Issue 16 Consumer Currents

ConsumerIssue 16 Currents Issues driving consumer organizations

Reinventing retail The proﬁ t behind data analytics

p6 Interview p20 Case studytudy p14p14 Markets Matt Shay, President How Procterr & WhyW the Gulf is of the US National Gamble’s greeneen the go-to emerging Retail Federation drive deliveredred a economy for on innovation US$2bn dividenddend brands andb stores he issue that should be at the top of every boardroom agenda in the global consumer industry is generating the right kind of growth. T Amid the relentless press of world events, it is easy to feel inundated by the volume, variety and complexity of challenges facing every consumer-centric company, whether they are a retailer, manufacturer or supplier. With consumer confidence growing but fragile, many businesses will understandably remain cautious about departing from the formula that has served them well since 2008: stay lean, build a strong balance sheet and survive. Yet with the Organization of Economic Co-operation and Development predicting that the world’s GDP will grow 3.6% in 2014, investors will expect the consumer industry to seize its opportunities, maintain its margins and grow through innovation, organic expansion and acquisition. In this issue of ConsumerCurrents, we explore a number of the opportunities and challenges that face the consumer industry as it seeks to generate the kind of growth that adds enduring value to the business. The drive to cut costs has revolutionized the consumer industry’s manufacturing strategy in the last decade. Yet, as we investigate on p16, some brands feel the cost advantage has not been as significant as they had envisaged and now believe that manufacturing closer to home – or to their main markets – can make them more responsive to consumer demand or reassure customers about the quality of their goods. There is no ‘one size fits all’ answer to this but it’s a question that many brands should consider. Manufacturing is, at least, an issue that companies can manage with confidence. Yet from surveys, anecdotal evidence and my own conversations, it is clear that this is not the case with big data. Some retailers, brands and e-tailers have driven their business forward with intelligent analytics. Yet many companies admit they are not making the best use of data and don’t quite know how to rectify that. Big data is a complex, time-intensive, expensive challenge but it can make a profound difference to a business’s performance, so we investigate the issue on p10. The critical point here is proving cause and effect so that managers know if they are getting the right return on their data investment and can learn from their successes and mistakes. One reason so many companies are investing in big data is that they believe it will enrich their understanding of their customers. The same desire has persuaded some businesses to open up their product development to consumers, as we highlight on p4. By embracing presumers (consumers who push, promote and influence products and services before they are realized) and custowners (customers who are so keen on a new idea that they help to fund it), companies can make their R&D more effective. Sometimes looking inward can generate growth. On p20, Len Sauers, Vice-President of Global Sustainability at Procter & Gamble, reveals how people at every level of the FMCG giant’s business changed their behavior, a drive that has paid off to the tune of US$1bn. The need to focus on sustainable growth is at the heart of our interview with Matt Shay, the President and CEO of the National Retail Federation, on p6. He has 17 years of experience in the public policy world in Washington DC and, he says in the interview, one of his goals is to ensure that politicians understand the economic importance of retail – a point that will resonate with retailers, suppliers and brands across the world. The political theorist Niccolò Machiavelli once wrote: “Whosoever desires constant success must change his conduct with the times.” Though he made that observation 500 years ago, it has seldom sounded more apt.

Willy Kruh Global Chair, Consumer Markets KPMG International @WillyKruh_KPMG

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4 Off the shelf Creative consumers, smart-TV, and the rise of the ROBO-shopper 6 First person Matt Shay, National Retail Federation CEO, on the importance of innovation 10 Key issues Analytics: how can big data make a big difference to your performance? 14 The Gulf Your guide to these emerging markets where the retail sector is expected to grow consistently and signifi cantly between now and 2016 16 Production’s coming home – or is it? What you need to know about reshoring, cheap labor and your reputation 20 Case study Procter & Gamble: sustainability head Len Sauers on the group’s green goals 22 Lessons from other industries What can retail learn from the internet’s impact on the music business? 23 Insights KPMG provides a wide range of studies and analysis ConsumerCurrents is published by Haymarket Network, Teddington Studios, Broom Road, Teddington, Middlesex, TW11 9BE, UK on behalf of KPMG International. Editor Paul Simpson Contributing Editor Cathryn Newbery Production Editor Sarah Dyson Art Editor Paul Yelland Designer Amy Hanbidge Contributors Simon Creasey, Jeremy Hazelhurst, Lisa Palmer, Kath Stathers, Ian Whiteling, Picture Editors Dominique Campbell, Jenny Quiggin Group Editor Robert Jeffery Senior Account Manager Alison Nesbitt Managing Director, Haymarket Network Andrew Taplin Cover image Xinhua/Wu Ching-teng/Photoshot. No part of this publication may be copied or reproduced without the prior permission of KPMG International and the publisher. Every care has been taken in the preparation of this magazine but Haymarket Network cannot be held responsible for the accuracy of the information herein or any consequence arising from it. Views expressed by contributors may not refl ect the views of Haymarket Network or KPMG International or KPMG member fi rms. 4 6 14 16

enables it to launch products faster and be more confi dent there is a ready-made audience for its new products. One set, based on the popular online game Minecraft, took six months to hit the shelves, rather than Lego’s usual two-year product development period. Cuusoo draws in visitors with a variety of interests, from loyal fans to those more interested in themes, such as afi cionados of Back to the Future, who wanted a model of the DeLorean time machine from the movie. “We’re very interested in ideas from fans that [are] weird, which wouldn’t have survived the product development process,” Lego New Business Group Senior Consultant Tim Courtney has said. “If our fans can tell us there’s demand, why wouldn’t we consider it? And if we turn it into a runaway success, that will show Lego understands the value of listening to our consumers.” the value of Matt Sevenoaks, UK Manager of listening to what KPMG Crowd Connection, says this strategy its customers want is “an evolution of the focus group, but you are getting deeper insight and more reach at a fraction of the cost”. “Brands are using open and closed Creative consumers online communities to de-risk product development and cut time to market. Some of the world’s biggest brands are turning to customers to help drive their Customers that engage and collaborate R&D as they seek to speed up product development and make it less risky in this way have stronger brand affi nity and loyalty,” he says. “If you want people to really engage ven retailers and suppliers who strive through which shoppers can rate 13,000 with your brand, you need to make a to be customer-centric might balk of its own-brand products, suggest connection with your consumers and make at opening up product development improvements and vote for new lines. the purchase an emotional experience. This Eto consumers, but some global Active members are rewarded with points way of working is picking up pace across all brands feel it’s a risk worth taking. This and ‘product godfather’ status. Since its sectors. Brands that don’t join the fray may phenomenon started with crowd-funding 2010 launch, Migipedia has amassed around not deliver services and products that meet websites such as Kickstarter and Quirky 30,000 members who have submitted more customers’ needs.” and helped create new types of engaged than 15,000 product ideas and 130,000 The longer-term challenge is whether customers: ‘presumers’, who engage with pieces of feedback. presumers and custowners will help fi rms products and services before they launch; Lego invites fans to submit ideas for launch products that are radically different. and ‘custowners’, who invest in the brands toy sets via its Cuusoo website, which The Sony Walkman, ATMs (“too impersonal”, they love and buy from. attracts more than 500,000 unique visitors complained potential customers), and Migros, Switzerland’s biggest per month. Winning inventors receive Seinfeld, America’s most successful sitcom, supermarket chain, decided to engage 1% of royalties from their sets’ sales. The were all nearly stifl ed before launch by consumers on an online forum, Migipedia, advantage for Lego is that this approach hostile feedback from focus groups.

during shows. The app already covers more than 500 programs and hundreds of thousands of products. A May 2013 report by ShopTV Nexttech creator Delivery Agent found that two-thirds of US shoppers were interested in shopping through TV, ﬁ nding it convenient and enjoyable. Chinese e-commerce giant Alibaba is investing in t-commerce, launching new smartTVs and set-top boxes in September 2013. The Switch on to t-commerce company’s biggest online shopping channels, Taobao and Tmall, hit sales of RMB 1 trillion (US$159.5 billion) for January to November 2012. Shopping gets easier every day. With smartTVs, customers can now buy Alibaba’s strategy looks sound as China has one of the highest market products from home using their TV remotes, opening up a whole new penetration rates for smartTVs at 44%, according to a 2012 GFK study. sector – t-commerce – for retailers. With smartTV ownership predicted to “The increasing popularity of shopping on TV represents a sea hit 500 million by the end of 2015, this new sector is likely to grow rapidly. change for retailers, advertisers and TV channels,” says Mark Larson, Since July 2013, many of Samsung’s smartTVs in the US have had the Global Head of Retail at KPMG. “The challenge is to understand the ShopTV app preinstalled, enabling viewers to buy products on-screen opportunities and risks provided by this fast-developing sector.”

© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member fi rms of the KPMG network are affi liated. Trend Spotting The spending forecast The rise of the ROBO shopper With online research driving billions of in-store sales, Misunderstanding the effect of weather on consumer companies need to capitalize on this consumer behavior, behavior could be costing retailers billions of dollars says Alton Adams, Principal at KPMG in the US Changes in the weather influence what consumers buy, where they Why does London tailor Archer Adams have a buy, when they buy and in what quantities they buy. These fluctuations branded black cab customers can book to take might be the last untapped ‘big data’ frontier in retail. Analyzing the them to the store? Because the company wants climate properly could help suppliers and retailers – who adjust their to get customers who are browsing online supply chains and product lines accordingly – gain a competitive edge. through the doors of its shop. It’s a smart move, “The weather affects the way people shop in every market,” says because people who research online and buy offl ine Scott Bernhardt, President of Planalytics, a business weather intelligence (ROBO) spend three to fi ve times more than when firm. “A deviation from ‘normal’ weather will drive consumers to they shop through the website, according to research purchase or not, to ‘cocoon’ [stay home] and buy online, or visit local by IDC Retail Insights. When Macy’s, a major US department-store stores. It changes the pattern: for example, people tend to have a larger, chain, introduced its new e-commerce platform in 2010, the website more expensive breakfast when it’s colder. Changes in the weather can generated a US$1 billion rise in online sales, and infl uenced more break down economic barriers. I might decide not to spend money than US$5 billion on in-store sales improvements in its fi rst year. today; but if the weather makes me think differently, I will spend money.” The percentage of consumers choosing to ROBO depends The American Meteorological Society estimates 2.3% of US retail on the product, the consumer’s age, and how urgently the item is output is sensitive to the weather. Fluctuations in sales in particular required. GE Capital Retail Bank’s 2013 survey of consumers who product categories can be spectacular. During the summer of 2013, spent US$500 or more on a hotter than usual in the UK, retailer Argos sold more desk fans in a purchase discovered that 81% fortnight than in the whole of 2012. Luckily, managers had analyzed the researched online before visiting a “The realization climate so the company had enough stock to meet the demand. store – up 20% on 2012 – and that ROBO is Argos isn’t the only retailer to realize it pays dividends to analyze spent an average of 79 days climate. “You can’t forecast the weather beyond 14 days,” says gathering data before buying. here to stay Bernhardt. “But it doesn’t matter if the forecast is correct. If the Regardless of location or age, weather agency says it will be good for barbecue grills and it isn’t, consumers are becoming more has prompted consumers act like it is.” In April 2013, forecasts for ‘barbecue weather’ pragmatic when buying, but this prompted a British supermarket to behavior is especially prevalent some pure play switch mince production to burgers. among the urban young, who are e-tailers to open Weekend temperatures peaked at particularly comfortable with 59ºF, but British supermarkets still sold online and mobile technology. physical stores” twice as many burgers as usual. Comparing products online is 36˚F David McCorquodale, Head of simpler and faster than in a mall. It empowers consumers to decide average UK temperature in Retail at KPMG in the UK, says: which stores they might buy from, and identify stores offering good March 2013, blamed for “Online is a game changer when deals. The easier it is for consumers to fi nd your brand and products 3.4% drop in fashion sales it comes to managing the impact online, the more likely they are to buy. This sounds obvious, but of unseasonal weather. It enables some retailers are struggling to master e-commerce. consumers to buy off-season clothes which are no longer on the rails, Simply being online isn’t enough. Consumers expect certain and retailers can deploy targeted promotions and push a product line to functions – logical navigation, easy checkout, fast shipping and free suit a sudden change in temperature.” Between March and May 2012, returns – and will go elsewhere if they’re not satisfi ed. As GE Capital’s clothing retailer Bravissimo promoted its swimwear only on sunny days survey suggests that 88% of consumers who started researching using a pay-per-click (PPC) weather-driven online marketing tool. PPC purchases online via search engines went on to buy in store, this is a sales revenues for swimwear soared by nearly 600% compared to 2011, multi-billion dollar opportunity. when it was advertised online in all weathers. Some clothes retailers Collecting information from consumers online is relatively easy. and e-tailers now use geofilters to target their promotions: coats for The challenge is to understand the relationship between online shoppers logging on from a rainy city or sandals if their skies are blue. research and offl ine purchases. If someone walks into your store and buys a product, they won’t tell you they did an hour’s research beforehand. Surveys, loyalty programs and promotions can all help brands and stores better understand omnichannel retail. Retailers are already rewarding ROBO shoppers who visit their stores. Start-up app Shopkick has partnered with Visa and brands such as Target to offer customers points that can be exchanged for rewards. Many European retailers – selling goods as diverse as books, food and computer games – encourage customers to order online and collect from nearby stores. Consumers will want to experience some products – such as clothing, footwear and furniture – fi rst hand, so ROBO isn’t going away. That’s why some pure-play e-tailers have opened physical stores as marketing tools. Expect multi-channel retailers to recognize that bricks-and-mortar stores are far more than places to sell stock: they are the perfect places to launch products, raise brand awareness, and excite consumers about goods and services.

“Retail is driving innovation”

Matt Shay, President and CEO of the US National Retail Federation, reveals how technology is transforming the way retailers do business

n a wintry morning in Washington, Especially for our global readers, please DC, in the headquarters of the provide a brief overview of the NRF. National Retail Federation, Matt We are a Washington DC-based corporate O Shay was sporting a crisp white membership trade association, and our shirt with cuffl inks that pictured Winston members are corporations. We represent Churchill. “It’s an American thing to have an companies, not individuals, of all shapes and affection for Churchill,” explained Shay, the sizes, from the very largest retailer in the world President and CEO of the NRF, the world’s all the way down to the smallest single unit largest retail trade association. shopkeeper in a local neighborhood. Shay became the top advocate for America’s powerful retail industry in May 2010, after What key initiatives does the NRF performing a similar joint role for the offer its members? International Franchise Association for six years. Our primary objective is to create an He had worked his way up the ranks at the IFA, environment in which retail businesses can having started there as chief general counsel. operate without too many impediments from In his fi rst job, at the Ohio Council of Retail government regulations. In the past few years, Merchants, he crafted two laws that earned that has primarily been about getting our businesses multi-million-dollar tax breaks. economy going again. Washington insiders were impressed enough Retailers are more successful in an to hire him and, having spent the last 20 years environment where consumers feel more working in public policy in the capital, he is well confi dent in the overall health of the economy placed to achieve one of his stated aims when and they’ve got jobs. They need to feel they taking offi ce – to ensure that the retail sector’s are in a stable position to make investments, voice is heard effectively in Washington. spend money and buy things for themselves Right now, as the man who represents and their families. 3.6 million retail establishments that account Also, we believe we ought to do more for one in four American jobs, Shay is aiming trade deals. We believe we should do more to help his members by campaigning to to reach the 95% of the world’s consumers ensure they suffer fewer restrictions from who live outside the United States. government red tape and rules. Finally, we ought to get our immigration NRF president and CEO ConsumerCurrents spoke with Shay about policy fi xed, so that we can attract and retain Shay aims to ensure the all things retail, such as what emerging the best and brightest talent from around the US retail sector’s voice is heard and acted upon technologies will change purchasing habits world, which is one of things that has made in Washington DC and how world events guide the way the this country so competitive, innovative and industry does business. diverse for so long.

