Consumer goods: Recognising the need to improve forecasting
The eighth in the series: The difference between returning shareholder value and issuing a profits warning
By David Rae | CFO UK | Published 14:29, 19 April 12
The finer points of sales and operations planning, demand forecasting and rolling budgets are unlikely to keep your average chief financial officer awake at night, but for those working in the consumer goods industry they are techniques that can be the difference between returning significant value to shareholders and issuing a profits warning.
It might seem a bold claim, but the constant battle of trying to accurately predict consumer demand lies at the heart of the day-to-day operations of consumer goods companies. Too much inventory leads to an unnecessary increase in working capital. Too little, and you end up with lost revenues and idle production lines.
Today, those challenges are more acute than ever. Weak demand in the more developed economies of Western Europe and North America, unpredictable growth in demand in emerging economies mixed with volatile commodity prices and exchange rates makes for a potent cocktail; and a forecasting nightmare.
Indeed, western economies during the past few years have teetered worryingly close to fully-fledged ‘stagflation’ – the combination of high inflation and low growth which led to Japan’s lost decade of the 1990s and early 2000s. While not a particularly welcome scenario for any large business, for those in fast-moving consumer goods companies (FMCG) it can be particularly difficult to cope with – a point made by the Hugh Johnston, CFO of PepsiCo, at a recent Barclays Capital investor conference.
The $58 billion (£36.2 billion) company makes about $20 billion of those revenues in emerging economies – a figure which has grown by more than 25 percent over the past five years. But while the emerging markets might be booming, those closer to home are much less positive.
“It's now clear the developed markets have little growth,” Johnston said. “In fact, we very much seem to be locked into a stagflationary environment. In the face of this, we've been working to move our pricing through 2011.
“The stagflation area environment and a stressed consumer have created difficulties for the entire [consumer packaged goods] space,” he continued. “While our brands are solid and our company is highly productive, this stagflation has made pricing a tricky balancing act. Price elasticities have become steeper at the same time where pricing is required to cover higher input costs, and this is squeezing performance across food and beverage.”
It’s this combination of rising input costs and difficult-to-predict consumer demand that means that most in the consumer goods space are finding life difficult. Happily, it’s also an area they are looking to address.
Recent research carried out on behalf of KPMG among more than 440 senior finance executives, found that planning and forecasting lies at the top of the priority list of CFOs.
“To make their best contribution, many senior finance executives believe they will have to address some important process weaknesses; foremost are methods for planning, budgeting and forecasting,” the report authors state.
Unfortunately, while the challenge is certainly real, reacting to that challenge is by no means straightforward – a point made by one CFO respondent from a large US organisation.
“Business complexities make changing planning, budgeting and forecasting difficult,” the CFO said. Indeed, 54 percent of respondents said that these processes were the most difficult to improve (it ranked above all others in terms of difficulty, and by some margin).
Despite this, a third of respondents said that the same processes would see dramatic change over the next two years – again, it ranked above all others in terms of those that demand transformation. What this says is that CFOs recognise the need to improve forecasting and other forward-looking techniques, and are willing to embrace a significant amount of pain in order to do so.
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