To Sell in Australia, Being Nimble Counts

Companies like distiller Diageo, leather goods maker Oroton, and Coca-Cola Amatil find that being nimble helps them become stronger in uncertain times

By Emma Gray, Jayne Hrdlicka and Mike Booker

Australia's downturn story is playing out differently than in other countries. While consumer sales have plunged dramatically in other regions, companies selling consumer goods in Australia have not felt the pain as quickly or severely. Business confidence surged in July to an almost two-year high, and the month before consumer confidence surged almost 13%, a 22-year record. Unemployment held steady at 5.8% in July and has risen by less than many economists had expected. Indeed, the Australian economy is one of the few advanced economies that did not fall into a recession.

If, as now appears likely, Australia does manage to stave off a U.S.-style downturn, the credit goes to calmer financial markets, low interest rates and fuel prices, and hefty government-stimulus spending that spurred retail sales. Demand from China has also helped Australia's commodity-based exports stay relatively strong.

Despite the rosy economic news, though, forecasters warn that Australia is not out of the woods. With economists expecting the Reserve Bank of Australia, which has held rates steady for the past four months, to begin leaning toward monetary tightening, unemployment among full-time workers could rise amid deterioration in the housing market. As government-stimulus cash payments dry up, consumers might tighten up on spending again, especially on nonessentials like luxury goods and durables, entertainment, home improvements, and travel. Historically, private-label penetration in Australia has been lower than other markets like the U.S. and Britain; for example, only 51% of milk is private brand in Australia, vs. 63% in the U.S. and 74% in Britain.

But that preference for branded commodities is now under attack. Companies in Australia are seeing a sharp rise in the sale of private-label products, in both generic and specialty milk categories.

In such periods of uncertainty, consumer product companies need to be positioned to deal with quick and unexpected change. Spirits maker Diageo (DGE) learned this lesson the hard way in April 2008, when, without warning, the Australian government increased the excise tax on "ready-to-drink" products such as cans and bottles of premixed drinks by 70%.

The company was forced to make some smart decisions fast. For example, how much of the tax increase could be passed on to consumers before they threw up their hands and mixed their own or switched to beer? While the tax hike was in legislative limbo, Diageo used the unwelcome surprise as an opportunity to hone its collection and analysis of market intelligence, make well-informed decisions, and act quickly—all necessary skills for steering through Australia's current economic uncertainty.

Our research shows that when companies are able to become cost leaders, scrupulously gauge consumer sentiment, and use that information to rapidly adapt to changes, they can not only survive and grow amid turbulence, but they emerge even stronger. Some Australian consumer products companies are rising as leaders by using these three strategies to gain an edge for the future.

First, get your house in order for a cost advantage

Winners get fighting fit in terms of costs before they need to—before a downturn hits. So when change happens, they're able to continue investing in their brands, customers, and capabilities, instead of coping with a budget crisis.

Oroton (ORL), a leather goods maker at the low end of the luxury market, got its house in order two years ago when confronted with financial pressures. By cutting noncore product lines and divesting three money-losing businesses, the Australian company trimmed both its complexity and costs—reducing total expenses from 57% to 52% of sales in 2008.

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