Report   The 2011 Consumer Value Creators Report Gaining a Value CreationAdvantage in Volatile Times
The Boston Consulting Group (BCG) is a global manage-ment consulting firm and the world’s leading advisor onbusiness strat...
Gaining a Value CreationAdvantage in Volatile Times   The 2011 Consumer Value Creators Report               Marcus Bokkeri...
The financial analyses in this report are based on public dataand forecasts that have not been verified by BCG and on assu...
ContentsExecutive Summary                                       4The 2011 Consumer-Company Value Creators                6...
Executive SummaryG                aining a Value Creation Advantage in Vola-         ◊ Inflation is a significant medium-t...
panies (23.6 percent) was 17 percentage points higher        Navigating this new environment will require compa-  than the...
The 2011 Consumer-          Company Value CreatorsW                    e are pleased to announce the 2011        of at lea...
than the retail sector’s average annual TSR); the average     growth. AutoZone, a U.S.-based company at number six,annual ...
The 2011 Consumer-Company Value Creators Rankings                                                                         ...
The FMCG Sector  The FMCG Top Ten, 2006–2010                                                                              ...
The Retail Sector     The Retail Top Ten, 2006–2010                                                                       ...
The T&T Sector  The T&T Top Ten, 2006–2010                                                                                ...
The Durables and Apparel Sector     The Durables and Apparel Top Ten, 2006–2010                                           ...
The Changing Dynamics             of Value CreationT             he further the world moves from the finan-      normal wi...
developed markets and underexposed to emerging mar-               companies in the developed world. Inflation in emergingk...
The Retreat from Risk                                            Increased Importance of Dividends. Another major         ...
As we noted above, consumer companies have a number                             environment, a company could easily squand...
plan for the company as a whole and for each part of            more conscious of the portfolio choices they make andthe b...
Bcg gaining a value advantage in volatile times
Bcg gaining a value advantage in volatile times
Bcg gaining a value advantage in volatile times
Bcg gaining a value advantage in volatile times
Bcg gaining a value advantage in volatile times
Bcg gaining a value advantage in volatile times
Bcg gaining a value advantage in volatile times
Bcg gaining a value advantage in volatile times
Bcg gaining a value advantage in volatile times
Bcg gaining a value advantage in volatile times
Bcg gaining a value advantage in volatile times
Bcg gaining a value advantage in volatile times
Bcg gaining a value advantage in volatile times
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Bcg gaining a value advantage in volatile times

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Marcus Bokkerink, Patrick Ducasse, Jeff Gell, Eric Olsen, Frank Plaschke, Daniel Stelter, Hady Farag, Mark Sciortino
November 2011

BCG ranks the top ten value creators in the consumer goods, retail, travel and tourism, and durables and apparel sectors over the past five years. Consumer companies are better positioned than companies in other industries to create value in volatile times. The trick is managing uncertainty and risk better than the competition.

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  1. 1. Report The 2011 Consumer Value Creators Report Gaining a Value CreationAdvantage in Volatile Times
  2. 2. The Boston Consulting Group (BCG) is a global manage-ment consulting firm and the world’s leading advisor onbusiness strategy. We partner with clients in all sectorsand regions to identify their highest-value opportunities,address their most critical challenges, and transform theirbusinesses. Our customized approach combines deepinsight into the dynamics of companies and markets withclose collaboration at all levels of the client organization.This ensures that our clients achieve sustainable compet-itive advantage, build more capable organizations, andsecure lasting results. Founded in 1963, BCG is a privatecompany with 74 offices in 42 countries. For more infor-mation, please visit www.bcg.com.
