Growth reimagined Consumer goods industry summary

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Key industry findings from the 14th Annual Global CEO Survey

2 14th Annual Global CEO Survey

The global economy is still recovering from the worst economic crisis in 75 years, as many countries grapple with the aftermath of the recession. So we set out to uncover how chief executive officers (CEOs) are approaching growth during a time when sustainable economic growth is far from certain. We surveyed 1,201 business leaders in 69 countries around the globe in the last quarter of 2010, and conducted further in-depth interviews with 31 CEOs.

Consumer goods industry summary

This is a summary of the findings in the consumer goods sector, based on interviews with 153 consumer goods CEOs in 48 countries, as well as six in-depth interviews. To explore the full results of the 14th Annual Global CEO Survey, please visit www.pwc.com/ceosurvey The PwC 14th Annual Global CEO

Survey documents a surprising level of confidence in this environment; chief executives are nearly as confi-dent of growth this coming year as they were in the boom years before the crisis. The survey also revealed where CEOs see growth coming in 2011, and how they are going to achieve it. In ‘Growth reimagined: Prospects in emerging markets’, we show how CEO confidence is being driven by targeted investments in particular emerging markets— often far from home.

We also identified three strategic focal points to achieve that growth: innovation, talent and a shared agenda with government. These three business imperatives have always had their place on the CEO agenda. But now, with their worst fears about the crisis behind them and an emerging recovery ahead, CEOs are adopting new attitudes and approaches, tailored to dealing with the issues of the multi-speed global recovery that they hope is underway.

Consumer goods industry summary 3

Qualified optimismLast year, consumer goods CEOs were confident about their companies’ growth prospects, and that optimism continues this year. Ninety-three percent of consumer goods CEOs expect to generate higher revenues over the next 12 months and just as many anticipate increases over the next three years.

It’s not surprising that confidence is high, with economies around the globe —and consumer demand—recovering. But just as the direction of the global economy is critical to how confident CEOs feel, so it’s the source of their greatest worries. Seventy percent of consumer goods CEOs are concerned that uncertain or volatile economic growth could pose a threat to their companies’ future prospects.

CEOs are worried about microeconomic concerns, too, particularly as they relate to consumer spending in developed economies. Douglas M. Baker, Jr., Chairman, President and CEO of Ecolab, told us that: ‘Consumer debt is going to have a significant long-term impact on buying habits, particularly in the US, which is our largest market.’

Perhaps unsurprisingly, then, consumer goods CEOs are keeping the pressure on when it comes to costs. Eighty-nine percent say that they have implemented cost-reduction initiatives in the past 12 months, which is broadly in line with our findings for the total survey

population. Many of them plan to repeat the exercise: 74% of consumer goods CEOs expect to cut costs further in the coming 12 months (versus 64% of CEOs in the full sample). Clearly, the concept of sustainable cost containment, talked about for years by consumer goods companies, is an idea whose time has come.

New strategies to meet new expectationsLike their peers in other industries, many consumer goods CEOs have changed tack significantly during the recession. Eighty-five percent told us that they have altered their strategies in the past two years—and 35% describe the changes as ‘fundamental’.

Shifts in customer demand prompted many retail CEOs to adopt a new course: 59% ranked it among their top three drivers of change. Economic uncertainty came a close second in their calcula-tions. As Paul Polman, CEO of consumer goods giant Unilever, noted: ‘Businesses that fail to tap into the expectations of their customer base will very quickly go the way of the dinosaur.’

Sixty-two percent of consumer goods CEOs believe that a permanent shift in consumer spending and behaviour could pose a threat to growth. And 40% say it’s one of the three most important risks they plan to mitigate over the next 12 months. Many of them are already taking action; they are working more closely with retailers to understand

how consumers are behaving at the point-of-sale, engaging customers in product innovation by soliciting their ideas, embedding employees with families in emerging-markets to understand local buying and eating patterns, and using social networking to spread the word about promotional or marketing activities.

Despite the end of the recession, consum-er demands for greater value, including increased price sensitivity, are still pervasive. This dynamic extends well beyond the USA. Senji Miyake, President and CEO of Kirin Holdings Company, Limited told us: ‘In Japan, one of the key trends we see is a new-found attraction towards lower-priced products.’