The NRF’s ‘This Is Retail’ campaign has highlighted the industry’s role in driving innovation. Do you believe the sector is becoming more innovative? And does it get enough credit for that? It is becoming more innovative, but we don’t get enough credit for it. If you think about some of the innovations we take for granted today, like barcodes and RFID tags, those are retailer-led investments in innovation. If you think about the way we do commerce today, with this [he points to his smartphone], customers try to fi nd ways to innovate in their lives, to do things more effi ciently, more quickly, to a higher level of satisfaction and confi dence. Consumers have been driving this revolution in technology that has caused retailers to spend enormous amounts of money on innovations just to keep up with their customers. Customers are increasingly channel agnostic, and don’t care about whether they go to a store to buy that sweater, or order it online from their computer in the offi ce, or on their tablet in a coffee shop, or on their mobile phone on the subway. Additionally, they often make different choices about where they want to pick that item up, whether it’s at the store, or having it shipped home. It’s all becoming confl ated to the point that retailers now are simply looking at the bottom line and trying to create an experience where customers feel they are moving seamlessly from one platform to another. It has required an extraordinary amount of innovation from retailers to develop systems that can speak to one another, while maintaining brand fi delity across all platforms, to make sure consumers have an integrated experience wherever they get it. There has been a positive benefi t for retailers. They can operate their businesses more effectively and more effi ciently. Previously, they had non-integrated inventories. Inventories were located in distribution centers that fulfi lled online Shay is rallying for world. Rather than have to lug around a orders. Stores fulfi lled the needs of policies to drive computer, maybe it is stored in a chip in your economic growth phone or in a direct link to the bank. Mobile customers who walked in off the streets. of 4-6% and give Now retailers use technology and create customers enough payments and the evolving electronic wallet is platforms that can look at everything in confi dence to buy one development retailers feel excited about. every store and every distribution center, Retailers are clearly leading on mobile and decide if they can ship it from a store payments in ways no other industry is. or a distribution center. Businesses make Also, we will see point-of-sale changes. thoughtful decisions about whether it is The old method where the sale occurs at more cost effective to ship items from the the cash register is not as common now. store close to the customer’s location, or Now a sales associate walks around with whether it’s best to pull it from a distribution an electronic tablet to make the transaction, center fi ve hours away. like in the Apple store. On the experience side, it is much easier to have the sales In addition to technology, what other associate walking around and interacting forces are inspiring new approaches? with the customers rather than them It’s the consumer experience. With sittings behind a counter. It gives customers something like mobile payments, we are more human interaction, because the comfortable putting credit card information associate is with you and you’re doing into a laptop and sending it to the internet something together.

© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member fi rms of the KPMG network are affi liated. What recent innovations in the retail about what growth is going to be and, industry do you feel have been therefore, they are not as willing to take particularly successful? big risks to extend themselves. That’s The use of mobile devices is the one that “Like consumers, because they don’t know if the economy jumps out most quickly. Think of the ability retailers are will grow. Am I going to get a raise? Can to use technology to drive messages to I make that investment? Home purchases mobile devices using geolocation systems increasingly were good this year, auto sales came back, while customers are in stores. This is a and home improvements are doing well, signifi cant area that is going to be what channel agnostic. but they came at the expense of other retailers focus on and invest in, because it’s kinds of spending. Consumers could either the way consumers want to shop. It all goes to the spend money on discretionary purchases or make investments in durable goods, but How well do you think retailers are same bottom line” they couldn’t do both. But we need an adopting new technologies and economy that can do both simultaneously. opportunities from using digital and mobile channels? What are the biggest challenges American Retailers are at a high level of awareness retailers face? and at a signifi cant level of adoption. We Consumer confi dence, job creation, and are at the beginning of this development, economic growth. If customers aren’t not the end. More capital investment needs confi dent about the health of the economy, to take place. Retailers on the cusp of they are not going to shop. We can’t resign investment decisions now have to decide ourselves to 2% GDP growth. We take the whether to build more stores or distribution view that we should be doing things to get centers, or adopt technology and invest in the economy growing at 4, 5 or 6%. innovation? It’s a constant balancing act. The store experience is not going away any time What important developments in world soon. With certain items we need and want, events and economics are guiding the we can only get them in a store. On the way retailers do business? other hand, the investment in online and Trade. We need to reach consumers outside mobile will continue. of this country. We need to be facilitating commerce across borders and encouraging How is the interplay between online, a new generation of leaders, thinkers and mobile, and bricks and mortar shaping innovators to come to this country. the retail industry? Think of the phrase that the US sneezes Do you mean bricks and clicks? The CEO of and the world catches a cold. What we Macy’s recently made the observation, import creates opportunities for almost as if he were surprised to hear this, manufacturers in China, Brazil, Germany that the supermarket chain is the tenth- and around the world, because it helps largest internet retailer. So the big players markets in other places. The US needs to on the internet are going to be the big US RETAIL BY THE NUMBERS be a growing, consuming economy. retailers. They are not there yet. Part of that In terms of immigration, I tell people that has to do with their investments in stores. if they think we should be protectionist But retailers don’t distinguish as to where US$2.5trn in retail contributes to and isolationist, then we are going to be they make the sale. Like consumers, America’s GDP. a second-class economy. retailers are increasingly channel agnostic. It all goes to the same bottom line. 42 million Americans work in retail. Is there a particular management theory, thinker, writer or book that has inspired With consumer confi dence quietly 2-3% annual sales growth in-store you or you feel would be important for returning, would it be true to say that takes place in US retail. retailers to read? generating the right kind of growth Having been a lawyer my whole career, is the top priority for the US retail 12-15% annual sales growth online I went back to Georgetown University a few industry in 2014? takes place in US retail. years ago to get my MBA once I started Yes. Consumer confi dence has been up working as a CEO. At graduation, one of our 95% of US retailers work in one and down. Looking at the past fi ve years, professors who taught strategy gave an people shop differently today to the way location. address on the importance of strategy. they did before the recession. People at 95.2 million Americans shopped on Right after him, the keynote speaker, who all income levels are more thoughtful in the was the CEO of a company, got up and Black Friday, 29 November 2013, the way they spend. The affl uent are not back to came to the podium and said, “Professor, spending the way they did before. Everyone first Friday after Thanksgiving Day. I just want you to know that culture will has adjusted to some degree. 77% of US holiday shoppers did eat strategy every day of the week!” In an organization, which comes fi rst, the some of their shopping online. Do you believe the credit crunch and the strategy or culture? I think culture comes economic crisis have permanently 1911 was the year the National fi rst. If you don’t create the right tone or changed customer behavior? Retail Federation was founded. environment, then strategy won’t make If you think of the recession as a credit a difference, because you will never be recession. Yes, people are not confi dent able to execute it.

The mountain of information retailers are accumulating is about to pay big dividends. But to harness the true power of big data, crunching the numbers is less signiﬁ cant than strategic vision

ith the amount of stored In the retail industry, which has invested just about driving profi ts but helping monitor information growing four times billions in customer relationship management trends internally and externally, which helps as fast as the world economy systems and powerful data warehouses, them stay ahead of customers, suppliers and W – and the processing power complacent executives may assume they their competitors. So, for example, if you’re of computers nine times faster – the most have data covered. Not so, Short cautions: doing sentiment analysis on social media, you striking aspect of big data is its sheer scale. “Companies like Google, Facebook and might identify a trend six months before your Yet for consumer brands, suppliers and Amazon already know more about most rivals and steal a march on them.” retailers, the quest to realize the immense companies’ customers than they do promise of data analytics doesn’t begin with themselves. The only thing you can be certain Ancillary analytics zettabytes, software packages or organograms of is that doing nothing is not an option. Some activities are not core to the business, depicting real – or imagined – fl ows of You have to up the ante to win market share.” but still need to be monitored – and can be information, it starts with a spot of self-analysis. In the retail sector, big data is often improved. Here the focus is not on being Eddie Short, Partner and Lead for Data and reductively seen as relating to the kind the best but on having adequate capability. Analytics at KPMG in the UK and EMA, says: of consumer metrics luxury goods brand Even so, data can still yield dividends. By “It’s not all about the numbers behind the Burberry has developed. Programs such sharpening its understanding of ancillary strategy, it’s about the strategy behind the as Customer 360 – a data-driven shopping analytics, Heineken has been able to reduce numbers. You need to understand the key experience that invites customers to the number of vendors it uses by a factor of drivers of value in your business, make sure digitally share their buying history, shopping 10. Better insight into its vendors has also you have a clear line of sight between data preferences, Twitter posts and fashion phobias translated into major improvements in its and your strategic priorities and make sure – harness powerful data platforms to analyze contractual arrangements with them. you have the processes you need to convert and deliver that information to sales staff via data into actionable insight.” their tablet computers. Such schemes have Remedial analytics Big data is an urgent challenge but the already proved their value, but Short says Big data isn’t always driven by the need to temptation to act now and discuss later there’s far more to big data than getting to seize an opportunity. When the worst happens, should be resisted. Understanding your know your customer. companies need to quickly and accurately priorities is crucial if you are to achieve the KPMG’s research has identifi ed three understand what went wrong and how to requisite return on investment. George types of analytics that companies focus rectify it. Short says: “Our research indicates Svinos, Head of Retail for KPMG in the Asia on, and in each area, big data could make organizations that take a disciplined approach Pacifi c region, says: “What some companies a crucial difference: to the key areas of analytics are likely to are struggling with is proving there is a bounce back much more rapidly from disaster.” cause and effect in any measureable way. Core analytics If you invest in new data – or new analytics Amazon has relied on analytics that support All these kinds of analytics are critical to capabilities – to launch a discounted the organization’s core purpose – and its long-term success yet they will affect each promotion to a particular customer segment, culture of metrics – to achieve its growth organization differently. The questions how do you know that you wouldn’t have sold targets. “Successful companies in this area,” may be similar – Where would big data be to those same customers anyway?” Short says, “recognize that analytics is not a game-changer for the business? What

