A Bit of Background on RGM
There’s been a recent resurgence of Consumer Packaged Goods (CPG) companies embracing Revenue Growth Management (RGM) as a strategic lever to deliver profitable growth. Given increased shopper scrutiny on CPG price increases, the improvement of CPG supply issues, and growing competitive pressure from private label products, it makes sense that the near-term and longer-term profitable volume RGM can deliver assumes a prominent role in CPG growth strategy.
Deloitte examined this move towards RGM in their 2024 consumer product industry outlook report. From their primary research, Deloitte determined that 66% of CPG companies growing both revenue and profit (Profitable Growers) invested in RGM systems, whereas 49% of companies did not grow both revenue and profit. Deloitte’s analysis below illustrates mentions of RGM in earnings documents for the global top 100 CPGs have doubled, further evidence of RGM’s increasing strategic importance.
A Practical Primer from an RGM Expert
Pensa’s Tim Whiting recently sat down with Julie Oxner, SVP of Business Intelligence from our partner Acosta Group, to discuss RGM in the CPG market. Julie is an industry veteran who works with leading CPG companies to offer strategic help and support in high-demand areas, including Revenue Growth Management. Here are the highlights of the conversation:
Julie let’s start with the basics. The term Revenue Growth Management has recently come into focus again as a key to CPG growth. What is RGM?
Often, people think of RGM as a tool, but it is MUCH more than that. RGM is a strategic planning and execution approach enabled by analytics and focused execution that leverages all revenue management levers in pursuit of revenue and profit growth. This requires cross functional collaboration and ultimately drives an organizational culture change. RGM is based on the foundation of people, processes, and tools and addresses vital levers such as Pricing, Promotion Effectiveness, Trade Architecture, Mix Management, and Assortment through an RGM lens.
Why is RGM an important 2024 consideration for CPG manufacturers seeking profitable growth?
A McKinsey study analyzing annual reports for CPGs who do RGM well shows a 4-7% increase in profit margin over those who don’t. In Acosta’s CPG Insider Group, one of our CEO participants said, “We believe that establishing Revenue Growth Management will provide the greatest source of near-term value and will be the fuel that drives our future growth.” This sentiment is shared broadly in the industry and evidenced by Deloitte’s study.
Some characterize RGM as a system, but you mentioned RGM is a much broader imperative? What do you mean by that?
Doing RGM well requires cross-functional collaboration and a true culture change in an organization. For example, if you want to improve your trade efficiency the first logical step is to analyze your promotional return on investment (promotional ROI). Many companies would need to switch their organization from measuring promotional lift and volume (i.e., driving cases) to an incremental-based ROI measurement approach. Enabling this change could require training an organization on what incremental ROI calculations look like, how sales teams are paid, and often requires a tool to help track and measure this new way of calculating success. As with any change, there is an adoption curve in the organization, and work is needed to move people along in the journey.
Many frameworks and models exist to guide RGM. Based on your experience, what are the primary levers that impact profitable revenue growth?
The primary levers that affect profitable revenue growth are Strategic Pricing, Promotion Effectiveness, Trade Architecture, Mix Management, and Assortment through an RGM lens. None of these can be entirely successful without people, processes, and tools to support work in each of these 5 pillars. For the past few years, pricing has been the pillar with the most focus as inflation skyrocketed, but for the past 6 months, promotion effectiveness and trade architecture have become more of a focus area as inflation slows and consumers and retailers are less supportive of additional pricing actions when considering product choices within a category.
How should brands think about pricing, promotion, and trade effectiveness in a modern RGM program?
In a modern RGM program, pricing and promotion should constantly be reviewed and optimized. Both manufacturers and retailers should be open to evaluating promotions by incremental Return on Investment (ROI) and not solely on volume and lift. Ensure that promotions with zero or negative ROI are stopped in favor of promotions with higher ROI. This will help make trade most effective. Manufacturers and retailers should also be open to testing and learning new promo tactics and price points to see which resonates best with consumers and provides win-win financials for both CPGs and retailers.
When it comes to pricing, it is important to understand the consumers’ willingness to pay for your product and how optimal unit/revenue curves change over time as inflation ebbs and flows to affect consumers’ wallets. This, combined with understanding commodity and other manufacturing costs, will help dictate if a brand is able to leverage pricing as a lever to aid in profitability or if volume will suffer with additional pricing action.
Trade effectiveness is a hot RGM topic. What are you seeing in the market?
Trade spending and optimizing trade in our ever-changing omnichannel landscape is a primary RGM focus. I recently attended the Promotion Optimization Institute (POI) Spring Summit and trade effectiveness was top of mind for the hundreds of RGM practitioners and CPG leaders who attended. 2024 POI survey results shared at the Summit stated that 88% of respondent companies struggle to manage modern trade.
