Pricing 2017

Developments, challenges and outlook for 2017

London, March 2017

James Brown

London office 1 Plough Place London EC4A 1DE, UK [email protected]

www.simon-kucher.com Today’s session

. Pricing in 2016 – context & experience

. Outlook for 2017 – focus areas

Exceedra Conference 2017 2 To start with some questions…

1. How many of you had clear plans in place for Brexit? 2. How many experienced cost increases as a result of Brexit? 3. Have you tried to increase prices post Brexit?

Source: Simon-Kucher Exceedra Conference 2017 3 Context: Looking back at 2016 and outlook for 2017

2016 – a year of two halves 2017 – dominated by a return to inflation

. Retailer price war as a response to discounters’ . No further room for absorbing cost increases, growth, leading to low/negative inflation remaining hedging runs out environment . Further blunt price moves pushed through . Simplification of trade terms demanded by based on balance of power and tactical the Big 4, demands for trade investment into advantages price . Return of inflation for consumer goods . Simplification of shelf pricing and retailer departure from ‘hi-low’ towards ‘mid-low’ and . Continuing price war between retailers EDLP, triggering changes in price-pack . Blurring of channel lines and impact of mega- architecture and promo guidelines deals such as Tesco-Booker becoming clear . Pre-Brexit uncertainty and “wait and see” approach from most suppliers . The big unknowns – how will retailers adapt their price and promo positions? Will relative . Dramatic shift in outlook following Brexit prices remain unchanged despite absolute decision – almost entirely exchange rate driven price increases? When real term incomes are . Post-Brexit fall in GBP building-up cost squeezed, how will shoppers react? pressures . First signs of price increases announced, but most did not hit the market in 2016

Exceedra Conference 2017 4 2016 was all about retailers’ price war PRICE WAR!

Exceedra Conference 2017 5 Many categories saw negative value sales trends, largely due to retailer price wars

£800m estimated value loss from supermarket price war*

0.0%

-1.0%

-2.0%

-3.0%

-4.0% Sample of -5.0% categories with negative value -6.0% trends in the past year -7.0% YoY Category value 2016 vs. 2015

-8.0%

*The Grocer: Category analysis using Nielsen data, December 2016 Exceedra Conference 2017 6 Competitive pressures forced main retailers to simplify pricing in 2016

. Main grocers forced to simplify their pricing as they were being beaten by the Discounters, champions of price simplicity

. Even though a large proportion of volume was sold on deep promos, the difference in shelf price was just too large

. Hence, pricing models have changed from high-low to mid-low or towards EDLP (or EDLP+)...

. ...and multibuys are being replaced by simpler promotions, such as price cuts

. At the same time, retailers increased demands for supplier to roll all trade investment into price, to simplify buying terms and reduce conditionality

Exceedra Conference 2017 7 Brexit uncertainty led to supplier inaction for most of 2016

BEFORE B AFTER

. Let’s wait and see… . It happened! What should we do? R . What’s the plan if it happens?... . Let’s wait and see… . Relax… it’s not going to happen E

X

I

T

Exceedra Conference 2017 8 Drop in GBP was felt with a few months delay, as hedging contracts started to expire

GBP just lost 11%, so our costs have gone up by 12.5%...!

But it’s going to bounce back, surely…

No need for panic, Our costs have gone we are hedged for up by 25% vs. 2015 We really another few weeks… and our hedging need to do contracts are something... expiring!

Source: Bloomberg currency charts Exceedra Conference 2017 9 Exceedra Conference 2017 10 Marmitegate: Unilever’s bold move provided “cover” for others and exposed the fact that prices need to go up

 Current pressures are different to the usual trading dynamics and manufacturers feel that now they have a strong and unambiguous case on why the prices really need to go up this time

 There are not many alternatives in the short run given the abruptness of the exchange rate changes - pack changes take time and promos de-escalatation has already started

 Hence, manufacturers are pushed against the wall and there’s only one way to go

 it’s either a price increase or a profit warning!

Exceedra Conference 2017 11 Others weren’t too far behind…

Exceedra Conference 2017 12 But retailers are not sitting still and accepting it

For the costs increases to go through: . Suppliers need to do the math, to prove that the cost increases are justified… . …and propose brand/pack specific impacts, rather then a blanket price increase rate

“They have resisted putting prices down when the market was going the other way, they can’t have it both ways”

https://www.theguardian.com/business/2016/nov/17/tescos-chief-warns-global-brands-weak-pound-marmitegate Exceedra Conference 2017 13 Price increases of electronics products announced shortly after GBP drop

. International consumer pricing very transparent . USD driven costs & Apps +25%: +10% to their channel company reporting • From 79p to 99p partners • From £1.49 to £1.99 . Particularly prone to • … international price arbitrage

• iPhone 7 32GB +£60 • iPhone 7 Plus 256GB +£100 • iPad Pro 32GB +£50

Microsoft Surface Book +£150 +15% to 25% price increases

Exceedra Conference 2017 14 With other key benchmark products continuing through into 2017…

From £399 to £419!