ReshoringAnalytics GUM

A packet of Wrigley’s chewing gum is the ﬁrst item scanned using Universal Product Code in a Marsh supermarket in Troy, Ohio

attributes are rated on every of Chinese consumers item purchased using a shop on their mobile Tesco Clubcard to build up phones, compared to a proﬁle of the shopper 16% of US consumers

loyalty program memberships are held by US customers in 2012

The rise in in-store sales US retail giant Macy’s attributes to its investment in data location-based payments are made processing every year in the US items carried by the typical US supermarket

RFID tags were in circulation by the end of 2011.

Byte size

of US federal IT budgets expected to be spent on big data within ﬁve years, an investment of US$13bn

internet-connected devices will exist in the world by 2020, 2.6 per head of population

17 Sources: IDC, Radicati Group, TR Research, Pow Internet, LoyaltyOne, IBM, Food Marketing Institute, Havas Worldwide, Deltek, Macy’s, MeriTalk © 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member ﬁ rms of the KPMG network are afﬁ liated. In one minute… searches are made on Google

tracks are downloaded from iTunes

of goods are sold on Amazon searches are made on LinkedIn

comments are pasted on Facebook

of all the data ever megabytes are generated in the produced by a typical world has been US ofﬁce worker Sources: Noble Marketing, created in the last PC Magazine, Business Insider, two years Daily Mail, Intel, Go-Gulf.com

supportive process, policies and structures There is a lot of hype around big will be needed? What expertise will add data. Technology critic Evgeny Morozov the most value when aligned to your recently quipped: “If you have a trove of business objectives? – but the answers “Until recently, unpublishable papers, just add the words certainly won’t be. ‘Big data’ and see them go viral.” Yet Short For some, the immediate value may advances in our says: “Big data will be one of the essential reside in reducing churn in a critical sector of capacity to collect management tools of the 21st century.” the workforce. For others, it may be about Indeed, various studies into the potential analyzing why the ratio of fl oor traffi c to sales data has exceeded impact of big data have concluded that varies so much between stores. One upscale analytics could improve retailers’ margins US retailer has used big data to analyze our ability to use it by anywhere from 40-60%, far from key data points (sell-through rates, out-of- profi tably. This is insignifi cant in an industry where margins stocks, price promotions) at the product are constantly under pressure. or stock-keeping unit level at a particular starting to change” Big data describes vast quantities of time and location, developing thousands of raw, digital data that test the ability of scenarios to assess the probability of selling existing software and management tools a product – so it can optimize assortments by to manage and analyze, data so massive location, time and probability. A US retail bank it is hard to know what it can tell you and monitors social media activities to identify at- what it can’t – and what value it might risk customers. One large consumer products bring to the business. Svinos says: “Until company, analyzing related-party payments by recently, advances in digital technology have contractors and third parties, identifi ed over meant that our capacity to collect data has US$30m of erroneous checks and payments exceeded our ability to use it profi tability. over an 18-month period. That is starting to change.”

Many companies are already realizing important that the scarce thing is the the latent competitive advantage in mining knowledge to extract wisdom from it.” the data they already own (or can access). The interaction between managers One major US retailer, which moved from and data scientists is critical. Historically, spreadsheets to big data in three years, companies ask a question and collect data credits its investment in analytics for a to answer it. With big data, it’s the other 10% increase in store sales. Other retailers way around. The data is being collected and believe that in a world where consumers are it’s up to you – and your data scientists – to tracked in-store as closely as on websites, know what to ask. The challenge for data and consumer personalization is becoming Eddie Short scientists is how they present their fi ndings [email protected] exponentially more sophisticated, big and make their assumptions clear. The data could help them solve the enduring challenge for managers is to intelligently Eddie is a Partner conundrum that is the omnichannel. This interrogate the fi ndings and not fi xate on conviction may explain why US retailers and Lead for Data the precision of the data or suggest that the spent US$2bn on business intelligence and Analytics at best solution is to ask for some more data. and US$9.4bn on infrastructure in 2013. KPMG in the UK and “Being able to ask why, rather than To succeed, business leaders need to EMA. He has more spending more time demanding to know realize that putting analytics at the heart of than 20 years’ more, is likely to deliver genuine insights that their business is not the same as becoming experience helping can be acted upon,” says Short. There is, he a slave to data. Svinos says: “Not everything multinational admits, a risk that “C-level execs scream for that succeeds in business is based on organizations more data, seeing it as a panacea. Showing what you have done before. A successful leverage their data them that not all data is business-critical – product will not necessarily predict the next some is utterly useless – can be diffi cult.” to create bottom-line successful product. But this kind of analytics Yet when the relevant data has been is an essential component of sound business value defi ned, managers and experts must feel decision-making.” Take away the hype, the free to mine it for value. Svinos says: “Often software and the technology, and you could the real value comes when you combine argue that big data is just evidence-based different data sets. Let’s say, for example, management elevated to the nth degree. that you are a supermarket that is branching out into insurance. If you found a data set Managerial mindsets that told you an applicant regularly fi lled Although some analysts argue that big Burberry delivers detailed their car up at 3am at a downtown gas data’s algorithms can replace managers as customer data direct to station, that would affect how you handle decision-makers, Short says: “Management the tablets of its sales staff their application. The key is developing an insight remains a vital part. The deeper understanding as to which relationships your insight into your business, the between data and data sets are important.” less you will have to rely on the kind of Hiring data scientists and investing in mathematical muscle Google brings to big software do not, by themselves, create an data. Often, even when the data scientists information-led organization. You also need have interpreted the information, it may a new attitude towards IT. Many managers not present you with one solution. It may at retailers perceive IT as a back-offi ce suggest there is an opportunity – or problem function – in other words, a large cost – to be faced and your experience, insight or center – whereas with big data, it needs to instinct could guide your response.” become the engine of business growth. In their book Big Data, Viktor Mayer- Schönberger and Kenneth Cukier suggest Trial, error and strategy the key is not replacing management with Successful companies make analytics data-crunching software but developing a an enterprise-wide, strategic priority; corporate mindset where managers can identify whether they have the appropriate analyze data, understand how to tap into governance, operating, competency and it and unlock new forms of value. process models to make the best use of To do this, companies need expertise. the investment; and act to ensure they Hal Varian, Google’s chief economist, says: have the mechanisms to deliver the right “Data is so widely available and strategically information to the right managers. Time is of the essence – front line managers tend to want it all and want it now – but so is simplicity. Complex legacy systems should not prevent retailers or brands from BIG DATA: THE BIG CHALLENGES delivering a single customer view across all products and markets. • Turning left-over data into valuable • Increasing the flow of value-added data Given such complexities, Svinos’s advice data-driven processes and analysis to companies about to invest in big data is: • Identifying which data is valuable and • Identifying and maintaining the right “Remember it’s a case of trial and error. which data only complicates analysis expertise and capabilities Don’t bet everything on one approach. • Embedding analytics into the • Understanding how big data could affect Accept your defeats, learn from them, and corporate culture your IT infrastructure think hard about the kind of information you • Confirming the accuracy of externally • Using big data to improve financial are collecting and how it can deliver the most sourced data planning, business performance enduring value for your business. And always • Ensuring IT data investments deliver value management and financial consolidation remember the question you should start out with: what am I trying to achieve?”