  3. 3. Gaining a Value CreationAdvantage in Volatile Times The 2011 Consumer Value Creators Report Marcus Bokkerink Patrick Ducasse Jeff Gell Eric Olsen Frank Plaschke Daniel Stelter Hady Farag Mark Sciortino November 2011 bcg.com
  4. 4. The financial analyses in this report are based on public dataand forecasts that have not been verified by BCG and on assump-tions that are subject to uncertainty and change. The analysesare intended only for general comparisons across companiesand industries and should not be used to support any individualinvestment decision.© The Boston Consulting Group, Inc. 2011. All rights reserved.For information or permission to reprint, please contact BCG at:E-mail: bcg-info@bcg.comFax: +1 617 850 3901, attention BCG/PermissionsMail: BCG/Permissions The Boston Consulting Group, Inc. One Beacon Street Boston, MA 02108 USA
  5. 5. ContentsExecutive Summary 4The 2011 Consumer-Company Value Creators 6The Changing Dynamics of Value Creation 13The New Normal 13The Retreat from Risk 15The High Costs of Being Wrong 16From Aspiration to Strategy 18Value Creation as an Investment Challenge 18What to Expect from “Business as Usual” 20Beyond “Business as Usual”: Determining Risk Exposure 21Implications for the Corporate Portfolio 23Five Questions Every CEO Should Know How to Answer 25For Further Reading 26Note to the Reader 27Gaining a Value Creation Advantage in Volatile Times 3
  6. 6. Executive SummaryG aining a Value Creation Advantage in Vola- ◊ Inflation is a significant medium-term risk. tile Times has been adapted from the thir- teenth annual report in the Value Creators Yet on most counts, consumer companies are in a series published by The Boston Consulting good position to thrive in the difficult days ahead. Group. (See The 2011 Value Creators Report:Value Creation in a Volatile Economy, September 2011.) ◊ Consumer companies tend to be more profitable thanEach year, we publish detailed empirical rankings of the companies in other industries.stock market performance of the world’s top consumer-company value creators and distill managerial lessons from ◊ Fast-moving consumer-goods (FMCG) companies, intheir success. We also highlight key trends in the global econ- particular, start with higher gross margins than mostomy and world capital markets and describe how these companies in other industries—largely because oftrends are likely to shape future priorities for value creation. brand loyalty. Therefore, even in a volatile environ-Finally, we share our latest analytical tools and client expe- ment, they face less risk to overall profitability.riences to help companies better manage value creation. ◊ On average, consumer companies are not as highly lev-This year’s report addresses the advantages that consumer eraged as other companies, and therefore they are lesscompanies stand to gain and the challenges they may face in dependent on financial markets. Their strong cashcreating value in a volatile economy, with a special focus on flows put them in a better position to handle macro-how they can manage uncertainty and risk in their decisions economic challenges.about target-setting and capital deployment. ◊ With lower leverage, on average, consumer companiesThe further the world moves from the financial crisis are better able to service their debt. Cost inflation,of 2008, the clearer it becomes that the event marked however, remains a risk.a fundamental turning point in the global economy. The top ten value creators in the four consumer-◊ Although the economy has improved somewhat, many company sectors we sampled—FMCG, retail, travel of the problems associated with the crisis and subse- and tourism (T&T), and durables and apparel—sub- quent Great Recession remain unresolved. stantially outpaced not only the weighted-average annual total shareholder return (TSR) of their respec-◊ Growth remains sluggish; there are even increasing tive sectors but also that of the overall consumer- signs that the recovery may be faltering in the devel- company sample. oped world. ◊ The weighted-average annual TSR of the top ten◊ Combined public and private debt as a percentage of FMCG companies (22.9 percent) was 13 percentage GDP has reached unsustainable levels in a number of points higher than the FMCG sector’s average annual developed countries. TSR; the average annual TSR of the top ten retail com-4 The Boston Consulting Group
