Insight

To Sell in Australia, Being Nimble Counts


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. It saw overall sales increase 11% year-to-year and hired a new design team to focus on design and innovation. Oroton's move to control costs and introduce new fashions, combined with increased sales, enabled the company to move forward with plans to open 11 new stores in 2009.

Two years ago Coca-Cola Amatil (CCA), the Australian bottler and distributor, didn't shirk from investing heavily—and innovatively—in infrastructure initiatives that now give it a cost and information advantage over competitors. CCA carefully targeted infrastructure investments that would make it a stronger and more resilient competitor. This strategy included beefing up the beverage company's already solid distribution facilities with a state-of-the-art SAP technology platform, automated warehouses, and new production lines. In 2008 alone, the initiatives delivered 35% of CCA's earnings growth, contributing to the company's 10% boost in earnings for the year. By closely managing costs the company has the flexibility to invest in its brands, even during downturns.

Listen to consumers—and adapt

Having a low-cost position is necessary, but it's not enough. In a fast-changing, unstable economy, companies need systems that make them smart (very quickly) by providing data and insights into shifts in consumer behavior. By better understanding what shoppers want, and getting that information to the decision-makers for analysis, leading companies are able to make the most out of every product and channel—making sure they have the right products in the right stores at the right prices to address consumer changes.

Perhaps the best Australian example of listening to consumers is Coca-Cola Amatil's abrupt about-face when it came up against a failing product: Consumers were unrelenting in their complaints about its new energy drink, Mother. Swiftly responding to consumer sentiments, CCA and brand owner Coca-Cola (KO) reformulated and relaunched the drink within months, even spoofing its unsuccessful original formula with the self-deprecating marketing tagline: "Tastes nothing like the old one." Grocery store sales of Mother skyrocketed, from just 4% of the energy drink market share in June, when it was relaunched, to 30% in the last quarter of 2008, making it the top seller in its category.

For a player like Diageo, the ability to listen to consumers and adapt is a critical weapon in the battle for market share. Given the volatile economy, consumers are going out less, opting to buy their beverages more in "off-premise" liquor stores. While many consumers think of premium spirits as an affordable luxury, others are trading down within their brands to something less expensive.

Diageo has developed a sophisticated approach to outlet segmentation that allows it not only to track how consumer behavior is changing, but to use this information to adjust its in-store marketing programs. Diageo's systems can identify changing consumption patterns in high-end bars, say, or mid-range restaurants. Using this information, Diageo's customer marketing team designs and deploys point-of-sale promotions to ensure that the company's products remain the top choice for all groups, regardless of a changing economy.

Likewise, by hearing what its consumers were saying, Jurlique International, the Australian natural skin care product maker, figured out how to more successfully win over much-coveted younger shoppers. When market research showed that consumers believed Jurlique was a French firm, the company launched a major marketing campaign that not only billed the premium skin care brand as 100% Australian—something that resonates well with young Australian consumers—but also that its products are made from herbs and plants grown at a Jurlique-owned organic farm in South Australia. It changed the logo and packaging and revamped its store formats to give them a more rustic, natural farm feel.

Because it showcased the brand as all-natural and made-in-Australia, the company was able to achieve its goal of appealing to younger consumers. Average customer age dropped from 35 to 30, and Jurlique's share of the premium skin care market in Australia rose to 11%. The company now shares the top spot with rival Clinique.

Create a smart and nimble organization

Listening to consumers makes a company smart. But the organization must be nimble enough to take advantage of those consumer insights.

As it responded to the unexpected tax hike, Diageo recognized that something it considered to be a strength—a consensus-driven culture—was a liability when it needed to make quick changes. There were too many people involved in too many decisions, at too many levels, too far removed from consumers. The company systematically stripped away organizational layers so that its front-line sales force could respond on the spot to data captured on changing consumer sentiment. It also put in place a system to quickly transmit relevant data to senior executives, who monitored a dashboard with key indicators and metrics. And the company implemented a program to clarify decision-making accountability. Diageo's new organizational muscle allows it to more quickly adjust prices and product offerings to remain attractive with consumers.

The company shares its research with its retail partners. For example, Diageo's insights into how consumers select brands in "cool rooms"—special areas in Australian bottle shops where alcoholic beverages are sold—has enabled retailers to refurbish this underutilized area of the store.

Coke, too, has been smart and nimble in shifting gears to address consumer insights, particularly during the economic downturn. As sales began to drop off in upscale restaurants, CCA shifted focus to selling more value offerings in the grocery channel, as well as installing more refrigerators to drive higher-margin single-bottle servings in the convenience and leisure channel, including mom-and-pop stores. The strategy paid off: Last year, despite softness in upscale restaurants, CCA's single-serving sales grew by 3.4%, and it now plans to invest $40 million in Australia in 2009 to continue growing share.

And leather goods maker Oroton is now better positioned to respond to uncertainty. The company vigilantly monitors such data as store traffic and how much consumers spend on each transaction. "We monitor everything that matters," says Sally MacDonald, Oroton's CEO. Just as important, the company can zero in on evolving trends and make adjustments, such as making more inexpensive items like key rings and fewer pricier handbags, or introducing knitwear and adjusting window messaging. In a similar story at Jurlique, "We have seen a decline in store traffic, so we have focused on improving conversion to ensure that the net result is positive growth," says Sam McKay, the company's managing director for Australia and Asia.

Whether or not the downturn hits Australia as hard as other regions, consumer products companies need to prepare. Those companies that have a low-cost position, listen to shoppers, and create nimble organizations that can act on customer insights will end up leading the pack.
Emma_gray
Gray is a partner in Bain & Co.'s Sydney office and a member of the firm's Consumer Products and Retail practices.
Jayne_hrdlicka
Jayne Hrdlicka is a partner in Bain & Co.'s Sydney office and a member of the firm's Consumer Products and Retail practices.
Mike_booker
Mike Booker, a Bain & Co. partner based in Singapore, heads the firm's Asia-Pacific consumer-products practice.

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