BAHRAIN

STATE OF Recent political unrest has failed to affect the country’s THE MARKET economic outlook. GDP rose by 2.5% in the fi rst quarter of Inside 2013, fueled largely by rising oil output. Although oil accounts for around a quarter of its economy, Bahrain is considered to have the most diversifi ed the Gulf economic mix in the region. STRENGTHS The retail market is tough to gauge due to recent political unrest, but reports suggest consumer confi dence has rebounded with spending set to rise. states Bahrain’s major malls enjoy high occupancy levels and With a combined GDP of US$1.37trn, this region is one of strong rental growth. the few emerging markets where the retail sector is forecast to grow signifi cantly and consistently over the next three years. Here is our guide to the Gulf Cooperation Council bloc WEAKNESSES Social unrest, which erupted in 2011 and caused the Grand Prix to be canceled, hurt tourism and the large fi nance sector. CBRE reports that occupancy rates have fallen in KUWAIT 3.4% some smaller malls.

BAHRAIN 3.5%

QATAR CONSUMER Originally launched in 1913 8.8% from a small shop in a souk, STARS today Ashrafs WLL is now UAE 3.6% one of Bahrain’s leading Average GDP growth retailers. The company sells major international fashion for GCC states, 2010-15 brands and household goods, as well as consumer electronic brands such as Kenwood, Nikon and Sony.

FOREIGN Waitrose now has four SAUDI ARABIA 5.7% stores in Bahrain. Géant INVESTORS Hypermarket, a partnership between Fu-Com International and Groupe Casino of France, is the largest retailer in Bahrain. LuLu is opening three hypermarkets this year as part of a long-term US$334m investment program.

THE VERDICT “Bahrain was the only Source: Oxford Economics OMAN 4.0% GCC country badly hit during the Arab Spring. Tourism was severely affected, and Annual GDP growth Annual GDP growth consequently retail. for GCC, 2010-15 for world, 2010-15 But now things are relatively stable and the economy is responding well, with investor 5.45% 2.96% conﬁ dence returning.” Anurag Bajpai, Partner, KPMG in the UAE

Launched in 2010, Kuwait’s With a relatively small With the highest GDP per capita Despite a fall in oil production The GDP of the world’s fi ve-year plan to strengthen its population of just over three in the world – US$102,000 in this year, the National eighth-largest oil producer private sector, most notably million, Oman has a lower 2012 – Qatar’s global profi le Commercial Bank expects grew 4.2% in 2012. Non-oil with major infrastructural GDP per capita (US$26,000) keeps rising as it prepares to GDP to rise in Saudi Arabia GDP growth is 3.1%, as investment, seems to be than some neighbors, but host the 2022 FIFA World Cup by 4% in real terms in 2013. tourism booms. Dubai is working: GDP is growing by a large number of high Finals. Current GDP growth The burgeoning middle class second only to London in real around 6%. Strong retail sales net worth individuals. The of 6.5% is set to continue as is expected to drive growth. estate consultancy CBRE’s are being fueled by urbanization concentration of wealth some experts predict the state’s The Oxford Business Report rankings of global retailer and a big infl ux of foreign has particularly attracted population could double to estimates that the retail sector presence. Dubai Mall attracts workers from Iraq. luxury brands. 4 million by 2020. accounts for 17% of GDP. 35 million visitors a year.

Retail sales are forecast to The capital, Muscat, is Growing affl uence, expat One of the Gulf’s fastest The UAE’s free-market grow by US$4bn from 2011 driving change in Oman’s numbers and tourism are growing retail markets, economy makes it one of to 2015. GDP per capita in retail sector. New projects, driving growth, as will Saudi Arabia will benefi t the easiest Gulf states to Kuwait is circa US$40,000. such as the Muscat Grand Qatar’s new airport. The from the arrival of around do business in – it’s often Global brands are popular, Mall and Mustafa Sultan healthy 3,200 sqft of retail 1.7 million new consumers used as a test bed for particularly fashion, and complex, should attract space per 1,000 people is set over the next fi ve years. retailers new to the region. young people are splashing global retailers. Consumer to rise in Retail fl oor space has grown Clothing sales in the UAE out on electronics. Two new spending power should the run rapidly, increasing by 80% in and Saudi Arabia are malls will add 2.4 million sqft increase, driven by more up to the Jeddah alone since 2005. strong, expected to exceed of retail space. tourists and expats. World Cup. US$14bn this year.

Kuwait’s censorship laws Oman is seen as a stable rather Projected high infrastructure, Youth unemployment in Saudi A dearth of retail space in have deterred certain retailers than spectacular opportunity for housing and retail-space growth Arabia is around 30%, one Dubai has led to high rents. of books, fi lms, records and retailers. The economy keeps in Qatar means its population of the highest in the world. This will be eased by new retail clothing. Virgin Megastore and growing and consumer and economy need to grow by There are lingering concerns projects, such as Nakheel Mall Dubai-based record distributor confi dence is stable, but malls over 5% a year, say fi nancial over the country’s supply on the Palm, which will provide Music Master withdrew in and supermarkets aren’t experts. The economy needs chain infrastructure, which an extra 1 million sqft of space 2012. Of greater concern is a expanding as fast as elsewhere to become less dependent on government plans to invest by 2016. High-street stores political crisis which has led to in the Gulf – possibly because energy. There’s a fear the retail US$110bn in the next fi ve years face a threat from online sales, parliament being dissolved six the economy is small and GDP property market could overheat may help to address. tipped to rise from US$280m times since 2006. per capita relatively low. if not carefully managed. today to US$1bn by 2020.

Long-established Kuwaiti Established in 1870, Qatar-based supermarket Fawaz A Alhokair & Co Founded in 1974, Jumbo Al Ostoura fashion boutique Khimji Ramdas and hypermarket chain Al (known locally as Alhokair Electronics is one of the has more than 40 stores runs more than Meera runs 33 stores Fashion Retail) trades off UAE’s leading occupying over 107,600 sqft 50 Khimji’s Mart and six more are its strong local market consumer of retail space under its supermarkets in the pipeline. It is knowledge to forge franchise electronics ﬁ rms, Al Ostoura or Limelight across Oman and also developing a partnerships with global with 27 stores and fascia. The chain also runs manages a chain network of stores fashion brands such nine service centers, stores under the names of of Welfare Markets with French retailer as Gap, Banana Republic selling such brands fashion designers whose for the police. Casino under the and Zara. as Apple, Dyson, clothing it stocks. Géant fascia. Lenovo and Sony.

Kuwait hosts many Western LuLu, which is part of Tex-Mex brand California Tortilla Toys R Us operates 11 stores Fashion brands Crazy 8, brands, including IKEA, the EMKE Group, has opened a store in Qatar’s capital in Saudi Arabia under a licensing George and Calzedonia Victoria’s Secret, Prada, a strong hypermarket Doha this year. Marks and agreement, and plans to open launched in Dubai this year, Mothercare and American network across Oman. Spencer has two shops there. two more this year. In August, Abercrombie & Eagle Major retailers LVMH, Al Meera runs three WHSmith the retailer unveiled plans for Fitch will follow suit Outﬁ tters. Marks & Spencer and outlets – eight are planned for a new 377,000 sqft distribution in 2014 while LVMH is EMKE Group L’Occitane have all the new Doha airport. Fashion center that will be the hub investing in a new mega has opened had a presence in the brand By Malene Birger has for its ﬁ ve-year fashion mall. Fashion retailer hypermarkets Gulf state since 2007. recently opened stores in regional M&Co plans to have 12 in the country. the capital. growth plan. stores in the UAE by 2018.

