Key note presentation by Theo Slaats, partner at Deloitte at Deloitte Pricing Seminar May 12, 2011 at Amsterdam Hilton

1. Pricing Excellence
Smarter consumers, smarter pricing
Amsterdam Hilton, May 12, 2011

2. Consumer mindsets are changing and both retailers and CPG companies
need to be responsive to the challenges and opportunities this will create
Implications for CPG
Search for „value‟ Reassessing „values‟
companies
Customers are: Social revolution through Companies need to:
digital media
• Increasingly focused on • Closely track, understand
value and anticipate
• Price sensitive, continuing Health and wellbeing • Recognise variation by
to trade down and shop market and occasion
around
• Better understand
• Continuing to emphasize opportunities for growth
value for the medium term Sustainability and the green and value creation
agenda
• Still desiring convenience • Identify and develop new
and indulgence products and execute with
the trade
Experiential purchases
1 © 2011 Deloitte The Netherlands

3. In addition, changes in the structure of the market are creating unique
challenges for CPG companies (1/6)
Comment
“Promotions are intensifying”
• Promotional intensity is increasing
• Retailers increasingly demand supplier
Unprecedented Promotional Activity investment in marketing and promotion
40%
• Promotional events have low success rate
Percent Product on Promo
39%
38%
Implication
37%
36%
• Clarity on customer profitability needed to identify
35%
Jan Jan Apr “hidden investments”
2006 2009 2010
• Strong post and pre-evaluation disciplines
needed around investment activity
2 © 2011 Deloitte The Netherlands

4. In addition, changes in the structure of the market are creating unique
challenges for CPG companies (2/6)
Comment
“Cross-border and cross-channel trade is increasing”
• Pan-European procurement contracts have the
potential to become increasingly common
Pan European grocery retailers
• Increasing risk that prices will be levelled-down to
Sales from
Company
Sales from Overseas
Overseas
the lowest price across geographies and channels
2007 (%)
2013F(%)
Delhaize Group 76 78
Ahold 75 79
Metro Group 58 72
Carrefour 55 64
Implication
Schwarz Group 52 61
Casino 38 48
Rewe Group 32 40 • Specific strategies and tactics avoid “levelling down”
Edeka 5 2
• Cross-border account management processes in
Note: Retailers listed in this table do not generate more than 75% of sales from a
single channel; F - forecast. commercial operating model for key international
Source: Planet Retail accounts
• Methods and tools for tracking and managing the
grey market become more important
3 © 2011 Deloitte The Netherlands

5. In addition, changes in the structure of the market are creating unique
challenges for CPG companies (3/6)
Comment
“The retailer is king”
• Top 5 grocers account for 50-80% of grocery spend
in most major European economies
• Retailers increasingly act as gatekeeper to the
% market share of top five food retailers by country consumer
• Retailers increasingly centralise and professionalise
procurement, demanding „more for less‟
Implication
• Trade programmes must deliver compelling category
proposition for the retailer
• Business account managers must have the right
capabilities and information
2003 • Trade terms need to deliver defensible and
2009 conditional pricing, while customers demand off-
invoice/fixed payments
Source: Mintel 2010 & 2004
4 © 2011 Deloitte The Netherlands

6. In addition, changes in the structure of the market are creating unique
challenges for CPG companies (4/6)
“Hard discounters are emerging Comment
as an important channel”
• Discount retailers are outperforming growth trends in
the FMCG sector as a whole
• Challenging all other channels; cash/carry, super
Global discount channel penetration by region: and hypermarkets, specialty and convenience stores
2009-2014F
• Introducing new categories and brands to achieve
Central
growing acceptance by consumers‟
Western & Eastern
Europe Europe
North 2009: 12.5% 2009: 5.3%
America 2014: 14.2% 2014: 7.5%
2009: 1.9% Implication
2014: 2.0%
Central & • Discount retailers offer huge volume sales
South America Asia &
Africa &
2009: 1.4% Middle East Oceania
2014: 1.8% 2009: 0.9% 2009: 0.5% • The lower total cost to serve can be lowered by
2014: 1.1% 2014: 0.6%
reduced account mgmt./field sales support required
• Limited control possible over promotional activities
Source: Planet Retail 2010
5 © 2011 Deloitte The Netherlands