According to POI, enabling trade management capabilities and processes is critical as spending is blurring and expanding across internal departments and industry channels. As shopper, digital, e-commerce, D2C, and other modern trade elements grow, it is essential to have trade management capabilities that can evaluate the opportunities (individually and total portfolio), appropriate a balanced enterprise funding allocation, and evaluate execution results.
We’re seeing many CPG manufacturers rationalizing portfolios even as they seek growth through new product innovation.
How does mix and assortment management play a role in RGM?
Assortment management is an important lever in RGM as 50% of SKUs often contribute less than 10% of the profit. Coming out of COVID, retailers are asking CPGs to have efficient supply chains and cut costs out of the system. One way to do this is to prune assortment. It’s known in CPG that a high percentage of new item innovations fail in the market, which leaves a lot of inefficient SKUs on the shelf and creates unnecessary costs in the supply chain. CPGs who routinely review portfolio assortment to identify gaps in distribution or velocity for highly profitable items, identify cost savings opportunities for high sales but low-profit items, and prune low-performing and low-profit SKUs will see profit growth while optimizing SKU count.
Mix is challenging as companies can influence mix, but ultimately the shopper controls mix by what they choose to purchase at shelf. Strategically choosing trade allowances, promotional funding, and frequency to influence a profitable mix can be impactful over time. CPGs and retailers must monitor mix changes over time to ensure they understand the full impact on revenue, profit, and trade rate.
What are RGM best practices CPGs should embrace to achieve their profitable growth objectives?
First off, prioritize what your organization will focus on in your RGM journey. Get some small wins and celebrate those wins because wins are contagious and will help fuel more adoption. Second, I think it is essential to make it easy for your organization to know what measurement is expected and measure it. For example, if you want to improve promotional ROI, then make the current data available and continuously share wins and opportunities as new promotional strategies are implemented.
What mistakes are you seeing CPG companies make regarding their RGM strategy?
The biggest mistake I see manufacturers making is being hesitant to act or to set clear priorities for RGM. RGM doesn’t have to be this HUGE undertaking. It can be starting small, making progress, and celebrating wins in the organization to continue to move forward. Often, it’s thought that RGM must be these big elaborate systems and tools, but in reality, even an Excel-based tool can get an organization started on a path to optimization and efficiency.
Julie, your counsel that RGM programs can start small though something as simple as an Excel tool is spot on.
Beyond Excel, as RGM programs mature, Artificial Intelligence represents a step change in increased speed, accuracy, and efficiency of those programs.
RGM in the AI Era
AI already plays a central role in supercharging CPG RGM programs.
In fact, Deloitte describes RGM as part of “the new age of algorithms and automation”.
This perspective is echoed in recent media coverage of leading CPG companies:
From Mondelez, “First, looking at RGM, AI is helping support the company’s approach to sales by leveraging second-party data to drive improved business decisions and sales execution”.
“AI also provides better insights to drive sales execution and excellence through guided selling for personalized recommendations, suggested order to make the order-taking simpler, recommended action to drive upselling, and sales performance tracking through data, analytics and insights.” Mondelēz RGM and Marketing Strategies Get AI Brain Boost
From Kraft-Heinz, “Kraft Heinz has established a dedicated organization within revenue management, building digital tools that have resulted in a 5% CAGR improvement in promotional ROI since 2019. Artificial intelligence has also been used to improve promotion ROI by identifying the right product mix for a retail location or region. Testing and prototyping have begun on AI-based models from promotional calendars that could potentially help reduce negative ROI promotions and further intelligently automate revenue growth…”. Kraft Heinz Sits RGM at the Heart of New Growth Strategy
As with many business processes, AI in RGM can automate and perform tasks faster and better helping people to make better business decisions, or in some cases automatically making business decisions without human intervention.
One emerging RGM application of AI is the use of computer vision and AI (CVAI) to inform RGM decisions with a timely and accurate understanding of retail shelf conditions. For deeper dive into different CVAI approaches at the shelf, read Computer Vision and AI at Retail – Why “how” Matters.
Julie, thanks for sharing your CPG RGM insights. You provided a wonderful strategic perspective and actionable steps that any CPG company should consider as part of their RGM strategy.
Conclusion
CPG Revenue Growth Management, when implemented and executed correctly, is a proven profitable growth driver. Leading CPG companies are actively rejuvenating their RGM programs, often enabled by AI.
If you are a CPG leader evaluating RGM, we’re here to help both through Acosta Group’s deep knowledge of RGM from insights through to action and Pensa’s AI-powered shelf intelligence to inform RGM decisions and measure RGM impact.
This article is by Tim Whiting, Vice President of Marketing and Partnerships at Pensa Systems.
