OREANDA-NEWS. December 17, 2008. The recent PwC Internet survey of 20 Russian companies representing different consumer goods segments identified certain factors which impede cooperation between retailers and suppliers in the changing market environment and provided a fresh insight into optimization of such collaboration, reported the press-centre of PwC.
 
First of all, the survey shows the impact of business consolidation and the crisis on retail landscape and FMCG manufacturers. Although the increased concentration has lead to tougher negotiations it has been balanced by certain positive effects. 32% of the suppliers note that they will receive bigger orders in the current environment, and their votes split equally (23%) between additional opportunities for further expansion and logistics benefits. Around 12% of the responders expect higher quality of goods and services as a result of consolidation process.

However the survey also shows that in a couple of years retailers’ concentration is expected to lead to further margin pressure and a significant shift in the balance of power in the market. Over 60% of the respondents believe that in 1 to 3 years operations in the Russian market will be driven by retailers. With this change of the retail landscape and the shift in power, FMCG companies are keen on improving their cooperation with retailers, while retailers are expecting more from the FMCG companies.

The liquidity crisis is affecting both retailers and distributors severely with the shortage of financing leading to a loss of sales due to out of stock and potentially bankruptcies. This may have a longer term effect on the supply chain. Amongst the factors which have a significant impact on retailers in the crisis environment are scarce working capital financing, decreased consumer purchasing power due to lay-offs and lack of consumer loans, problems with accounts payable and slowing retail expansion to the regions.

Martijn Peeters, PwC Advisory Director noted:
“The financial crisis will drive further consolidation and push weaker players out of the market. For most retailers there is significant room for operational improvement and as fast growth with cheap debt will become difficult, retailers can and should focus on these operational improvements to enhance their profitability and cash flow. Improvements in the supply chain, category management and a focus on decreasing out of stock which is notoriously high in Russia are some of the activities that can be done to achieve this.”

The survey also showed that currently retail industry expects moderate to severe impact of crisis in 2009 with a decline in profitability as a result. Although FMCG companies are preparing for cost cutting the crisis will provide growth opportunities as well.

Specifically the respondents note that the key measures to reduce adverse effects are cost cutting and logistics optimization. Recession opens up opportunities for improvement of the market environment through acquisitions of troubled companies and assets, revision of client base and contracts and finding talented people.

Dale Clark, PwC Retail & Consumer Practice Leader, comments on the situation:
“The financial crisis provides companies in the Retail & Consumer industry with an incentive as well as an opportunity to re-examine their strategies. Those who can benefit from this opportunity and review their business strategies and invest prudently to obtain efficiencies, will win in the medium to long term. Those companies that batten down the hatches from the current storm and ignore the need to continue investing, may show better short term results, but will lose out to companies that invest in a growth strategy.”

In addition, in the current environment it is crucial to enhance collaboration between FMCG manufacturers and retailers to boost total sales and profitability growth. International experience shows that cooperation between retailers and FMCG companies is more intense in areas of data sharing, inventory management and category management.

According to Martijn Peeters this type of cooperation will become more important for the Russian market environment with the emerging of concentrated players on both ends of the spectrum providing the opportunity to really invest in key account management and with the shift from a sales driven market to a retail driven market. With better cooperation it should be possible to significantly increase revenue and profitability of existing shelf space.

Dale Clark concludes:
“Currently suppliers and retailers should play “on the same side of the field” and maximize effort to attract and retain the end customer through thorough development of the best value proposition for the consumer.”