Consumer goods CEOs will need to be nimble to stay ahead of changes in consumer preferences, or risk watching faster competitors grab market share. And the competition may come from unexpected directions, as Louis Camil-leri, Chairman and CEO of Philip Morris International (PMI), explained: ‘I don’t think Sony ever viewed Apple as a potential competitor. And suddenly, BOOM! For that matter, Nokia probably didn’t view Apple as a competitor, either. So when it comes to how to view competition, the world is shifting and it’s shifting fast. One must take a much broader view than just looking at one’s classical competitors. As the world gets smaller, that competitive profile tends to shift.’

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1 ‘IMF World Economic Outlook’ (October 2010).

Targeting emerging marketsThe International Monetary Fund predicts that growth rates will still be sluggish in developed economies this year, but that the emerging markets will continue to boom1—providing huge opportunities for consumer goods companies. That’s why 62% of consumer goods CEOs say emerging markets are more important to their company’s future than developed markets. Some companies are already expanding their presence. Bob McDonald, Chairman of the Board, President and CEO of US-based The Procter & Gamble Company (P&G), said: ‘We currently have about 20 new factories under construction around the world, 19 in developing markets, one in a developed market, which is the U.S.’

But shifting much of their business to new markets will mean a lot of changes for most companies, as Unilever’s Paul Polman opined: ‘Within ten years, 70% of our business will come from the Far East. That shift eastward has tremen-dous implications for our company’s structure and culture. The values at the heart of our company certainly won’t change, but our culture and business model will need to evolve to reflect a changing customer demographic.’

Other consumer goods CEOs clearly share the same view: 57% anticipate that they’ll need to make strategic changes to capitalise on the increasing prosperity of consumers in emerging markets.

China key for both growth and sourcingThe majority of CEOs, regardless of the sector in which they operate, have high expectations for growth in Latin America and Asia—particularly China. Thirty-nine percent of CEOs in the full sample think China is one of the three foreign countries most important to their company’s growth. Thirty-three percent of consumer goods CEOs also put it on their list of the top three growth markets.

Even more (44%) see China as a key location for their future sourcing needs, although they’re looking to other emerging countries, too (see Figure 1). And they’re not ruling out developed markets. The US still slots in at number two, with 21% of consumer goods CEOs giving it the nod. Why the US, when sourcing is typically viewed as a race to find the lowest costs? Respondents cited the strong track record of US suppliers in serving international customers and producing innovations, as well as the country’s overall stability.

Figure 1: For future sourcing needs, China is far and away the top choice of consumer goods CEOs

Q. Which countries, not including the country in which you are based, do you consider most important to your future sourcing needs?

Base: All respondents (Total sample, 1,201; Consumer goods, 153)Note: Respondents could select up to 3 countriesSource: PwC 14th Annual Global CEO Survey

Germany

Total sampleConsumer goods

USA

China

India

Brazil

4437

2122

2011

1615

1214

‘Long-term future growth will definitely come from emerging markets.’

Louis Camilleri, Chairman and CEO, Philip Morris International

Consumer goods industry summary 5

markets for growth, the competition is likely to be fierce. Consumer goods companies will need efficient operating models and processes. They’ll also need to make sure they have sufficient access to raw materials. Forty-two percent of consumer goods CEOs (versus 34% of the total sample) tell us they’re con-cerned that scarcity of natural resources could put the brakes on growth.

And they’re taking the issue very seriously: 58% of consumer goods CEOs plan to put more corporate effort into securing natural resources over the next three years, compared to just 44% across the total sample. In fact, 39% of consumer goods CEOs now include natural resource-related factors explic-itly in strategic planning and risk management scenarios.

Consumer goods CEOs are also con-cerned about other global risks. Sixty-

three percent are worried about exchange rate volatility, for example, and 41% see currency fluctuations as one of the most significant risks they need to deal with.

