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December 4, 2018updated 28 Feb 2022 4:00pm

Can food multinationals enjoy benefits of scale and be more local?

Some major food multinationals want to realise the benefits of getting closer to the consumer - but without losing the benefits of having scale. Can that be achieved?

Historically, large multinational food groups have continuously evolved and adjusted their strategic model. For a few years, they take a global approach to business and then the pendulum swings and they start to act more locally and try to get closer to their customers. These regular strategic shifts led to the rather clunky sounding phrase ‘glocal’ being coined.

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The latest phase started in 2016 when Unilever unveiled its Connected 4 Growth programme and the establishment of country category business teams. On announcing the news, Unilever claimed the new structure would allow it to “roll out global innovations faster and be more agile in responding to local trends”.

In November 2018, Mondelez International announced it was creating 13 business units to sit under the company’s four geographic divisions. In an analyst call Mondelez chairman and CEO Dirk Van de Put said the approached aligned its “incentive structure to drive greater ownership of local business results”.

Unilever and Mondelez are not alone. Other multinational food groups are either going through or exploring organisational change to allow them to become more agile and respond quicker to local trends.

But it is possible for these global manufacturers to act in a local way yet still benefit from their enormous economies of scale?

What’s driving this phase of food multinationals being more local?

There appear to have been to catalysts for the recent pendulum shift that have combined to spark action: stock market conditions and significant changes in consumer habits, according to food industry experts.

The industry emerged from the financial crisis of 2008 relatively unscathed because consumer demand for products did not plunge as in other sectors.

And, in the wake of the recession, the stock market prized defensive stocks. Consumer packaged goods groups benefited from this favourable investor sentiment – until around 2016.

Then the market started to shift away from defensive stocks outperforming to cyclical stocks outperforming, according to Andrew Cosgrove, global consumer knowledge leader and lead analyst at EY.

“Most CPG companies stock performance [at the time] wasn’t being driven by their own balance sheet,” Cosgrove says. “On the one hand it was being driven by these products being reliable cashflow generators and secondly they were all seen as acquisition targets for some of the consolidated plays that were going on in the industry.”

But the shift in investor sentiment wasn’t the only issue. Because these groups weren’t badly scarred by the recession it effectively insulated them against the need to change. As a result, many were slow to react to the introduction and success of disruptive new operators and business models amid the recent significant changes in what consumers want to eat – and how they want to shop.

Meanwhile, as the market slowly started to tighten up, these groups also started to have a maniacal focus on margin, which led to intensive efficiency drives and death by a thousand cuts.

“But now the balance is shifting back towards growth again away from efficiency and you can’t cut your way to growth,” Cosgrove asserts. He says the large CPG groups have been complaining over the last couple of years about a lack of growth in the market but he feels there is good growth out there, just that most of this growth is “shifting to smaller, more local, agile brands”.

Hence, food multinationals have tried to mimic how these smaller local brands operate and tried to look at how to get closer to consumers in order to kickstart growth in their own businesses. However, it’s not an easy manoeuvre for larger operators, which rely heavily on the benefits of economies of scale, to pull off.

“The driver of this is if you have scale, you’ve got certainty, you’ve got influence, you’ve got depth, but you’re very slow,” says Hamish Renton, managing director of UK-based consultancy HRA Global. “The dream scenario would be you get a big firm to behave like a small firm. That would be a killer combination because small firms lack resources, experience, influence, connections, but they have agility. They are able to move quickly and launch quickly.”

This shift is manifesting itself in food multinationals undertaking extensive restructuring programmes that involve devolved decision making and decentralisation.

“We’re seeing more of a genuine matrix structure,” says Renton. “Before they were more salami slicing what they were doing in one market for another: here’s a product, stick a different skirt on it and sell it in this market. Now they’re actually genuinely offering teams more ability to flex the product to their local market.”

Renton acknowledges that, as in other CPG sectors, the large multinational food groups have in the past constantly swung from a global to a local focus and back again, so this recent movement isn’t an entirely new trend. But what’s different this time around is that innovation is coming from middle management and not senior management.

“This isn’t the collective brainpower of amazing thoughtful management having bright ideas,” Renton argues. “This is a deliberate focusing and corralling, forcing middle managers to talk to customers and come up with ideas. [Historically] senior managers have always done the doing, but this time around senior managers are sponsoring, championing, protecting, supplying resources, encouraging and mentoring – they’re not doing the doing. That’s the new factor.”