7. In addition, changes in the structure of the market are creating unique
challenges for CPG companies (5/6)
Comment
“There is significant private label activity”
• Expansion of private increases price competition,
• Many major retailers are undertaking SKU
rationalisation, carving out more space for private
Private label penetration vs. concentration 2010 label,
Switzerland • Strongest private labels are becoming brands in their
UK
own right‟
Spain
Germany
Netherlands
Belgium
France
Australia
USA Implication
Canada
India Italy NZ
Japan South Africa
China Brazil • Work with retailers to create optimal category
Russia Mexico
solutions that serve both the retailer and supplier
• Understand true cost to serve, to protect and
improve margins
• Reach out directly to the consumer through new
channels, social media, brand loyalty programmes
Source: Planet Retail 2010
6 © 2011 Deloitte The Netherlands

8. In addition, changes in the structure of the market are creating unique
challenges for CPG companies (6/6)
Comment
“Commodity prices are rising”
• Margins are squeezed due to rising input costs and
retailer demands for year-on-year price reductions in
real terms
Food, energy push up consumer prices
• Retailers accept price increases, but are at the same
Wall Street Journal 17 Feb 2011 time looking to protect and increase their own
margins
Retailers face struggle to pass on increase to Implication
consumers
Financial Times17 Feb 2011
• Price and promotions synchronised with input costs,
if price elasticity and category positioning allow it
• Proactive SKU rationalisation can optimise the
product portfolio margin
• Shifting consumers to higher price, higher margin
products has a key role in protecting and enhancing
margins
Source: Planet Retail 2010
7 © 2011 Deloitte The Netherlands

9. Pricing & Profitability Management covers the full value chain from brand
owner to consumer
Price setting and pricing execution
Brand owner
- Align trade/wholesale price setting
- Minimise margin leakage
Channel effectiveness
- Use consumer, shopper and customer insight to optimise the value
Distributors proposition and strengthen pricing
- Understand customer profitability and cost-to-serve and align trading
terms with channel and customer growth strategies
Promotional effectiveness
- Better aligning promotions with brand strategies and channel /
Points of
customer characteristics
Sale (POS)
- Establish rigorous pre and post evaluation disciplines
Point of purchase optimization
- Align consumer pricing strategy behind a clearly defined
Consumers/ (premium/standard/ economy) brand architecture
Shoppers
- Understand pricing elasticities by channel / outlet type and work with
customers to create win-win category business plans
8 © 2011 Deloitte The Netherlands

10. In a European context, this requires a careful understanding of Europe-wide
and country level considerations
Europe-wide Country level
• Increased transparency • Different languages and culture
across borders • Differing levels of consumer
Consumer • Brand consistency vs requirements and sophistication
• Convergence on value • Alternate value drivers
• Pan-European procurement
contracts • Localised promotion pressure
Customer • Standardised trade terms vs • Local trading practices
• Scale of pan-European • Localised competitors
competitors
• Strength in pan-European • Need for local/regional autonomy
initiatives in negotiations
CPG • Global/European • Need to recognise local
vs
company standards/requirements legislative differences in pricing,
discounting, promotions etc
• Minimising cross border
conflict • Minimising cross channel conflict
9 © 2011 Deloitte The Netherlands

11. The development of leading Pricing & Profitability Management capabilities
is a journey – with value unlocked along the way
Leading capabilities
Basic capabilities Emerging capabilities
• Discrete price and promotion • Integrated price and promotion
• Price and promotions strategies strategy
Strategy
• No investment differentiation • Investment differentiated based • Investment aligned with most
on customer scale strategic customers / channels
• Prices set using historical • Pricing using predictive
• Prices set using cost plus
analyses modeling and advanced
Analytics • Limited / no post-promo
• Promotions achieve minimum statistics
analysis
ROI • Calculate “real ROI”
• Monitoring performance via • Gaining real-time insights using
Visibility • Ad-hoc tracking and reporting
syndicated data retailer point-of-sale data
• Integrated go-to-market
• Silo‟ed organisation • Dotted-line reporting to create
Organisational responsibilities
Alignment
(Mkt = Pricing; Sales = Trade shared go-to-market
Promos) responsibilities • Common incentives across
marketing and sales
Execution • Achieving targets at any cost • Executing a business plan • Managing full customer P&L
• High-level guardrails with • Integration of guardrails with
Governance • Ad-hoc, when needed
semi-annual reviews standard performance reporting
10 © 2011 Deloitte The Netherlands

12. From our experience, there are six key areas upon which achieving optimal
Pricing and Profitability Management depends
Establish
Deliver a
process design
framework
that engages the
for growth
sales force
Align business Create a
and financial simplified and
strategies to defensible PPM
drive change approach
Ensure
Align leadership
programme is
& communicate
sustainable post-
to customer base
implementation
Key Success Factors in Pricing & Profitability Management
11 © 2011 Deloitte The Netherlands

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