Putting customers at the centre of innovationInnovation is fundamental for consumer goods companies. Bob McDonald put it succinctly: ‘We live or die based on the innovation that we do.’ Louis Camilleri also thinks innovation is vital, and links it to survival in economic crises, much like the one the world has just experi-enced: ‘In times of uncertainty and recession, all consumer products companies basically face two fundamen-tal issues. One trend is trading down to cheaper products. The other is consumer fragmentation. In terms of fighting these trends, the answer is innovation’, he told us. Consumer goods CEOs expect their

Figure 2: Consumer goods CEOs expect innovation to drive new revenues

Q: To what extent do you agree or disagree with the following statements about your expectations regarding your company’s innovation over the next three years?

Base: All respondents (Consumer goods, 153)Note: ‘Neither agree nor disagree’ and ‘Don’t know/refused’ excluded.Source: PwC 14th Annual Global CEO Survey 2011

Disagree

52 33

467 25

20

3 3

5011

6332218

Disagree strongly

Our innovations will lead to significant new revenue opportunities

Our innovations will lead to operationalefficiencies that provide us with a competitive advantage

An important part of our innovation strategy is to develop products or services that are environmentally-friendly

We expect the majority of our innovations to be co-developed with partners outside of our organisation

Agree Agree strongly

5

%

3

‘In the 1990s, it was all about global expansion in the markets that opened up for capitalism: Eastern Europe, Russia, China. This decade for us, I think, will be about getting our categories into every country around the world.’

Bob McDonald, Chairman of the Board, President and CEO, The Procter & Gamble Company

Emerging competitorsThe emerging markets are not just a source of consumers, materials and labour, though; they’re also home to some potentially powerful emerging competitors. For example, Chinese manufacturer Haier is now the world’s fourth-largest producer of consumer white goods and the world leader in refrigerators. In fact, as of February 2011, three of the world’s top 10 compa-nies by market capitalisation are Chinese. Only two—Walmart and ExxonMobil—come from the US. As global companies fight to tap rapidly growing emerging-market middle classes, domestic competitors will also be trying to serve those markets.

Even so, only 40% of consumer goods CEOs believe that the global brands of the next decade will originate from the emerging markets. That’s actually fewer than the 47% of CEOs across the total sample who expect to see new brand powerhouses coming from the emerging markets.

Scarcer natural resourcesIt’s clear that with so many consumer goods CEOs—and, indeed, those in all industry sectors—turning to emerging

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efforts to be successful: 85% believe that innovation will lead to significant new revenues (see Figure 2).

Many companies are bringing their innovation activities closer to their customers by giving customers a say in the design of offerings, or opening innovation up to more partners. A consumer goods business looking to expand in India, for example, is focused not only on shipping the best possible product out of its facilities, but also on where it is best designed, and on how to package, distribute and sell it into a changing marketplace. Innovation takes place at each stage and increasingly with different partners along the way.

Innovation isn’t confined to big block-buster changes. Unilever’s Paul Polman explained: ‘People tend to see innova-tion strictly in terms of revolutionary, breakthrough products—technologies to sequester carbon emissions or microchips that can process data 600 times faster. That’s fine. But most innovations are the result of steady, continuous improvement.’

Responding to greener consumersConsumer products companies are responding to changing consumer expectations in other ways, too. They take sustainability very seriously, for example. Seventy percent are focusing on the development of environmentally-friendly products (versus 64% of the total survey population). Similarly, 50% are increasing their commitment

to addressing climate change and 49% are stepping up their efforts to protect the planetary ecosystem and preserve biodiversity (versus 40% and 36%, respectively, of the full sample).

Open innovation Thirty-nine percent of consumer goods CEOs think the majority of their innova-tions will be co-developed with external partners. In some cases this means working with retailers to understand and address the needs of the consumer. It also means opening up the process to supply chain partners. For example, far more often than not, Procter & Gamble’s innovations crystallize in partnership with an external organisation. As Bob McDonald put it: ‘Today, nearly every new item we bring out was produced with at least one partner somewhere in the world. So, for example, we co-locate scientists from partner organisations and from our organisation in the same laboratory. It’s amazing what you can do when you knock down the barriers in an organisation or the barriers between organisations’.

Given that an estimated 90% of all patents expire without creating any economic value,2 an approach to innovation that envelops employees, partners and alliances makes sense. It keeps costs down and improves the odds of success. Open innovation provides companies with a way to use market discipline to foster innovation.

