Paul Morrison

Hello and welcome to Retail and Consumer Pulse by WNS. In this podcast, we dig into the trends that are reshaping the retail and consumer goods sectors, exploring the latest thinking from industry experts. My name is Paul Morrison, and today, we are going to dig into the ways in which private equity is creating value with brands and manufacturers.

To provide expertise on this topic, I'm delighted to be joined by Michael Mitterer, who is Chief Growth Officer in Europe in the manufacturing, retail, and consumer space.

And maybe Mike, you could just kick us off and tell us a bit about your background.

Michael Mitterer

Thanks very much, Paul. My background is in the chemical industry, where I spent many years in various CF orals at Lanxess. Lanxess was the carve-out of the chemical divisions of Bayer.

But over the last 12 years I spent in the business services industry, I have been working with many P/E-owned companies and also directly with some P/E houses.

Obviously, there are also a lot of spin-offs in the chemical industry, for example, Envalior, which is a spin-off of my old company, Lanxess and DSM.

Paul Morrison

It's brilliant. Thank you for that. So, back on our main topic of P/E, just to set the scene, I think it's fair to say there's been a load of activity in the marketplace across manufacturing and CPG, a lot of rumored, unplanned, and actual transactions. I'm thinking Temsec, Durham Pai Partners, Tropicana, KPS Capital, Innomotics, and Siemens, just to name a few. And looking at the aggregate flows of trade in the sector, it has been over $250 billion in transactions in the last 12 to 18 months. So, there’s a lot of activity.

What do you think is behind this activity? What's driving a lot of the energy in P/E in this space?

Paul Morrison

The good news is that Michael, you and I have recently written a paper on private equity titled “How P/E-backed CPG and manufacturing firms can unlock value at speed.” What's behind this, and what's behind some of the activity in the space that you're seeing in the market?

Michael Mitterer

Obviously, everybody thinks about P&E houses immediately in terms of efficiencies, about driving a business case, about taking costs out of companies. Having said that, this varies between P/E houses. Some P/E houses have a much clearer focus strategy on growth, looking more at growing companies, while others are looking more at making them more efficient.

If you look at the European industry recently, I think there are many more substantial challenges to companies regarding their sales, their market share, and also their cost structure. If you look at the German car industry, there's a lot of pressure now, and this is impacting a lot of automotive suppliers.

A lot of these automotive suppliers are owned by private equity houses. The good news is that the car industry, particularly in Germany, is now taking very fast and decisive actions to manage and overcome the current situation. I believe that the industry in Germany, which is very close to my heart, obviously will come out of this stronger. And because the kind of industry is an important driver, if you think about all the supply network behind it, in the whole value chain, there's a huge dependability on them.

Paul Morrison

Absolutely. So, there’s a lot to unpack there. I guess framing it, as you say, there is a lot of macro and political change. There's a lot of volatility. And despite all that, the wheels of industry continue to turn. None of these macro trends is changing the need and the instinct of private equity companies wanting to generate value and create value in a relatively short three to five-year time frame. So, businesses and P/E carry on despite this. As you picked out and as we set out in our report, there's a cost reduction and a revenue improvement side to this. As we work through the analysis in the report, let's break out those two halves.

The paper that we wrote starts with the top five or six levers that P/E companies are using to drive cost and efficiency. To list those out, they are process redesign, AI and automation, data-driven insights, global sourcing and shared services, supply chain digitization, and improving cost to serve. So, the six levers there that we called out, do you want to pick out a couple of those to bring to life, Michael?

Michael Mitterer

Actually, I think instead of picking a couple of these out, the question is not anymore so much whether we should pull this lever or whether companies want to pull these levers. I think they're all becoming absolutely essential.

And all these levers need to be pulled. Especially in larger corporations, I remember a lot of discussions in the past where people said that if we automate our processes, we don't need to outsource to come to the same result.

I don't see these discussions so much anymore. I think everybody comes to realization that the full combination of everything is that including outsourcing and automation has become essential, and also, the time to value becomes much shorter. So, some of the discussions in the past were really the prioritization discussion, and what levers us to pull and when. It came out of a very strong market and financial position.

And a lot of companies are now under huge pressure. So the question is not really which levers to pull. It’s the other question of sequencing to get to the fastest time to value, really.