Renton adds another new factor is nobody has a “monopoly” on innovation. “Innovation isn’t something the innovation department does,” says Renton. “Innovation is done by operations, finance, sales, etc, and the combined intelligence of all of those teams coming together.”

Are there benefits for innovation?

One company that appears to be the embodiment of this new approach is Unilever through its Connected 4 Growth (C4G) programme, which launched two years ago.

“The world is changing faster than ever, with new trends disrupting and shaping the future of business, such as increased localisation, fragmentation of consumer needs, digitisation and lower barriers to entry,” says a Unilever spokesperson. “These trends show no sign of slowing, so it’s vital that businesses adapt to stay closely connected and responsive to consumers.”

According to the spokesperson, C4G enables Unilever to take share locally by “empowering teams to spot, act fast and lead on trends, growth pockets and high growth segments”.

The spokesperson adds around 70% of Unilever’s business is global with the remaining 30% meeting local trends and needs. In the company’s old structure the global category teams were responsible for delivering innovation for global and local projects, whereas the local teams were responsible for in-market execution.

Under the new structure, global teams focus on trying to deliver global innovations faster, and around 240 country category business teams in local markets take on responsibilities such as being better connected to consumers and customers, identifying local trends and expanding in fast-growing segments, innovating faster through a “simpler and better-connected structure” and ultimately driving profitability and growth for the business.

Nestlé has taken a similar approach. According to a spokesperson, Nestlé’s current structure allows the world’s largest food maker to fast-track product launches and “to operate and be more agile to meet the changing consumer demand and expectations where we are present. We do leverage local expertise to increase speed to market and build on the global capacity to coordinate roll-out of new products across geographies”.

The spokesperson cites the example of KitKat. In Japan, the company sells more than 350 different KitKat products in a variety of flavours.

“The market of KitKat is mature and consumers are keen to try new and interesting flavors,” explains the spokesperson. “That makes it a natural choice for the confectionery business to launch KitKat chocolate Sublime Ruby first in Japan. Later we rolled out this innovation in several markets in Europe. This is the result of a collaboration between our global and local teams in terms of strategy, product development and execution to continue to grow our leading international confectionery brand.”

The challenges

Fundamentally what businesses like Nestlé and Unilever are trying to achieve is what Andy Searle, a managing director in the consumer team at consulting firm AlixPartners, describes as a “very agile, customer-focused, sales-and-marketing insights engine at the front end and a very lean operationally efficient back-end in terms of supply chain and back-office functions”.

However, this structure creates significant challenges for businesses that have for years relied on their scale. “It messes with their scale because they have divergence in products or they end up with a total logjam because they have a front end that is lean and agile, but a very stiff, straitjacketed back-end,” says Searle.

The other challenge this strategic approach presents is companies are going to release as “many awful products as great ones”, says Renton.

“Their hit rate is going to decline. These big companies are used to churning out good, respectable selling brands time after time and this approach means they’re going to be more agile and take more risks, so they’re going to get it wrong more often.”

Considering the number of multinational food manufacturers that are embracing or considering embracing the concepts of decentralisation and devolving decision-making to local teams, this doesn’t appear to be an issue that concerns them too greatly.

Roger Bayly, a managing director with Alvarez and Marsal who co-leads its corporate practice in Europe, says many companies he works with are looking to put in place “agile teams” that are capable of delivering innovation to market quickly.

“We’ve done a lot of work recently around what we call ‘rapid commercialisation’ with clients, which is about bringing teams together across functions to look at opportunities in a market or around a product and the aim is to get to revenue within six to 12 months,” says Bayly.

As for that troublesome issue of still benefiting from economies of scale, Renton thinks it will ultimately make companies seek out more creative alternative manufacturing solutions.

“Whereas before they would always have made something in-house, now, in order to enter a market, they might find getting it co-packed or made by somebody else is a good way in,” he says.

It’s a view shared by Professor Richard Wilding OBE, chair of supply chain strategy at Cranfield School of Management, who says the ‘glocal’ challenge isn’t just something multinational food groups are struggling with. Other global goods manufacturers are also trying to figure out how to operate more locally, yet still benefit from their economies of scale, and many are embracing the concept of ‘supply chain 4.0’ which involves taking technologies from ‘industry 4.0’ and applying them to their supply chain.