‘The world has changed. The definition of “competition” is different,’ Bob

McDonald said. ‘Another thing we spend a lot of time talking about is new categories we can create. Often, new categories will fall between the bound-aries of two existing categories. So if you’re an innovative company and you’re organised by category, who’s going to invent the category that falls between the boundaries?’

Bridging global skills gaps The ‘war on talent’ was declared more than 10 years ago, but few CEOs are prepared to declare victory. Talent is at the top of the CEO agenda for 2011. As Douglas M. Baker, Jr. noted: ‘Ultimately, if you don’t pay attention to the people side of your business, you’re not going to succeed long-term.’

While some companies retrenched during the downturn, many are now hir-ing again – but this may sometimes be hard. Two-thirds of CEOs believe there’s a limited supply of skilled candidates, although consumer goods CEOs are slightly more optimistic. Even so, 56% of consumer goods CEOs report that they’re struggling to find enough qualified people.

If they’re to fill the skills gaps, they’ll need to start by making their companies more attractive to employees, and devising a strategy for the development and deployment of personnel globally. Identifying under-utilised pools of talent is another means of filling key roles. But all goes for nought if the firm can’t retain top talent.

2 C. Wasden, ‘Getting beyond novelty: How discipline and failure foster innovation’, View, PwC (Fall 2009).

Consumer goods industry summary 7

Thinking globally and locallyThe war for talent is particularly acute in rapidly emerging markets. Many businesses are therefore stepping up the overseas deployment of key employees. The number of international assign-ments among multinationals has increased 25% over the past decade, and we predict that it will grow by another 50% over the next ten years.3

But persuading experienced employees to move to other countries isn’t always easy: 39% of consumer goods CEOs report that they are finding it difficult to deploy people globally. Getting it done sometimes requires changing your company’s people strategies, and 63% of consumer goods CEOs are doing just that (see Figure 3).

Global deployments are a first step to ad-dress shortages as company footprints change, but many CEOs know they need to nurture local talent in the long run. Louis Camilleri explained: ‘Ultimately, you can’t rely solely on expatriates to run a local business forever. They certainly have an important role to bring our affiliates in given countries up to certain standards, but they also have the critical role of transferring knowl-edge and expertise so that those businesses can stand on their own. The goal is that those affiliates are eventu-ally run by country nationals.’ Most of today’s multinationals are seeking greater independence for managerial talent locally, and that is contributing to talent shortages.

Figure 3: Consumer goods CEOs are changing people strategies to deploy more staff on international assignments

Q: To what extent do you plan to change your people strategy in the following ways over the next 12 months?

Base: All respondents (Consumer goods, 153)Source: PwC 14th Annual Global CEO Survey 2011

No change

47 37 14

3155 12

142756

132758

Some change Significant change

Work with governments/education systems to improve skills in the talent pool

Change policies to attract and retainmore women

Incentivise younger workers (roughly age16-30 today) differently than others

Increasingly recruit and attempt to retainolder workers

28 49 22

4435 19

Use more non-financial rewardsto motivate staff

Deploy more staff on internationalassignments

%

‘We must now place a high priority on human resources recruiting and training that’s geared toward serving a global marketplace.’

Senji Miyake, President and CEO of Kirin Holdings Company, Limited

3 ‘Talent Mobility 2020: The next generation of international assignments’, PwC (2010).

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Casting the net widerSome companies are turning to women as an under-utilised source of talent. For example, in South Korea, foreign multinationals have gained advantages ‘by aggressively hiring an excluded group, women, in the local managerial labour market’, according to research from the Harvard Business School.4

The consumer goods sector is one of the few industries where women have made it to the very top echelons of manage-ment, with female CEOs heading up leading companies; for example, beverages and food giant PepsiCo has Indra Nooyi at the helm. And while very few CEOs are worried about retaining female staff, they recognise the need to attract women: 43% are planning to changes their human resources policies to attract and retain more female employees.