Paul Morrison

I think that's fair, and they're definitely impactful levers. So, I agree about the question of sequencing. One of the things in the report is we pull out some analysis and statistics around impact just to give a flavor of that in process redesign as a statistic around 30% of activities in CPG operations are classified as non-value adding.

When it comes to scaling automation and AI, one analyst has estimated that the average impact of 25% cost reduction in these sectors is the median output. And then finally, on data-driven insight, only 13% of CPG companies say their decision-making is highly data-driven. So, just on the first three levers there, I think a lot of the analysts and experts are looking at what is possible with these levers. They see very big opportunities to be opened up.

And just to build on that, as WNS, we work across these sectors and work both with private equity companies and their portfolio companies. We do get our hands dirty with working on these projects as well. One other example is supply chain digitization. One of the key practices in that space is around putting in place a control tower so that the digital flows, information flows that are becoming possible, are acted on and drive more value.

So, control towers and supply chain are key areas where we're getting actively involved at the moment. That's the cost reduction side of the story that we build out in the paper. Perhaps we can turn to the other side, the revenue growth side, and I think my starting point for this is, very often, analysis on value creation in the space is seen as cost take out, back office optimization, when in reality, the big wins and the big numbers can be on the pricing product and CX side of things. So, I think the revenue side is super important and powerful.

Just to list the top five levers that we mentioned.
#1 Smarter pricing and trade promotion
#2 Hyper-personalization and promotions
#3 Channel expansion
#4 CX and retention
#5 Product portfolio and assortment

And that gives us a flavor of some of the levers that we emphasize in the report. I wonder about your response or your summary of what you took away from the revenue growth analysis that we did, Michael.

Michael Mitterer

If you look at the times we live in right now, which are characterized by huge uncertainty about the economic stability and the new composure of the world economy.

The US export market for European companies is becoming tricky. We don't know whether this is temporary or this could become permanent. We all know that the Chinese companies will know and will understand how to get the most out of the situation for themselves. So, key export markets could be at risk, which means keeping growth on the same level can probably be extremely challenging for a lot of companies in the next months or maybe in the next years, depending on how the situation further evolves. So, I think a lot of activities and all the levers you have named, I wouldn't want to prioritize because it depends a little bit also per industry and the company. But I think all these levers need to be pulled to keep market share or to avoid too much loss of a market share and then obviously growth.

So, it's the same on the cost side. I think most companies nowadays will run initiatives short-term, medium-term, and long-term to pull all these levers and get all this together because the pressure is becoming much higher than it used to be.

Paul Morrison

Absolutely. I'd agree with that summary. It emphasizes some of the points in our podcast most recently with Dorotea from ISG in which we were looking at the increased mobility of buyers in these volatile times. So, I definitely agree with that.

I'll just pull out maybe a couple of the levers on the revenue side that we're interested in, starting probably nowhere better than with pricing and trade promotion. One of the stats there around dynamic pricing strategies, which are ever more ambitious and widespread - they can uplift margin by 5%. So, very real impact is achievable. We work pretty extensively in this space with a retailer and a number of food and beverage companies, and we've seen that have a very big impact. I guess it’s another favorite or a high sort of topical lever in the space of hyper-personalization and data-driven promotions.

A stat there that 75% of consumers are more likely to buy from a brand that recognizes them by name, so this increasing impact and increasing emphasis on real-time personalization, particularly in the CPG space, is becoming ever more popular and achievable and something that we've worked with a number of our clients in the retail and brand space as well. So, that's an exciting lever. So there's lots that we pass over there in our conversation here that's in the report, and the show notes will include a link to the report.

Before we close, Michael, I'd be interested if stepping back from some of the specifics of the analysis and the reports, what your thought is as a take away from this? What's your key insight for P/E and for portfolio companies that are looking to step up performance in in these markets in the coming years?

Michael Mitterer

To be honest, Paul, I'm quite reluctant to give portfolio executives from P/E firms any advice as these are super intelligent people throughout. But what I can say is that WNS has more than 50% of our revenue with P/E-backed companies and the reason for that is that we are much more entrepreneurial and a much more fast moving company than some of our more established companies. We have a very high cultural fit with P/E houses, and I would hope and offer to every P/E company to work together to pull those levers and to increase time to value and help them to achieve their objectives.

Paul Morrison

Thank you very much for that summary there, Michael.
We'll have to close. Time is against us, so it just remains for me to say thanks for your time and your insights today.

Michael Mitterer

Yes.
Thank you very much. Bye.