Exceedra Conference 2017 15 Where will it stop?

Exceedra Conference 2017 16 GRAPHICS – equivalent slide for Inflation (like previous slide on price war) – ivan is providing INFLATIONsome snapshots

Exceedra Conference 2017 17 What’s “in store” for the remainder of 2017?

. Inflation: cost pressures aren’t going to go away as the pound sits in its new low  Suppliers will try to offset costs by price increases, shrinking packs and de- escalating promotional activity  Retailers will be ready to push back, and we may see some high profile fallouts but price increases will be passed through  Shoppers will experience a rapid return of inflation to the market. We expect food to remain within single digit inflation, whilst durables and electronics to largely mirror exchange rate effect

. Competitive environment: The supermarket price war will not disappear any time soon and will mitigate some of the inflationary impact  Discounters will be looking to capitalise on the price rises and grab even more share whilst the Big 4 will continue to battle hard to keep what they have  Demands for simplification and folding of trade terms will continue  Channel lines blurring and new mergers will see terms and customer prices under increasing scrutiny

Exceedra Conference 2017 18 Return of inflation as suppliers and retailers pass on cost increases

Grocery inflation at 1.4%, near three-year high*

*Kantar, 12 weeks to Feb 26th 2017 https://www.theguardian.com/business/2017/mar/07/food-inflation-doubles-uk-shoppers-feel-pinch; “Butter prices rose 15.8%, fish prices rose 8.8%, and tea prices were up 6%” Exceedra Conference 2017 19 Promo de-escalation to continue as pricing becomes ‘simpler’

Why did we not see promo de-escalation until now? . Difficult to de-escalate promos for individual suppliers, as this may go against a category / competitor trend… . …and may therefore result in (at least) temporary ‘pain’ . To de-escalate, the whole market needs to move in the same direction, which typically happens because of external pressures

So what’s different this time? . Regulatory pressures and enquiries into the shape of promo activities in UK grocery retail . Significant pressure from Discounters towards simpler pricing . Significant cost pressures

 real chance to de-escalate and cut non-performing promos!

Exceedra Conference 2017 20 There are views that price war is easing off, but have the fundamentals of price war friendly environment really changed?

Excess capacities New entrants Unexpected cost reduction Disruptive technology Commoditisation of product Irrational behaviour Low market growth …. Industry structure

Exceedra Conference 2017 21 Discounter growth was a big fuel for the price war… How long before a Lidl or Aldi becomes one of the Big 4?

Great Britain grocery share data Aldi and Lidl’s combined share of UK grocery market

30 28.4 20% 27.9 18% 25 Aldi overtook Waitrose in 2016, 16% Morrison's in its 14% 20 sights? 16.8 16.5 16.2 12% 15.7

15 10% (%) ~11% at 10.6 8% 10.6 present 10 6% 5.86.3 6 5.9 5.25.3 4.6 4% 5 4.2 ~4% in 2.12.2 2% 2010

0 0%

2010 2015 2020

01/04/2010 01/10/2010 01/04/2011 01/10/2011 01/04/2012 01/10/2012 01/04/2013 01/10/2013 01/04/2014 01/10/2014 01/04/2015 01/10/2015 01/04/2016 01/10/2016 01/04/2017 01/10/2017 01/04/2018 01/10/2018 01/04/2019 01/10/2019 01/04/2020 12 weeks to 28 February 2016 12 weeks to 26 February 2017

http://uk.kantar.com/consumer/shoppers/ Exceedra Conference 2017 22 “They try and fight us on price but they won’t win, because they define our margin. And we will be 15% cheaper”

Matthew Barnes CEO Aldi UK & Ireland

Exceedra Conference 2017 23 The main retailers are looking outside their traditional core market, to offset share and profit loses

With around £100m expected in cost savings… someone is going to have to drop their prices Exceedra Conference 2017 24 As channel distinctions become blurred, suppliers might be in the firing lines

All part of or supplied by same (£60bn) …demanding the same supplier terms? company… Suppliers’ nightmare?

• The cost of a fallout with your biggest customer has just become bigger! • Transparency and benchmarking of existing terms is likely to reveal some skeletons in the closet! • How do you fight back the “pick-and choose” of the best deals?