Older workers are another under-utilised pool of talent. In many countries, populations are ageing and Baby Boomers are becoming eligible for retirement. Thirty-seven percent of consumer goods CEOs are concerned about the impact that pending retire-ments will have on their workforce (which is similar to the response from CEOs in the global sample). Forty percent are altering their people strategies to address the issue,

although only 13% anticipate changing course ‘significantly’.

More than half of consumer goods CEOs also anticipate difficulties in recruiting and retaining younger employees, those mercurial Generation Y workers who have their own distinct expectations about their relationships with employ-ers. And they’ll need to succeed with these future employees to ensure growth. Here, again, 41% of consumer goods companies are changing strate-gies to give such employees what they’re looking for.

Retaining talent can be toughMany employers made concerted efforts through the recession to retain as many qualified people as possible, opting for hiring freezes and pay cuts rather than layoffs. Voluntary turnover declined in mature economies during the recession, but historical trends demonstrate that the level will rise again. In hot talent markets, turnover rates can be very high, reflecting scarcity. Annual staff turnover in China can reach 20% or even 40% in some sectors, compared to turnover rates that are typically less than 10% in the US or UK.

Gregory R. Page, Chairman and CEO, of Cargill Incorporated, described the situation at the company he heads: ‘Certainly we are not happy when we have turnover among people we’ve

invested years in developing. Those kinds of losses—particularly in smaller geographies—set you back because they are the people you were counting on to lead that part of the organisation. In some developing economies, you see people changing jobs for a 10 or 15% pay increase.’

Achieving shared priorities with governmentsWhile CEOs in every sector focus on their own growth plans, many also see a common purpose with governments. It’s not always easy to chart where responsi-bility starts for companies, but some industry players are already making an effort. Bob McDonald noted that ‘P&G has an agreement with almost every government that we call a joint value creation. Basically, it’s our plan to say, “Here’s how we’re going to help you create economic growth in that country.”’

For example, many consumer goods CEOs plan to work more closely with government to foster a more skilled workforce, recognising that it’s also in their interests to do so. They’re also playing a role in maintaining the health of the workforce, as Gregory R. Page noted: ‘As we consider people’s dietary issues, we see opportunities to help the Western world deal with its wellness concerns.’

3 J. Siegel, L. Pyun, and B.Y. Cheon, ‘Multinational Firms, Labour Market Discrimination, and the Capture of Competitive Advantage by Exploiting the Social Divide’, Harvard Business School working paper (2010).

Consumer goods industry summary 9

Page believes that infrastructure is the government’s responsibility, though: ‘The role of government in creating reliable infrastructure – a power grid, transportation, an educational system – is obviously critical to establishing an environment in which commercial activity can flourish. In the absence of infrastructure, economic opportunity declines for everyone. No one company is big enough to compensate for a substandard electrical grid. You can’t run a big business on the back of a 300 horsepower diesel engine.’

Globalisation reimaginedCEOs’ shift towards a targeted strategy signals the advance of globalisation but it may diverge from how it’s looked in the past. Companies are not only affected by globalisation; the actions they take will shape it. That 78% of consumer goods CEOs support ‘good growth’ is recognition that they would like to see globalisation evolve in a way that links economic growth and social development. Good growth is a long-term path towards value creation that creates lasting prosperity for both shareholders and society.

Consumer goods CEOs are committed to making a difference on a number of sustainability issues. Half of them are increasing their commitment to address climate change, for example. Such programmes help attract and retain a strong workforce. And employees who believe their efforts are aiding society as well as their company are likely to be more committed to the research efforts that drive innovation.

Even more important, consumers expect corporations to take the lead and demonstrate social responsibility. As Unilever’s Paul Polman told us: ‘In my opinion every brand must have a social mission and the consumer must have an integral part in defining that mission.’

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John Maxwell Global Retail and Consumer Leader john.g.maxwell@us.pwc.com

Michael Brewster Director, Global Retail and Consumer Marketing michael.j.brewster@us.pwc.com

Contacts Our CEO Survey coverage includes a full report, in-depth interviews and a visual story of the data. Explore the entire story in the full report. Simply download at www.pwc.com/ceosurvey. To view other publications and learn about PwC’s consumer goods industry practice visit www.pwc.com/consumer.