data-driven approach to their trade invesments and promotion planning. Winning companies do the following:

use more granular data to differentiate trade rates. All companies use an analytical approach to set promotion and marketing investment levels. However, winners use more activity-based factors to differentiate their trade rates by the customer and as a result, their trade rates vary more and at much more granular levels.

Winners also gather data from a broader range of sources, helping them develop promotions tailored to specific consumer segments. All winners get data directly from their partner retailers. And some winners also collect data from the field using mobile technology and IT tools, such as handheld, shopper tracking. In addition, winners have SKU level data on sell-through rates for trade events.

Analyze the impact of promotions monthly or more often, and replan them accordingly. Most winners conduct event-level post promotion analysis at least once a month. They use certain metrics in evaluating promotion effectiveness. They use an advanced metric 0 incremental return of investment for the company - and none of them use volume impact as a measure of promotional effectiveness. All winners measure sales impact and impact of a trade promotion on the overall category.

Winners use more activity-based metrics and more highly differentiated trade rates.


Activity based factors used to differentiate trade rates:
• Assortment expansion / share of shelf
• Merchandising / promotional secondary placement
• Advertising / circular space
• New-product introduction / innovation acceptance
• Frequency (weeks of trade promotion)

Level that trade rates vary:
• SKU - high granularity
• Product
• Category
• Customer
• Customer segment
• Channel - low granularity

Winners conduct event-level post promotion analysis more frequently, using more advanced metrics. 


Promotion effectiveness evaluation metrics:
• Incremental return on investment for company (advanced)
• Sales impact (le, % lift) (basic)
• Impact of a trade promotion on the total category (basic)
• Total sales contribution (basic)
• Net sales (basic)
• Volume impact (le, % lift) (basic)

In addition, winners also take action based on postpromotion reviews: specifically they reallocate spending across channels and customers, and they refine their promotional plans without reducing the level of funding. They also manage over spending more agressively. All winners renegotiate with customers the terms of future promotional events. Some winners terminate the person responsible after a predetermined number of overspending instances.

Invest in trade-promotion optimization (TPO) tools. Winners invest in TPO tools to create data transparency and allow for better trade investment decisions. TPO tools can help companies determine what drives year-over-year performance variance. They can be extremely useful for measuring the effects of a promotion on the entire category on both the manufacturer and the retailer. And for developing guidelines for optimal promotions by retailer, geographic region, and category.

Indonesian CPG manufacturers have much to learn from each other, as well as from their counterparts and competitors in Asia and across the globe. By emulating best practices in customer and channel management, Indonesia’s Consumer Package Goods (CPG) players can position themselves to win in an increasingly competitive and fast-changing market.

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