Tons of technical analysis is available online on ways to pick a stock. I considered few and got confused. Why investment decisions are supported with too many technical analysis and forecasts? Interesting thing is that the rules of the game are variable and so it is not so simple. Still I dare to find some simple ways and try to understand rules of the game. To start with I’ve taken one of the largest industries, the FMCG industry. The basic question I tried to answer about the variables affecting the industry performance. Stock pick would be automatically in place if the performance indicators are known.
First and foremost is changing market dynamics with fluctuating crude oil prices and inflation. Last few months were terrible. On one side input prices are increasing resulting in thinner margin to manufacturers. On the other side the share of wallet of consumer is decreasing. Overall decrease in category demand is now become visible. Companies with better brand equity are successful in transferring this burden to consumers. However with high competition already in place every time price increase will not be a viable solution.
Second emerging market dynamics is the emergence of organized retail. In this new format, relatively weaker brands also get equal opportunity to place their products and offerings along side a stronger brand. Two things will distinctly visible in such situation. Either exclusively differentiated product or the most cost effective product will get lead in the battle. In high inflationary situation consumer would tend to choose second option in order to control the outflow from their wallets. So brand loyalty earned by various major players will be at stake. Product with very high brand equity could maintain their position till the situation improves. Weaker or moderate brands will be the target of new cost effective products or brands.
Third is the cost leadership. A company’s pro activeness towards innovation, rationalization of cost structure, capabilities in manufacturing and in outsourcing gives a long term perspective of their approach towards cost leadership.Take the example of shampoo in which a crude oil derivative is used in packaging shampoos, while PET, a petroleum-based plastic product, is employed in manufacturing hair oil bottles and packaged water bottles. Crude oil derivatives account for almost 17 per cent of the total cost of corrugated boxes. Which company is working towards other innovative solutions? Another cost iscost of distribution which is very high in FMCG sector. So efficiency of supply chain and logistics adds significant value to cost leadership.
Fourth is competition with unorganized sector and regional players. Their overhead costs are much lower than a company with national presence. Being ‘local’ gives them a very cost effective advantage of distribution and logistics. Their presence can be felt at remote rural level. But since they are small the effect of inflation are even bigger for them. Poor management and poor cash flows are other prominent concerns. So a comprehensive consolidation can also be seen in next 2 to 5 years. The companies with better cash will take this.
Let me summaries the performance indicators to address health of a FMCG company in following parameters:
1. Brand equity with competitive advantage
2. Operating profit margin to understand cost advantage
3. Distribution efficiency by evaluating rural presence
4. Proportion of outsourced manufacturing
5. Cash in hand
Showing posts with label RETAIL. Show all posts
Showing posts with label RETAIL. Show all posts
Friday, April 10, 2009
CATEGORY VS BRAND
One distribution channel is setting up the rules of game in today’s environment is multi franchise organized retail. Now a days the only distribution channel is prominent for the most of the consumer durable and FMCG product is organized retail. This multi franchise model is redefining challenges of branding and product management.
The older brand building activities now become category building activity. For example, imagine a manufacturer of refrigerator who successfully builds a brand and in turn customers turn up to the retail store. But inside the store, story is different. The need trigger or decision to have a refrigerator could have been augmented by the said manufacturer, but inside the store customer is open to buy any brand. For a walk in customer inside a store there are lot of variables available to take a purchase decision. It may or may not be dependent on the branding of the company which prompted the customer to consider the product.
This case implies that the older way of advertising and branding are basically building more of a category than a brand. At this point positioning of product plays a key role. The brand managers should think of which gap or problem they are solving by making a positioning of a product. Because a slight differentiation if exploited properly could play a major role in making purchase decision. These gaps or points of differentiation are available everywhere. It could be price point, product features, point of entry in customer home, geography, channel or even variables like buying need of customer, perceived value of product by the customers etc.
While positioning a product one should be very clear on competitive strategy. As in multi franchise sales network a wrong strategy will give opportunity to competition to win and set the direction of game. It’s a zero sum game. Its like a game of cards where you keep guessing of available cards with the opponents. You check your strong and weak cards along with setting trump card. You make a plan with a sequence of moves. And if your sequence of moves are ideal you can even win with your weaker cards, because you are setting the direction and opponents have to react to your move. But there is one flaw. The whole strategy is based on few real things ( strong and weak cards, trump etc) and more guess work like who are the opponents having cards stronger than your weaker cards. And an assumption that all the best cards are not in one opponents basket. So it is risky. And so it is challenging. When you put a wrong move someone else wins and then he starts setting directions to the game. Since guess work and risk are still on the table, you’ll have to wait for next opportunity to win a move and take the commands of the game back in your folds. Strong and weak cards can be replaced by competitive strengths and weaknesses of any organization.
The older brand building activities now become category building activity. For example, imagine a manufacturer of refrigerator who successfully builds a brand and in turn customers turn up to the retail store. But inside the store, story is different. The need trigger or decision to have a refrigerator could have been augmented by the said manufacturer, but inside the store customer is open to buy any brand. For a walk in customer inside a store there are lot of variables available to take a purchase decision. It may or may not be dependent on the branding of the company which prompted the customer to consider the product.
This case implies that the older way of advertising and branding are basically building more of a category than a brand. At this point positioning of product plays a key role. The brand managers should think of which gap or problem they are solving by making a positioning of a product. Because a slight differentiation if exploited properly could play a major role in making purchase decision. These gaps or points of differentiation are available everywhere. It could be price point, product features, point of entry in customer home, geography, channel or even variables like buying need of customer, perceived value of product by the customers etc.
While positioning a product one should be very clear on competitive strategy. As in multi franchise sales network a wrong strategy will give opportunity to competition to win and set the direction of game. It’s a zero sum game. Its like a game of cards where you keep guessing of available cards with the opponents. You check your strong and weak cards along with setting trump card. You make a plan with a sequence of moves. And if your sequence of moves are ideal you can even win with your weaker cards, because you are setting the direction and opponents have to react to your move. But there is one flaw. The whole strategy is based on few real things ( strong and weak cards, trump etc) and more guess work like who are the opponents having cards stronger than your weaker cards. And an assumption that all the best cards are not in one opponents basket. So it is risky. And so it is challenging. When you put a wrong move someone else wins and then he starts setting directions to the game. Since guess work and risk are still on the table, you’ll have to wait for next opportunity to win a move and take the commands of the game back in your folds. Strong and weak cards can be replaced by competitive strengths and weaknesses of any organization.
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