The consumer packaged goods (CPG) industry in the Middle East is changing rapidly. Growth is slowing. Consumers are more price-sensitive. Retailers are more demanding. Business digitization is growing. Regulation is increasing. Ownership laws are being relaxed. Collectively, these changes are shaking the foundation of the local CPG distributors, challenging their capabilities, and eroding their once-strong market position.
Until recently, local distributors in the Middle East served a critical role in the CPG industry. Any brand manufacturer that wanted to sell in the region was required, often by statute, to work with local partners. This is not the case anymore.
At the same time, brand manufacturers (mainly multinational corporations) are confronting slower growth, increasing operating costs, and pressure from shareholders. They have less patience for local distributors that do not meet performance expectations. This is why they are developing their business models to encompass many local distributors’ activities, particularly those that make the greatest contribution to value. These changes have left distributors with low-margin services such as imports, customs clearance, warehouse and logistics, along with higher-risk activities related to managing inventory and collecting receivables.
There have been varied responses from local distributors. Some have cut costs and driven efficiencies across their value chain, but are now struggling to drive top-line growth. Others have vertically integrated, mainly into manufacturing that offers higher gross margins. However, this is taking them into business with a high risk of failure and for which they do not have skills and expertise. Distributors are at a crossroads: they can choose to continue clinging to an outdated business model, or they can embark on a transformation that will require some tough decision making.
To win in this increasingly uncertain and demanding environment, distributors need a bolder, transformational approach. Over the years, the “Fit for Growth” approach where responses are combined has proven most effective in better positioning companies for a sustainable course of high performance.
First, companies must create clarity and coherence in their strategy and articulate the differentiating capabilities that matter to their strategy and ability to win in the market. Distributors, ideally in partnership with their key brand manufacturers, should map out the value chain from manufacturing to retailers’ shelves, evaluate their performance across the chain, and then identify the areas and activities where they offer clear and differentiated added value.
Second, they need to put in place a strategically informed cost structure and approach to capital allocation. The issue with cost-cutting is not whether to do it, but how and in which parts of the business. Top-performing companies do not cut costs across-the-board. Instead, they run lean operations in non-strategic areas of their business and then re-invest the resources they have saved in areas, activities and capabilities that they have identified to be critical to success. Such cost-cutting is less like cutting fat, but rather a fitness plan that builds the competitive muscle of their differentiating capabilities.
Digital enablers are critical for transforming the cost structure. One key element is the productivity and efficiency gains that result from automating lower-value tasks, thereby focusing resources on higher-value-added work.
Third, organizations must re-organize around these differentiating capabilities. Once they have restructured their costs, distributors should redesign their organization around what they do best; from their organizational structure to incentives, decision rights, skills, and cultural elements. The purpose is to harness the collective actions of employees and align their behaviors in support of the strategy.
The “Fit for Growth” transformation allows distributors to take advantage of their newfound fitness to generate scale. This includes expanding into new markets and forging joint ventures. One promising option is to become an “anchor distributor” for their key brand manufacturer, allowing them to cover a wider geographical area. In this arrangement, the “anchor distributor” acts as a partner with clear alignment on strategies, complementary capabilities, and go-to-market models. This would create a congruous, effective and agile unison that is able to react rapidly to customers’ demands, competitive threats, and market challenges.
These changes will not be easy, but most established distributors in the Middle East have little choice given the significant changes in the region’s consumer market. By taking the ambitious steps needed, distributors can restructure themselves. They can emerge leaner and better positioned to thrive in the consumer market of the future.
Ramy Sfeir is a partner at Strategy& Middle East, part of the PwC network.
Sami Darouni is a senior executive advisor at Strategy& Middle East, part of the PwC network.