…or an opportunity? • Greater reach and simplified logistics? • Aligned and improved execution across more stores (one agreement covers more)? • Better data (finally EPOS from convenience)? 7,000+ convenience stores alone

Exceedra Conference 2017 25 Pressure on suppliers remains high: Shoppers, retailers and suppliers will share the pain

. Consumer Goods suppliers will still be stuck in a retailer-lead price war . Brexit uncertainty and unfavourable forex will continue to put pressures on imports, commodity prices & other costs . Significant increase in inflation is likely to impact shoppers’ real incomes, as wages unlikely to keep-up . The threat of de-lists will be used to push requirements for “simplified” pricing structures . Detailed understanding of balance of power, consumer and shopper needs and strong revenue management capabilities will be needed

Exceedra Conference 2017 26 Our advice to consumer goods suppliers: 4 focus areas for 2017

Ensure cost recovery through price increase: In the short term, blunt increases better 1 than inaction. Limited number of suppliers expected to grab volume share given the scale of cost impact

Develop strategy for ongoing price management in the new environment: Revisit 2 price, pack and promo architecture across your portfolio to ensure it’s fit for purpose following the changes

Risk assess and revisit trade term structures: Prepare for further demands as the 3 sector gets even more consolidated; ensure TTs are justifiable and defendable

Bolster revenue management capabilities: Enhance your RM teams to ensure that the 4 changes can be properly designed, implemented and tracked

Exceedra Conference 2017 27 About Simon-Kucher

www.simon-kucher.com Simon-Kucher & Partners at a glance

Best consultancy in marketing and sales World leader in pricing

manager magazin brand eins Thema Marketing and sales Marketing and pricing Sales and CRM World leader in giving The world’s leading advice to companies on how pricing consultancy Simon-Kucher Simon-Kucher Simon-Kucher to price their products 1 & Partners & Partners & Partners BusinessWeek The Economist

2 Boston Consulting Boston Consulting Boston Consulting Group Group. Group. Pricing strategy In pricing you offer . . specialists something nobody else does 3 McKinsey & Company McKinsey & Company McKinsey & Company The Wall Street Journal Professor Peter Drucker

Source: manager magazin survey of top managers in Source: brand eins Thema/Statista survey of 1,426 partners and project leaders from consulting firms and Germany, August 2007 and 2011/IMB 1,300 C-level managers from German companies, May 2014

Global presence >3,200 projects in the last 3 years

33 offices worldwide, 980 employees Strategy Marketing €241m revenue in 2016 > 500 > 700 . Growth and competitive strategies Toronto Beijing Boston . Product portfolio San Francisco New York Tokyo Amsterdam Madrid (re-)design Atlanta Barcelona Milan Dubai Bonn Munich . Pricing excellence Brussels Paris Singapore Cologne Warsaw . Customer relationship and Copenhagen Vienna São Paulo Frankfurt Zurich customer value management Santiago Istanbul Sydney Sales Pricing London . Sales strategies and sales Luxembourg > 700 > 1,400 channel optimization

Source: Simon-Kucher Exceedra Conference 2017 29 Advising industry leaders from all sectors…

Pharmaceuticals Travel & Hospitality 24 of the top 25 pharma companies Accor Europcar Thalys 3 of the 4 largest vaccine British Hilton Thomas manufacturers Airways Lufthansa Cook All 5 of the largest biotech Center Navigon Travelport manufacturers Parcs TUI

Energy & Utilities Telecom & Media BP/Aral RheinEnergie 1&1 Deutsche The Castrol Mainova RWE Axiata Telekom Economist Group E.ON natGAS Shell Betfair Skype Which? EnBW Nordex Tank & Rast LinkedIn T-Mobile Xbox Live EVN Orlen Yello PayPal Vodafone

Tech & Software Manufacturing & Logistics Citrix Microsoft Security Bosch Honeywell Siemens Fujitsu Novell SAP Caterpillar La Poste Swiss Post The influence of Intel Sony De Post Osram Tetra Pak Intuit Philips Ericsson DHL Parcelforce TNT Simon-Kucher on the Kronos RSA SunGard Express prices we pay for just about everything is as little recognised as it is Automotive Financial Services staggering." Alfa Romeo Kia Porsche American Citi GE Capital Audi Maserati Express Credit HSBC BMW Michelin Toyota Barclays Suisse RBS Daimler Mercedes- Volvo BNP Deutsche Virgin Paribas Bank Fiat Benz VW Money Source: William Poundstone 2010; Selected references from Simon-Kucher project experience; confidentiality agreements prevent us from naming many other major partners Exceedra Conference 2017 30 Our Global Consumer & Retail Practice has extensive experience across all sub-sectors