“Despite little economic “There have been some “Qatar has seen rapid “GDP per capita is lower “Seen as a safe haven, diversiﬁ cation and a big major moves in terms development of many than its neighbours, the UAE’s retail sector reliance on oil, Kuwait of retail penetration, shopping malls featuring reﬂ ected in Saudi Arabia’s is being boosted by has a mature retail sector with more modern and high-end retailers, along retail brands, while the tourism and investment and high penetration of well-established retail with the penetration market is fragmented, from Saudi Arabia multi-brand and fashion brands increasing their of a lot of established focused on the main and Qatar. The next stores, including many presence in Oman, as supermarket brands cities. But with entry for evolution is likely to Kuwaiti retailers. But are supermarkets. As due to the big potential foreign brands easing and be homegrown UAE low tourism means less a result, the economy spending power of 60% of the population retail brands expanding growth potential than is becoming far less the rapidly growing under 30, the country has across the GCC and other states.” fragmented.” population.” strong growth potential.” beyond.” Neeraj Dassani, Partner, Anurag Bajpai, Partner, Neeraj Dassani, Partner, Neeraj Dassani, Partner, Anurag Bajpai, Partner, KPMG in the UAE KPMG in the UAE KPMG in the UAE KPMG in the UAE KPMG in the UAE

in 2001. Yet in the past two years, moving manufacturing back home (reshoring), or to other low-cost regions closer to key markets (near-shoring), have become fashionable. Produc tion’s Bogoian’s experience helps explain why. “With issues like unreliable communication and extended lead times, customer satisfaction was quickly waning,” he says. “Avoidable mistakes prevented us from realizing the cost advantages we anticipated. coming home Those problems were coupled with an overall lack of accountability that showed little sign Reshoring is more than a buzzword. There is a strong case for of changing.” Kenai’s leadership decided the consumer goods companies to rethink their manufacturing best way to fi x those problems was to return strategy – as long as they drill down to the detail production to the US. In a survey published last year, the Massachusetts Institute of Technology found that 33.6% of the 340 respondents were enai Sports creates 100% considering bringing manufacturing back to sustainable clothing. Like so many the US, with 15.3% defi nitely planning to others in the labor-intensive fashion reshore. Some American businesses have industry, this American company led the charge. Tailors Brooks Brothers, for Kstarted off manufacturing abroad. “Hats that example, moved 70% of its suit production cost 45 cents to make and T-shirts that came to a plant in Haverhill, Massachusetts, rather in at under $1/piece were a siren’s song for than offshoring production to Thailand. an upstart apparel company,” says Kenai Easybike Group, which makes electric founder Charlie Bogoian. bicycles, is moving production from China With cheap oil, low labor costs in to Saint-Lô in Normandy at the start of 2014 many developing countries and new to benefi t from government subsidies and technologies making it easier to manage tax breaks, and to build on the Solex brand’s these relationships, offshoring has been French heritage. the strategy of choice for many businesses Many companies ‘coming home’ are for more than a decade, especially since reaping the rewards not just operationally, Chin a joined the World Trade Organization but also in the marketplace. Homegrown

1. Don’t just follow 2. Challenge your the herd assumptions “Organizations may notice their Reshoring can help companies to exert more competitors reshoring production control over their suppliers, and to rejuvenate and increasing their market shares,” their supplier network. But reinventing supply says Andrew Underwood, Head chains can be traumatic, disruptive and prove of Supply Chain at KPMG in the more of a drain on resources than forecast. UK. “But this does not mean it Companies need to be robust about challenging is right for their businesses. Any the case for moving manufacturing. Do your move must be supported by ﬁ gures still make sense if your assumptions an assessment of all factors about quality control or reliability turn out to be associated with reshoring.” 5% worse than forecast?

3. Weigh every cost Less apparent or hidden expenses – such as exchange rates, taxation, real estate, and organizational overheads, which can have a big impact on proﬁ t – must be considered.

The rationale for making goods in China is more 4. Consider your key markets about access than cost One of the strongest arguments against reshoring is market access. Many offshoring hubs are fast-emerging economies with a burgeoning middle class. “You’ve got to think about the markets where you are likely to see growth – where you might regret pulling back,” says Underwood. “If you follow the herd for short-term cost benefi ts, you may later fi nd these are exactly the places you want to be.” Swedish white goods giant Electrolux, for example, is still manufacturing in China and Thailand while closing plants in Australia, products project such desirable values Europe and North America, partly because it believes that many of its future customers as quality and sustainability because of a will be in Asia’s emerging markets. shorter distribution network, while tapping into consumers’ patriotic sentiment. Recent research suggests that 76% of US shoppers notice ‘made in the USA’ labels. Last year, 5. It’s not just about 6. Don’t ignore Karen Kane dresses, blouses, and jackets the manufacturing sustainability promoted with ‘Made in the USA’ posters at Dillard’s department store posted 15% higher With recent research suggesting that by Failing to consider social responsibility can sales than similar non-promoted clothing. 2025 developing economies will account seriously damage your brand. “Awareness When Jack Welsh was chief executive of for nearly 70% of global demand for of sustainability means you might prefer General Electric, he said the ideal strategy manufactured goods, some not to ship products long distances,” says for a global company would be to put every multinationals are taking a broader Professor Ann Vereecke of Belgium’s factory it owned on a barge and fl oat it around long-term view, seeking a deeper local Vlerick Business School. Manufacturing the world, taking advantage of short-term presence in countries they previously close to your markets makes environmental changes in economies and exchange rates. regarded as sources of cheap labor. One sense. This will become increasingly Reshoring, offshoring and nearshoring, or the Swiss corporate giant has moved on from important as carbon taxes rise. It will be most effi cient combination of the above, are what it described as a ‘cost arbitrage’ interesting to see how Australia’s expansion a more realistic way of maximizing growth strategy for countries such as China to an of the carbon tax opportunities. Yet Boards need to consider the ‘in country for country’ approach that to encompass big questions: What are the strategic goals? encompasses not just manufacturing but the transportation Does a shift in manufacturing support the the location of product management and sector impacts on strategy? Have we truly considered all costs? R&D functions. This thinking can supply chain costs “Many businesses failed to assess the persuade organizations it is better to stay when it comes costs associated with offshoring correctly, close to rapidly developing new markets. into force in 2014. with error margins of around 20% in some cases,” says Andrew Underwood, Head of Supply Chain at KPMG in the UK. “When 7. Is it wise to bet everything on one country? considering reshoring, the mistakes should not be repeated.” Reshoring may look like a viable option, but do you have to manufacture all your goods in With Underwood’s advice in mind, a single market? Manufacturing in different countries might reduce the risk of being caught here are fi ve factors that every company out by fl uctuations in consumer demand, political instability, natural disasters and exchange should consider before they recalibrate their rates. Offshoring and reshoring are not mutually exclusive. manufacturing strategies:

Close for comfort? Speed to market is vital for fast-moving consumer goods retailers such as Zara

Cost analysis to sell in China, you had better be in China. To The catalyst for most companies’ decisions compete you must use the same weapons to offshore their manufacturing was cost, as those already in that market.” driven by cheap labor. Yet in many emerging “The question that “You’ve got to think about the markets economies, labor is more expensive than where you are likely to see growth – it used to be. Better educated workers are every company where you might regret pulling back,” says increasingly aware of their bargaining rights, considering moving Underwood. “If you follow the herd for short- and low-skilled labor is becoming harder to term cost benefi ts, you may fi nd later that fi nd. Wages in China, for example, have risen production should ask these are exactly the places you want to be.” by 15 to 20% per year over the past four Another option is to nearshore: to years. In comparison, US salaries have fallen is: where are locate facilities in a country close to the by 2.2% since 2005. our customers?” company’s base and/or key markets. Swedish The relentless automation of the furniture manufacturer IKEA is planning to manufacturing process – the International start production in the US to cut delivery Federation of Robotics predicts global robot and channel in your business. Much of the costs, while some British manufacturers sales will rise by 2% to 162,000 units in necessary information tends to be available are choosing to nearshore in Poland and 2013 – has also meant that labor accounts for within organizations’ enterprise resource the Czech Republic. For American fi rms, a diminishing proportion of total cost. These planning (ERP) systems, yet too many Latin America (especially Mexico) is proving factors have prompted several manufacturers companies struggle to use this data to run particularly appealing. Siemens is focusing on to mull over reshoring. effective programs and projects. Indonesia and Thailand as it seeks to expand But before taking the plunge and bringing in these emerging markets. production home, it’s important to assess Customer centric Speed to market is vital for producers how such a move would infl uence costs The question every company considering of fast-moving consumer goods (FMCG). across the business, from exchange rates reshoring should ask is: where are our Spanish retailer Zara’s fashion-forward and taxation to energy charges, organizational customers? This was a key factor in Karen reputation rests on how quickly it gets overheads and distribution. After careful Kane moving most of its manufacturing back designs from the drawing board to stores: consideration you may fi nd that taking only to the US and Mexico. just two weeks for the 60% of products a proportion of your manufacturing home If products are mainly exported – it manufactures in Europe. The remaining makes the best fi nancial sense. especially to markets close to existing ‘basics’ – items such as plain T-shirts whose Rather than pulling manufacturing out production facilities – reshoring could demand is less infl uenced by shifting of China altogether, for example, some lengthen the supply chain, ramp up trends – are made in Asian and African companies – especially textile producers distribution costs and lengthen the time countries where the benefi ts of cheaper – are adding another production base taken to reach the market. Do you really labor outweigh shorter lead times. in a lower-cost Asian country, such as want to cease or cut production in a market There is some evidence that consumers’ Bangladesh, Cambodia, Indonesia, Malaysia, like China where, by 2022, 630 million spending habits have become more stop- the Philippines, Thailand or Vietnam. middle-class consumers could provide a start and less predictable since the global To make the right decision, it’s crucial to huge potential audience for your products? fi nancial crisis, prompting companies to have an in-depth understanding of the exact As Professor Ann Vereecke of Belgium’s seek shorter, more fl exible supply chains. cost to serve across each line of product Vlerick Business School says: “If you want Technology has also driven this behavior as

© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member fi rms of the KPMG network are affi liated. customers test out new channels, some of outside its fl agship store in London. Another which make demand more volatile, such as European brand that denied using the factory the rise in returns stemming from customers had to change its statement after its labels over-ordering online to ‘try out’ products. were photographed in the rubble. Andrew All the fi rms implicated in the Dhaka Underwood Hazard warning incident have vowed to get a clearer view of Partner, Management “Organizations are waking up to the their supply chains, but Underwood says this Consulting, Supply challenges of offshore manufacturing in is “remedial and reactive. A good chunk of Chain Management, distant parts of the world – and the risks,” people are not doing enough due diligence.” KPMG in the UK says Underwood. Many CFOs believe that andrew.underwood reshoring helps them manage these risks @kpmg.co.uk more effectively. Relying on one region can The importance of R&D be dangerous. The 2011 tsunami in Japan Companies should not underestimate The key questions disrupted the supply chains of many of the the synergy between manufacturing and world’s electronics manufacturers, while R&D. The quality of products, your ability Will moving production cost or save 2013 fl oods in Thailand shut an area that to innovate before your rivals, and how you money? makes almost half the world’s disk drives. quickly you can bring goods to market are This is the first question every Board asks but they don’t always come up with the right Yet reshoring production has its own all at stake. “There is an appetite to bring answer. You can’t just calculate wages and hazards. The changeover period will cause manufacturing and R&D closer together,” shipping costs. The aspects that are too often instability in the supply chain and could says Underwood, “but this doesn’t mean ignored – or not investigated properly – are disrupt orders. A manufacturer’s tier-one, all production facilities will necessarily inventory carrying costs, quality, speed of -two and -three suppliers may not decide be reshored. PZ Cussons, a London- communication, government policy, impact on to follow, meaning the component supply listed healthcare and consumer goods innovation, and travel costs. If these aren’t chain lengthens and becomes more exposed manufacturer, produces soap bars in Eastern considered, you can’t get a true picture. to risk. The other option is to source new Europe, but reshored liquid soap to Salford, Will the move enhance or damage suppliers, which can be very time-consuming near Manchester, because it has greater your brand? and has pitfalls of its own, such as no shared value added and demands more R&D.” Making products at home may help you history, contracts that may be misunderstood You also need to gauge how market the quality of your products – but you and differing expectations of service. straightforward your manufacturing process have to deliver. Similarly, unless you keep Nor should companies assume a plentiful is. The simpler it is, the easier you might close control of your supply chain, if you let supply of skilled labor in home markets. A fi nd it to manufacture some distance from cost override every other factor in your 2012 survey by recruitment fi rm Manpower your R&D. If the process is complex, it may manufacturing strategy, you run the risk of a Bangladesh-style disaster. found that 81% of Japanese companies had be safer and more effi cient to keep it near struggled to recruit qualifi ed technicians and R&D. The US is home to a third of the How much confidence do you have in your engineers to fi ll vacancies. A shortage of world’s high-tech researchers, which is why supply chain? appropriate labor could harm product quality. so many fi rms whose revenue is driven by The horsemeat scandal in the UK led some R&D are based there. supermarkets to source their products from Reputation management close to home. Horsemeat was an especially Manufacturing thousands of miles away can No tipping point – yet emotive issue but the wider point remains: have a profound infl uence on your reputation, Reshoring is in vogue but Underwood says if you have a very complex global supply especially if something goes wrong. It’s not we have “yet to reach a tipping point”. chain, you run the risk of similar quality issues. The other concern for companies is just the plant at the end of your supply chain: Market instability means many companies resilience: some supply chains are becoming your brand is out there, too. are reluctant to move production at all; 97% so interdependent that it is hard to isolate KPMG research has found that many of respondents to Area Development’s 2012 them from the impact of events such as the global manufacturers had little confi dence in Annual Corporate Survey did not expect to earthquake in Japan. their supplier risk audits, while many have move a foreign facility back to the US, while looked to localize/regionalize supply chains 98% didn’t expect to relocate a domestic How significant are your logistics costs? to manage their risks better. Such concern production plant off shore. Cheap oil was the magic ingredient that was brought into tragic focus when a textile “You’ve got to think about likely growth made many long supply chains work a factory in Bangladesh collapsed in April 2013 markets,” says Underwood. “Making decade ago. That era is over, although some manufacturers have been attracted to the killing more than 1,100 workers. One major a quick, trend-led decision purely on cost US by headlines suggesting the shale gas UK clothing retailer, which used the plant, is very dangerous. You must carry out a full, boom will slash industrial energy costs. featured in news headlines for all the wrong detailed assessment of all associated costs Some sectors look set to gain more than reasons when protesters waved placards and factors before making any changes. others but, in general, it is important that “Some of the companies should not exaggerate the desired benefi ts competitive benefit to be derived from International comparisons of of near-shoring lower energy prices. manufacturing output 2010 (US$ billion) – increased agility, shorter Wherever you manufacture, how easy is it to do business there? lead times This is one factor that is too often and improved overlooked, even though the World Bank 279 information runs an authoritative global competitiveness 614 fl ow – can be index. Torsten Slok, Chief International y orea achieved in an Economist at Deutsche Bank Securities, existing company says: “If you ask how many days does it structure by take to open a business, to get electricity, 226 a renewed focus things like that, you realize there are a lot of reasons why the business environment is epublic of K on operational Brazil 282 China 1,923 268 France German India Italy 308 1,084 Japan R UK 231 US 1,856 much better in the US than in places where and distribution labor happens to be really cheap.” effi ciency.” Source: UN National Accounts Main Aggregates Database 19

© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member ﬁ rms of the KPMG network are afﬁ liated. Len Sauers, Procter & Gamble’s “At P&G there Vice President, Global Sustainability is a directive that sustainability be a part of everyone’s job”

waste materials. For example, the company has sold diaper manufacturing waste for use in cement products. Currently, 50 of the multinational’s manufacturing sites send no waste to landfi ll, while 96% of the raw materials leave in its products. The rest is either recycled (3%) or reused. The roof tiles at some of its sites are made from paper refuse. Sauers, who has a PhD in toxicology, began his Procter & Gamble career 26 years ago as a toxicologist. He has since taken on roles of increasing responsibility in the areas of biotechnology, human and environmental toxicology, and regulatory affairs. “P&G has always seen value in having someone with a technical background lead our sustainability FACT FILE work,” he says, “so when the job opened up, Name Procter & Gamble I had the right skill set to step in.” Founded 1837, USA Companies that prioritize sustainability Headquarters Cincinnati, USA understand the challenges and the business Chairperson AG Lafl ey Website www.pg.com benefi ts. Business leaders like Sauers are accountable for outcomes, whether meeting greenhouse gas reduction targets or managing waste water. “Focusing on sustainability can drive business success because it can inspire companies to devise new solutions,” he says. For instance, reducing its blades and razors packaging saves Sustainable Proctor & Gamble over US$1 million annually, while making the products easier to open. Sustainability issues can still be a hard sell at board level, but they are increasingly becoming a core component of doing strategy business. “Sustainability investments must deliver the same return as other business units,” Sauers says. Companies leading the Procter & Gamble’s rigorous en Sauers, the Vice President for Global way on sustainability issues seem to have goals to minimize its carbon Sustainability at Procter & Gamble, has one trait in common: they integrate the L a job on his hands. He leads an fi nancial, social and environmental risks and footprint are good for the organization that has to fi nd ways to: opportunities around sustainability as they planet – and for the FMCG power its manufacturing plants with 100% would any other aspect of their business – renewable energy; use 100% renewable that is, without special treatment. giant’s bottom line materials in its products; ensure no consumer Only four years ago, Procter & Gamble waste goes to landfi ll; and deliver products faced rising commodity prices and slow that have a smaller carbon footprint. growth in some developed markets. Procter & Gamble is a US$84 billion Yet sustainability was still seen as a way business with 140 factories worldwide. to build profi tability. The company had It has 25 brands that generate over a billion begun to put a price on waste and dollars in annual sales. And it tasks its greenhouse gas emissions attributable workforce with innovating and acting to make to products, from production to use by every day better for people and the planet. consumers. Its environmental vision added Sustainability is a priority for Procter & value and boosted the bottom line. These Gamble, even in uncertain economic times. goals were incorporated into Procter & Its sustainability program has brought Gamble’s annual US$2 billion R&D budget, US$1 billion to the bottom line over the past driving environmental innovation. 10 years through smart use of manufacturing What is Procter & Gamble’s secret?