One organisation Wilding thinks has got to grips with this challenge is sportswear giant Nike, which announced last year it intends to cut product lead times from 60 days to just ten days.

At the moment, Nike employs one million workers in 566 factories globally and has 75 distribution centres serving 30,000 retailers in 190 different countrieItst’s future supply chain model involves ‘near-shoring’ 1,200 3D printing, or additive manufacturing, machines around the globe.

“That means they have 30% fewer steps, they can be far more customer centric because they are only going to be making what customers want and the really interesting thing is they will use 50% less labour,” says Wilding. “Their current model is one million workers in 566 factories. Now they are basically saying we need 50% less labour for that to take place. They are digitising their end-to-end supply chain and creating a model with shorter lead times, that is delivering what consumers want, when they want it and where they want it.”

Can it work for everyone?

This idea of delivering what customers want on a more local level appears to already be paying off for Unilever, according to the Magnum and Knorr owner. “Two years into C4G, we’re seeing more growth in the core of our business through innovation, which will help us expand in fast-growing segments and build new channels while driving greater savings through ZBB, reinvesting savings back into the business to drive growth,” says the company spokesperson.

Under the new strategy, Unilever’s country category business teams have already introduced a number of bespoke products to local markets such as a chilli sauce brand called Jawara in Indonesia, which was launched after the company’s local team identified a gap in the market and Culture Republick, a light ice cream with probiotics that was recently launched in the US. The latter was created from scratch and launched within one year by a team of five people.

That said, even if such an approach is working well for Unilever, it may not necessarily work for everyone in a similar position, according to David Sables, CEO of UK-based Sentinel Management Consultants.

“It’s possible to do this, but only if you’ve got a top-down vision, commitment top down and empowerment top down,” says Sables. “If they’re fully committed to doing it, then what they are doing is the right thing, but this is a huge change from a brand-centric agenda to a customer-centric or local-centric agenda.”

That commitment issue is a potential sticking point because of the inclination of these large consumer packaged goods providers to continuously shift their strategic focus from local to global and vice versa.

“I’ve been in organisations where they say ‘we’re centralising this year,’ but just wait two or three years and it [decentralising] will come back around,” says Searle.

Alvarez and Marsal’s Bayly concurs. “The degree of what’s done locally versus what’s done regionally or centrally, waxes and wanes in all large businesses over time,” he explains. “We’ve been through a phase where there was a big drive towards process simplification, centralisation, standardisation and I think we are now seeing a bit of a rein away from that towards a bit more local autonomy, proximity to the customer and so on and so forth.”

Large multinational food groups face a constant battle between deciding when to centralise and when to decentralise. At the end of the day it boils down to where do they want to be at any given time, says Searle.

“Do you want to go for scale or do you want to go for localisation? And do you want to drive margin, which tends more towards scale, or growth? The markets most of these guys are in are slowing down from a value and volume point of view and it’s getting much more competitive with the rise of private label, with discounters, with consumer habits changing and also with some of the growth in the emerging markets tailing off, so the big challenge is how do you reignite growth in these businesses and is it possible?”

Many multinational food groups appear to believe that for the time-being at least going ‘local’ is the answer to these questions.

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Free Report
img

How is technology having an impact on Consumer buying behavior?

As the world rapidly becomes more connected, it is important for brands to understand the impact that improved technology is having on consumer purchasing behaviors. To react effectively, brands must know how to engage with increasingly digitally savvy consumers. GlobalData’s latest Trend Tracker report provides an analysis of Digital Lifestyles – one of GlobalData's top consumer trends for 2022. The report includes an overview of how digital lifestyles are evolving, including the significant impact that the COVID-19 pandemic had on accelerating digitalization, and how this trend is emerging across different Consumer sectors. Key features included in the report:
  • A breakdown of the trend’s prominence across sectors
  • Insights into consumer online penetration, preferred electronic devices and engagement
  • The key drivers and challenges impacting the digital lifestyles trend
  • A spotlight on key innovations set to reshape the consumer landscape
  • Analysis of what’s next for digital innovations and how brands can leverage the trend
Download this report to keep in touch with the more digital consumer.
by GlobalData
Enter your details here to receive your free Report.

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