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This information is confidential and was prepared by Bain it is not to be relied on by any 3rd party without Bains prior written consent DRAFT China FMCG industry RTM and WS development practice Bain presentation (draft) November 2013 This information is confidential and was prepared by Bain it is not to be relied on by any 3rd party without Bains prior written consent 2 SHA1311- KO wholesale works . ion v8 Summary of key messages (1/2) FMCG companies face a series of challenges in selecting and managing RTM models when they pursue growth in China - Sheer size of opportunity (universe of outlets) - Managing pricing is particularly difficult in China, because Chinese shoppers are “repertoire” and because of complexity of markets/channels - Need to balance execution effectiveness, and cost to serve with increasing reach Most successful FMCG companies in China need to be good at managing multiple RTM models at the same time as a sustainable competitive advantage. There is no one size fits all approach - Direct selling (controlled model): Core strength of some MNCs (including KO) for organized and even fragmented trade but Chinese FMCG players increasingly adept at this model - Indirect selling: commonly utilized by Chinese FMCG players given speed, reach and lower cost but many models with varying roles and levels of control The most successful MNC and Chinese FMCGs tailor direct and indirect selling models to different market and channel/customer priorities, with strong internal capabilities and systems to manage conflicts between models 1 2 3 This information is confidential and was prepared by Bain it is not to be relied on by any 3rd party without Bains prior written consent 3 SHA1311- KO wholesale works . ion v8 Summary of key messages (2/2) Managing hybrid models (combination of direct selling and indirect selling) is a dynamic process. Successful FMCGs continuously evolve their models along with different stages of development - Adapt to market dynamics e.g. urbanization, industry consolidation, channel mix evolution - Optimize costs with increase in scale and internal capabilities, without sacrificing control Many FMCGs invest in building dedicated internal capabilities and systems for each model. For indirect selling: wholesaler management capabilities and systems critical but so are network of scaled, capable and loyal WS - Management tools and detailed playbooks to manage pricing transparency, margin pool, transshipment, optimize cost to serve etc. - WS reps dedicated to recruiting, setting targets, incentives, upgrading/training W/S, increasing loyalty and occasionally restructuring - Fully integrated with sales systems For many FMCG companies, there is a large size of the prize from successfully managing the complementary indirect selling model 5 6 4 This information is confidential and was prepared by Bain it is not to be relied on by any 3rd party without Bains prior written consent 4 SHA1311- KO wholesale works . ion v8 Agenda Managing multiple RTM models in China Key success factors for managing indirect selling models in China Some implications for KO This information is confidential and was prepared by Bain it is not to be relied on by any 3rd party without Bains prior written consent 5 SHA1311- KO wholesale works . ion v8 FMCG companies in China face a series of challenges in selecting and managing RTM models Sheer size of opportunity, universe of outlets Complexity of managing different markets and channels - Different drop size and economics - Managing pricing is particularly difficult in China - Constantly evolving market and competitive dynamics Large and fragmented network of distributors/ wholesalers to manage; size it is not to be relied on by any 3rd party without Bains prior written consent 6 SHA1311- KO wholesale works . ion v8 FMCG companies in China need to be good at managing multiple RTM models at the same time Direct selling it is not to be relied on by any 3rd party without Bains prior written consent 7 SHA1311- KO wholesale works . ion v8 Example: Want Want developed combination of indirect and direct sales models to sustain growth Note: Most revenue is from China Mainland Source: Company annual report; Analyst reports; Literature search WANT WANT RTM DEVELOPMENT 2 90s Quickly expanded across China through indirect sales and distribution model for general trade (same RTM for snack food only manage tier1 DTs - 25 sales offices in China - Very limited sales rep. #, only responsible for collecting money from tier 1 distributors 00 12 05 Growth constrained by varying quality of wholesalers and