  7. 7. panies (23.6 percent) was 17 percentage points higher Navigating this new environment will require compa- than the retail sector’s average annual TSR; the nies to confront three basic challenges. average annual TSR of the top ten T&T companies (17.3 percent) was 14 percentage points higher than ◊ First, they need to understand how the new environ- the T&T sector’s average annual TSR; and the aver- ment is likely to affect their aspirations and ambitions age annual TSR of the top ten durables and apparel for delivering shareholder value—and reset their companies (22.6 percent) was 18 percentage points value-creation strategy appropriately. higher than the durables and apparel sector’s average annual TSR. ◊ Second, they need to translate the company’s revised value-creation strategy into a detailed plan for the◊ The weighted-average annual TSR of the top ten con- company as a whole as well as for each part of the sumer companies (across all four sectors analyzed) business. was about 34 percent, which was more than three times the average annual TSR of the overall consumer- ◊ Finally, and perhaps most important, they need to give company sample of 192 companies. even more attention than in past years to the effects of uncertainty and risk in their strategy development andThe ongoing economic slump—the “new normal”— planning processes, as well as in their approach to set-has produced a corresponding sea change in investor ting value creation targets.sentiment and priorities. This year’s report explores how consumer-company◊ Given the volatility and uncertainty of the current eco- executives can meet these challenges. nomic environment, professional investors are becom- ing increasingly sensitive to risk. ◊ We single out lessons from the top performers.◊ These investors are looking for companies that can de- ◊ We detail the macroeconomic challenges. liver low risk and consistent returns at or slightly above the market average. ◊ We explain how companies can develop a value cre- ation strategy.◊ They are clamoring for companies to start deploying the trillions of dollars they have accumulated on ◊ We provide a list of five questions that every CEO their balance sheets by increasing cash payouts to should be able to answer. investors.Gaining a Value Creation Advantage in Volatile Times 5
  8. 8. The 2011 Consumer- Company Value CreatorsW e are pleased to announce the 2011 of at least $2.5 billion; and durables and apparel compa- consumer-company Value Creators nies with a market valuation of at least $3 billion. rankings for the five-year period from 2006 through 2010. Our sample The rankings are based on five-year TSR performance encompasses 192 global companies from 2006 through 2010.1 We also show TSR performanceacross four consumer-industry sectors: fast-moving con- for 2011, through June 30. In addition, we break downsumer goods (FMCG); retail; travel and tourism (T&T); TSR performance into six investor-oriented financial met-and durables and apparel. The rankings, which conclude rics that BCG has identified in previous Value Creatorsthis chapter, show the overall top-ten consumer-industry reports as critical value drivers. (See, for example, Thecompanies, the top ten within each of the four sectors 2008 Value Creators Report: Focusing Corporate Strategy onthat we analyzed, and how the performance of these top Value Creation, September 2008.)companies compares with that of the total industry orsector samples. The weighted-average annual TSR for the full set of 192 global companies in our sample was 9.8 percent. ThisTo arrive at this sample, we began with total shareholder performance (slightly below the long-term historical aver-return (TSR) data for more than 9,000 companies pro- age of approximately 10 percent) incorporates the pre-vided by Thomson Reuters. We then refined the sample cipitous decline in market values in late 2008 owing toby taking the following three steps: We eliminated all the global financial crisis—a decline that the rebound incompanies that were not listed on a world stock ex- 2009 equity values only partly recovered. (See “Reboundchange for the full five years of our study or did not have but Not Yet Recovery,” BCG article, March 2010.)at least 25 percent of their shares available on publiccapital markets. We also eliminated all companies that What kind of TSR performance was necessary to achievewere not in the four sectors of the consumer industry we truly superior performance, given the sample average?were tracking, to end up with about 1,000 companies. The top ten performers achieved an average annual TSRWe then established an appropriate minimum market- of 29 to 54 percent. The weighted-average annual TSR ofvaluation hurdle for each sector to eliminate the smallest the top ten FMCG companies was 22.9 percent (13 per-companies. centage points higher than the FMCG sector’s average an- nual TSR); the average annual TSR of the top ten retailThis year’s sample includes the 46 largest FMCG compa- companies was 23.6 percent (17 percentage points highernies, the 52 largest retailers, the 44 largest T&T compa-nies, and the 50 largest durables and apparel companies. 1. TSR is a dynamic ratio that includes price gains and dividendWe defined the largest companies by using the following payments for a specific stock during a given period. To measuresector-specific market-value hurdles (in U.S. dollars): performance from 2006 through 2010, 2005 end-of-year data mustFMCG companies with a market valuation of at least be used as a starting point in order to capture the change from 2005 to 2006, which drives 2006 TSR. For this reason, all exhibits in the$9 billion; retail companies with a market valuation of at report showing 2006–2010 performance begin with a 2005 dataleast $8 billion; T&T companies with a market valuation point.6 The Boston Consulting Group