Selection*

Food & Beverage Non-Food FMCG Fashion, Apparel Consumer Retailers FMCG & Luxury Durables

. Apetito . Avon . Adidas . Michelin . Barnes & Noble . Associated British . Coty . Brooks Brothers . Nikon . Delhaize Foods . Dr. Scheller . Coach . Nokia . Deli XL . Bofrost Cosmetics . Clarks . Olympus . Douglas . Coca Cola . Johnson & . Nike . Tesa . Metro Johnson . Danone . Swarovski . Texas Instruments . Migros . Kimberly Clark . Dr. Oetker . Steinway & Sons . Warner Music . Office Depot . NeoStrata . Ferrero Group . T M Lewin . Otto . Nivea . Haribo . Xbox Live . The Container . Procter & Gamble . Molson Coors Store . Reckitt Benckiser . PepsiCo . Schwarzkopf & . Pernod Ricard Henkel . Unilever . Shiseido . Weetabix . Weleda

Source: Simon-Kucher; * Selection due to client confidentiality Exceedra Conference 2017 31 Where we support our Consumer Goods clients in Revenue Management

Market research and Pricing strategy Consumer pricing* analytics

Brand / pack Price-pack Trade-promo Retailer Design and level commercial architecture effectiveness specific RSPs management of goals and Promo primary price calendars research

Portfolio pricing Development of price and promo guidelines strategy comprehensive review or tackling specific challenges Data and reporting

Development of performance tracking, data Ensuring pricing Customer pricing strategies align with capture and gaps overall corporate Transparency Trade terms Cross-channel goals – at all levels of achieved assessment price price and management RM Org and Process benchmarking

Design and implementation of complete customer Design of RM pricing and trade terms frameworks organisation set- up, governance and processes

* Retail price setting is at the sole discretion of the retailer Exceedra Conference 2017 32 Your UK contacts at Simon-Kucher

James Brown Ivan Šegrt Partner, London Director, London 1 Plough Place, London EC4A 1DE 1 Plough Place, London EC4A 1DE phone: +44 (0) 207 832 6700 phone: +44 (0) 207 832 6700 e-mail: [email protected] e-mail: [email protected]

James Brown is a Partner with Simon-Kucher & Partners in London Ivan is a Director in the London office of Simon-Kucher & Partners. and had 11 years experience in industry roles prior to joining Simon- His areas of specialisation are promotional effectiveness, price Kucher. modelling and structured pricing projects in Consumer Goods and He has been with the firm since 2009, and now leads the Consumer in particular. Goods practice in the UK. Although covering all Consumer Goods categories he has a particular focus on food and grocery, advising both Ivan has lead projects in multiple consumer goods sectors ranging UK based clients and acting as UK market expert on global from luxury wines & spirits, general grocery, consumer electronics, engagements. specialist DIY products. He specializes in commercial strategy with a particular focus on Ivan joined Simon-Kucher with seven years of industry experience. pricing.. He covers both UK and International clients including several He worked for Anheuser Busch - InBev, leading projects and leading FMCG businesses and a number of Private Equity firms where managing teams in Sales, Pricing and Category Management. he works across their portfolios. He subsequently joined Dunnhumby (subsidiary of Tesco), where James is a regular media commentator on pricing topics (Sky News, he used shopper data to assess effectiveness of promotions, BBC, ITN, Guardian, FT, plus others. In addition he is a frequent speaker at conferences and events (including Professional Pricing working on projects with leading FMCG companies. Society, Revenue Management & Pricing International and several in Originally from Montenegro he holds an MSc in European Political house events for global Food & Beverage companies). Economy from the London School of Economics and Political Prior to joining Simon-Kucher, James was Head of International Pricing Science and a BSc in Economics and Politics from the University of at Hertz Europe. Before this he held the role of Senior Pricing Manager Bristol. at Ricoh. James studied Politics with Economics at Goldsmiths College and completed a Masters in Politics & Government at Birkbeck College

Exceedra Conference 2017 33 Americas Atlanta, Boston, Mountain View, New York, San Francisco, Santiago de Chile, São Paulo, Toronto Europe/Middle East Amsterdam, Barcelona, Bonn, Brussels, Cologne, Copenhagen, Dubai, Frankfurt, Geneva, Hamburg, Istanbul, London, Luxembourg, Madrid, Milan, Munich, Paris, Vienna, Warsaw, Zurich Asia/Pacific Beijing, Singapore, Sydney, Tokyo

London office 1 Plough Place London EC4A 1DE, UK Tel. +44 20 7832 6700 www.simon-kucher.com