relatively weak internal sales capabilities 06 10 Built up direct sales model and internal capabilities it is not to be relied on by any 3rd party without Bains prior written consent 8 SHA1311- KO wholesale works . ion v8 Example: Want Want relied on indirect sales and distribution model to drive quick expansion in 90s Source: Company Annual Reports; Expert Interviews; Literature Searches 2 Mainly sell through W/S markets 25 sales office in China Very limited Want Want own sales people -Only responsible to collect money from T1 DTs -No visibility on T2 DTs or below Want Want T1 Distributors T2 DT / WS Indirect selling it is not to be relied on by any 3rd party without Bains prior written consent 9 SHA1311- KO wholesale works . ion v8 Example: Want Want built up direct sales model for MT and key cities from 2006-2010 Source: Company Annual Reports; Expert Interviews; Literature Searches 2 Global and national KA retailers Want Want KA salesT1 Distributors“He Want” sales T2 DT / WS Direct selling it is not to be relied on by any 3rd party without Bains prior written consent 10 SHA1311- KO wholesale works . ion v8 Example: Want Want then built up E Expert Interviews; Literature Searches 2 Global/ national it is not to be relied on by any 3rd party without Bains prior written consent 11 SHA1311- KO wholesale works . ion v8 Example: Wrigley as an MNC company adept at managing indirect and direct selling models 2 Indirect selling it is not to be relied on by any 3rd party without Bains prior written consent 12 SHA1311- KO wholesale works . ion v8 FMCGs tend to use different RTM models tailored to different market and channel priorities/dynamics 3/4 Geographic Geographic and channel priorities Channels MetroU1U2CountyT it is not to be relied on by any 3rd party without Bains prior written consent 13 SHA1311- KO wholesale works . ion v8 Example: Wrigley tailors its RTM models with differential focus on key cities and TT *Carrefour, Wal-Mart, Auchan, RT-Mart, Lotus, Metro C Literature Searches Key cities (50 key and provincial cities) B cities (200 prefecture cities) C, D cities Indirect distribution Indirect selling it is not to be relied on by any 3rd party without Bains prior written consent 14 SHA1311- KO wholesale works . ion v8 White space (no control) Developed market (greater level of control) Stage 2Stage 1 Contract/ conditionality Compensation model No contract; purely transactional Basic 2 party contract, subject to renewal each year Mark up + rebates on vol. target Mark up + rebates on vol. target it is not to be relied on by any 3rd party without Bains prior written consent 15 SHA1311- KO wholesale works . ion v8 Example: Beverage Co. evolves from indirect selling model to direct model as its local market share increases Market entry: Indirect selling with little control Developing stage: Evolves towards direct selling Stronghold: Direct selling, strong control, moderate cost Ontrade it is not to be relied on by any 3rd party without Bains prior written consent 16 SHA1311- KO wholesale works . ion v8 Agenda Managing multiple RTM models in China Key success factors for managing indirect selling models in China Some implications for KO This information is confidential and was prepared by Bain it is not to be relied on by any 3rd party without Bains prior written consent 17 SHA1311- KO wholesale works . ion v8 Some key considerations for roles and type of indirect selling and distribution model 5 Do we have resources, capabilities, and relationship network to attract exclusive it is not to be relied on by any 3rd party without Bains prior written consent 18 SHA1311- KO wholesale works . ion v8 5 Flywheel of W/S mgmt. capabilities it is not to be relied on by any 3rd party without Bains prior written consent 19 SHA1311- KO wholesale works . ion v8 Example 1: Wrigley has developed a leading W/S mgmt. system 5 PRICING TRANSPARENCY it is not to be relied on by any 3rd party without Bains prior written consent 20 SHA1311- KO wholesale works . ion v8 Logistics capabilities: - Small vans it is not to be relied on by any 3rd party without Bains prior written consent 21 SHA1311- KO wholesale works . ion v8 Example 2: Want Want has developed a dedicated system to manage its 8K wholesalers in China 5 PRELIMINARY Source: Company annual reports; Literature searches Systematically manage W/S performance with greater support of good performing, scaled W/S Clear W/S segmentation criteria based on performance - Transparent to all the W/S through dedicated W/S website - Criteria incl. market share within the territory, volume/ revenue target, in-store execution, etc. Systematic process of