“All company leaders are involved in sustainability decisions,” says Sauers, “and there is a directive that sustainability 5 key steps to a greener Procter & Gamble* be a part of everyone’s job.” He doesn’t get a free pass on his ideas. When he sought to replace foam-based packaging with a renewable material, such sales of sustainable innovation products as haircare brand Pantene’s bio-resin bottle, $52 billion (US$2 billion over target) he met with fi nance to explain why it made sense to switch to something that cost reduction in absolute waste in last fi ve years 20 cents more per pound. The time frame 68% for return on investments is a stumbling block sustainability offi cers must overcome. “You drop in water use have to go in with a business case,” he says. 14% “I want us to move from a petroleum product to renewables because they use fewer fall in energy consumption greenhouse gas emissions in their production.” 8% As laudable as that goal sounds, it isn’t enough to swing the board. Sauers also has cut in carbon dioxide emissions per unit of production to put numbers on business risk and brand 11% value, something fi nance people understand. *Achieved from 2007 to 2012 “Renewable materials can give you more fl exibility in materials supply,” he says. “It can As Sauers works on attaining Procter & be this factor that a consumer is responsive to Gamble’s 12 new 2020 goals, he says he has Vincent Neate, and that drives a purchase decision.” come to realise that long-term partnerships Head of climate Procter & Gamble’s sustainability strategy are integral to success. In 2013, the company change and is ambitious. Sometimes fulfi lling it is a joined forces with companies including Heinz sustainability at matter of detail. When managers studied the and Nike in the Plant PET Technology KPMG in the UK use of laundry detergent, they found that the Collaborative to develop plant-based environmental impacts differed between plastics. The aim of the group is to replace the developed and developing economies. conventional plastic made from fossil fuels “If I think of the developed world and I with plant-based versions, which would Make a business case for sustainability look at the laundry sector, energy is the main signifi cantly reduce the environmental How easy it is to do this depends on the sustainability theme. Hot water washing of impact of plastics manufacture. sector and the sustainability issue. For clothes accounts for 4% of the total energy Although businesses such as Alcoa, Procter & Gamble, making a business case use in the United States,” says Sauers. Google and Procter & Gamble have embraced for saving energy and water wasn’t too “If we look at the developing world, under sustainability through investments and difficult, because efficiency measures save laundry, water drives the footprint.” decision-making, many companies in the resources and money. This analysis has driven the development Standard & Poor’s 500 lag behind on such There are more complex issues, such as of products such as Downy Single Rinse, in efforts. Luckily, more fi rms are moving in the providing healthcare in developing countries. which one rinse provides the same right direction by creating alliances and Convincing someone that teaching about cleanliness and health activities is a good performance as the traditional three-stage making sustainability part of everyone’s job. investment is a life-changing thing to do. process. In regions where household The investments Procter & Gamble has water can be several hours’ walk made, on Sauers’ watch, prove that being Sustainability can improve a firm’s image away, the product also saves time good for the planet can pay dividends. Companies and brands that have fallen and effort. That’s one win-win CFOs would foul of sustainability issues have had their be foolish to ignore. reputations badly damaged. Undertaking One of Procter & a sustainability program is, therefore, Gamble’s key sustainable about getting things consistently right, goals is reducing the and ensuring your business activities environmental impact won’t harm your brand’s reputation. of its products Believe in sustainability and your strategy will succeed Any sustainability program must be driven by your company’s desire to actually do good, not just appear to be doing so. If you believe in sustainability, make it integral to everything you do. Then there’s no risk of you sacrificing sustainability principles when things get tough.

Measure the difference you are making Although it’s easy for companies to measure inputs, activities and outputs, it’s significantly harder to measure what the impact of a sustainability program is on the local community. That really is the Holy Grail of sustainability programs: to measure and understand the positive impact your activities are having.

BOTTOM LINE 1 Be strategically vigilant The internet creates new products and services, kills existing ones and accelerates the pace of change. In IT, it’s a case of survival of the fastest – that may soon be true for music and retail. CEOs must look ahead, be strategically nimble, and ready to innovate with new business models. 2 Weigh risk and reward When transformational change beckons, it can be easier to quantify likely losses than potential revenue from completely new products and services. The winning companies will be those whose goals are not impeded by a legacy mindset. 3 Put the customer ﬁ rst Are you providing the service your customers need – or one that is convenient for you to offer? The labels’ past focus on traditional formats and outlets let new entrants flourish. Many retailers are struggling to create a multi-channel strategy that Moby: musician, producer and lets consumers buy what they open-source pioneer want, when, where and how they choose.

severely it would hurt traditional music retailers, what kind of consolidation it might trigger among the labels, and how artists Remaking music would view this revolution. And despite repeated predictions of the CD’s demise, With the internet poised to transform retail, the record labels’ CDs still accounted for 57% of the industry’s global revenue in 2012, compared to 35% for experience of the digital revolution could well prove instructive digital, the fastest-growing sector. Like many large companies forced to reinvent their business in a hurry, music he most intriguing aspect of Moby’s fi les, physical products were a choice, not a labels initially found change easier to new album Innocents isn’t the music, necessity. Artists could circumvent record articulate than to execute. Defi ning a new Tit’s the fact that the musician – credited labels by distributing music from their strategy was tough. Aligning leaders and with helping bring electronica to the musical websites as Radiohead did, selling 1.25 million divisions behind that strategy, measuring – mainstream – has open-sourced the drum, copies of their album, In Rainbows, this way. and reacting to – success or failure and guitar and keyboard parts so fans can remix The major labels, having invested millions changing behavior was even harder. his songs. So far, Moby’s bundle of music in the 1980s in digitizing their music for CDs, Music is now everywhere – and the labels has been downloaded two million times from initially saw the internet as a threat, rather are profi ting from new revenue streams. BitTorrent and 21,000 fans have remixed his than an opportunity. Their business model Some have invested in Spotify, a service with music to suit their personal taste. had been built on revenues generated by the six million who subscribe to stream music Innocents is the culmination of a album format. Millions of consumers still rather than purchase it. Sony and Universal revolution that started in 1979 when Sony liked albums, yet many others preferred to Music partly own Vevo, the biggest music launched the Walkman portable cassette download, share or rent music – and were video outlet on YouTube, on which Miley player. The success of this device – and the happier paying 99 cents for a song than $20 Cyrus’s latest video generated a record CD version launched in 1984 – proved that for an album with a few fi llers. 19.3 million views within 24 hours. Some consumers were willing to pay to play music Anxious not to cannibalize their existing have also negotiated deals to take a cut of where and when they wanted to, integrating business, the labels allowed ‘outsiders’ such their artists’ total income, including revenue their favorite songs into their everyday lives. as Napster and Apple to drive this digital from merchandizingand live performances. Yet this revolution had limits. Even with the revolution. Then in 2000, global recorded Moby’s fans can remix his album for free, Walkman, music still had to take a physical music revenues began to decline – and kept but if his innovation succeeds, artists, form (cassette or CD), be bought from a store declining until 2012 when they grew, by companies like BitTorrent and labels could – principally in a format (the album) that was 0.3%, to US$16.5bn. charge consumers to personalize the music profi table for the labels – and the CD player, To be fair to the labels, the disruptive they love. Rock and roll is an unlikely open though portable, was still hefty. power of the internet was not obvious. The sourcing pioneer but such initiatives suggest The internet changed all that. With digital major known unknowns included: how the industry is rediscovering its mojo.

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