Dairy-Co was in a pricing race to the bottom and questioning the long-term viability of its beverages division in its entirety. The development of a new consumer-centric growth and diversification strategy justified a moderate amount of capital investment that brought new innovation-enabling capabilities to the organisation. The subsequent implementation of a multi-brand, multi-format and channel-expanding product portfolio culminated in revenue growth of the entire beverages division by almost 50% in under three years while growing the average gross margin by two-fold.
In 2012, Dairy-Co’s domestic retail division consisted of low-margin, commodity-like dairy foods and beverages which were under threat by both, the aggressive pricing activities of branded competitors, and the mounting pressures from private label growth. As gross margins continued to erode, Dairy-Co’s beverages P&L couldn’t carry any significant marketing investments in advertising and promotion to strengthen brand associations, keep it top-of-mind with consumers or signal commitment to retailers. A catch-22 existed, where brand health was weakening due to a lack of communications support, however, the tight margins couldn’t justify any brand investment.
While many within the organisation were thinking, “how do we take out cost to improve margins?”, the better question related to building step-change value back into the beverages portfolio to cement its viability, enhance margins and unlock adequate advertising and communications investment.
The organisation’s newly-created innovation function saw this business problem as more of a symptom of participating in a low-margin, commodity category with an undifferentiated product range. Therefore, the focus shifted from inwards to the outside, exploring highly-profitable spaces where under-satisfied consumer needs exist. A thorough, design-thinking approach helped to identify several compelling, actionable insights in these higher-value spaces, which in turn were used to iteratively design and validate new value propositions. Commercial rigour was then applied to building a business case for moderate capital investment to bring about new capabilities that would not only help deliver these new value propositions to market but would unlock a multi-year, multi-brand and multi-category innovation plan.
Within a span of 18 months, the business had moved from acknowledging an internal financial problem to launching two new-to-market product ranges produced on the recently acquired capital equipment. In parallel, a broader innovation pipeline was being constructed to fuel business growth, maximise return-on-capital and stand-up a new contract manufacturing business model for non-conflicting spaces.
The initial two launches found product-market fit and demand immediately, grabbing considerable value share and driving overall category growth for retail partners.
For the organisation, its overall beverages portfolio grew +47% over an 18-month period and its margins had doubled, allowing the re-commencement of brand communications support across all of beverages. In addition, the total cost of capital was returned in less than three years.
Key lesson: Business ‘problems’ are actually, usually, symptoms of something bigger. Nine times of out of 10, a financial or supply-side symptom can be linked to an external demand-side ‘problem’. It’s by solving this problem creatively – by relentlessly pursuing remarkable value for those that we serve – that we can solve the pains of the business.
[‘Experience’ blogs are reflections and learning experiences from Radiocarbon consultants from their time on the client-side]