target setting, tracking it is not to be relied on by any 3rd party without Bains prior written consent 22 SHA1311- KO wholesale works . ion v8 Example 2: and developed tools for direct sales force that are also being transferred to W/S 5 DAILY SALES REPORT CARDMORNING BRIEFING SCHEDULE Key features Visual repre- sentation Source: “He Want” Project Training Materials Data requirement per outlet is simple and not excessive Requirements include: # of SKUs on- shelf, # of SKUs received by the outlet that day, # of previously un-introduced SKUs received by the outlet that day, value of new sales order Planned down-to-the-minute Report-outs on previous days highlights Emphasis on the broader team and company, not on the individual through recitation of company values and group exercises A lot singing and slogans PRELIMINARY This information is confidential and was prepared by Bain it is not to be relied on by any 3rd party without Bains prior written consent 23 SHA1311- KO wholesale works . ion v8 Develop business partner to reach full potential Terminate or manage “downside” Invest to develop the capability Example 3: Snack Food Co. uses pre-agreed criteria and tools to assess and upgrade/restructure DTs Source: Bain experience HighLow Low Top 10 wholesaler Contribution and commitment to Snack food co. Capability and potential Financial strength (25%) Logistics capabilities (25%) Warehouse facilities (25%) Distribution coverage (10%) System compatibility (5%) Servicing levels, etc. (10%) Sales (40%) Historical sales growth (20%) Est. Snack food co. share of wallet (20%) Years of cooperation and exclusivity (20%) PRELIMINARY 5 Engage High This information is confidential and was prepared by Bain it is not to be relied on by any 3rd party without Bains prior written consent 24 SHA1311- KO wholesale works . ion v8 Source: Bain experience Terminate or manage “downside” Engage Develop business partner to reach full potential Invest to develop the capability Best-in-class logistic provider in 4 key and T1 cities Potentially expand into surrounding T2/3 cities and provide in-store servicing Provide good delivery service in T1 and 2/3 cities Best-in-class logistics provider in 4 key and T1 cities Potentially expand into T2/3 cities and provide in -store servicing Provide basic logistics and in-store servicing in tail T2/3 cities Expected roles: Dev it is not to be relied on by any 3rd party without Bains prior written consent 25 SHA1311- KO wholesale works . ion v8 Agenda Managing multiple RTM models in China Key success factors for managing indirect selling models in China Some implications for KO This information is confidential and was prepared by Bain it is not to be relied on by any 3rd party without Bains prior written consent 26 SHA1311- KO wholesale works . ion v8 Recap: 6 key messages FMCG companies face a series of challenges in selecting and managing RTM models when they pursue growth in China Most successful FMCG companies in China need to be good at managing multiple RTM models at the same time as a sustainable competitive advantage. There is no one size fits all approach The most successful MNC and Chinese FMCGs tailor direct and indirect selling models to different market and channel/customer priorities, with strong internal capabilities and systems to manage conflicts between models Managing hybrid models (combination of direct selling and indirect selling) is a dynamic process. Successful FMCGs continuously evolve their models along with different stages of development Many FMCGs invest in building dedicated internal capabilities and systems for each model. For indirect selling: wholesaler management capabilities and systems critical but so are network of scaled, capable and loyal WS For many FMCG companies, there is a large size of the prize from successfully managing the complementary indirect selling model 1 2 3 4 5 6 This information is confidential and was prepared by Bain it is not to be relied on by any 3rd party without Bains prior written consent 27 SHA1311- KO wholesale works . ion v8 Implications for KO Clear need to be good at managing multiple RTM models at the same time. Your competitors are becoming better at this, and the bar is being raised Indirect model is very important to KO, and we need to proactively manage wholesale like we manage our controlled model We need to discuss and determine how to build - The right semi-controlled model for KO - The required internal capabilities and systems - A network of scaled, capable and loyal WS There is a large size of prize from rolling out the above successfully
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