  9. 9. than the retail sector’s average annual TSR); the average growth. AutoZone, a U.S.-based company at number six,annual TSR of the top ten T&T companies was 17.3 per- generated a good deal of cash and used it to buy back acent (14 percentage points higher than the T&T sector’s significant number of shares. McDonald’s, at numberaverage annual TSR); and the average annual TSR of the seven, grew in line with GDP, improved profitability,top ten durables and apparel companies was 22.6 percent and gave cash back to its shareholders. At number eight,(18 percentage points higher than the durables and ap- Walmart de México grew its top line into double digits,parel sector’s average annual TSR). well above the level of consumer spending in Mexico. Yum! Brands, at number nine, delivered aUnlike in 2010, when rapidly developing very balanced shareholder-value package,economies dominated the rankings, this No single driver of similar to McDonald’s.year’s results are slightly more balanced.Six of the consumer industry top ten are success stands out Winning the top spot in the T&T sector,located in rapidly developing economies for this year’s group Turkish Airlines achieved more than 20this year, compared with nine last year. percent top-line growth and generated of top performers.Similarly, six of the top ten companies in cash. Air China, the number-two company,the FMCG sector and in the T&T sector are accomplished a similar feat. U.S.-basedfrom rapidly developing economies this WMS Industries, at number four, grew andyear. And three of this year’s top ten companies in the re- expanded margins, as did Wynn Resorts at number five.tail sector and in the durables and apparel sector are Companies in the sixth through ninth spots saw growthfrom rapidly developing economies. as the most critical contributor to TSR. At number ten, Singapore Airlines returned cash to shareholders in theNo single driver of success stands out in this year’s sam- form of dividends and debt paydown. That, combinedple. Instead, among the top performers, we found a num- with an expanding valuation multiple, drove shareholderber of factors that contributed to their success, ranging returns, even as margins declined and the top line grewfrom growth to profit improvement. But that is good at only 1 percent per year.news, because it indicates that companies can create val-ue in a number of different ways. In the durables and apparel sector, in which four of the top ten companies are based in the U.S., the overridingIn the FMCG sector, we found emerging-market compa- theme has been one of tremendous growth with somenies at the top of the list, with developed-market compa- valuation increase. Indeed, it was through growth andnies nipping at their heels. The latter achieved their per- multiple expansion that Deckers Outdoor, the numberformance with a balanced delivery of shareholder one company, “beat the fade.” That is to say, it grew fast-returns—through growth, profitability, and cash deploy- er than investors would expect a mature company toment. Two of the four developed-market companies were grow and, as a result, was rewarded with a higher valua-rewarded with an expanding valuation multiple. tion multiple. Fossil, an apparel and accessories company that ranked third, grew and improved margins while re-The top three companies in the retail sector are from taining its multiple—essentially performing in line withSouth Africa, Portugal, and Chile, respectively, and each investor expectations. Burberry, which came in fifth, grewgrew at double-digit rates while expanding its valuation in what was a challenging period for many luxury playersmultiple. Amazon.com, at number four, grew rapidly but and was rewarded with an expanding multiple. Cash de-in line with expectations and, as a result, modestly ex- ployment played a key role in the performance of thepanded its valuation multiple. X5 Retail, which has number-eight company, Hasbro. While it grew and ex-emerged as a key player in the Russian Federation, panded margins, it also increased its debt leverage, repur-achieved its number-five ranking thanks to high top-line chased shares, and, as a result, saw its multiple increase.Gaining a Value Creation Advantage in Volatile Times 7
  10. 10. The 2011 Consumer-Company Value Creators Rankings The Consumer Industry The Consumer Industry Top Ten, 2006–2010 1 TSR Decomposition Market Sales Margin Multiple Dividend Share Net debt 2011 TSR2 value3 growth change change4 yield change5 change TSR6 # Company Location Sector (%) ($billions) (%) (%) (%) (%) (%) (%) (%) Durables 1 Deckers Outdoor United States and 54.0 3.1 30 6 18 0 –1 0 11 apparel 2 Hengan International Hong Kong FMCG 53.4 10.6 35 1 16 4 –2 1 5 3 Shoprite South Africa Retail 44.8 8.0 18 7 16 4 0 0 3 4 Tingyi Hong Kong FMCG 42.2 14.3 29 –2 10 4 0 1 23 5 Jerónimo Martins Portugal Retail 37.9 10.3 18 –2 14 3 0 6 17 Durables 6 Titan Industries India and 35.1 3.5 34 –7 6 1 –1 2 19 apparel 7 Cencosud Chile Retail 31.3 17.9 20 1 9 2 –3 2 –8 8 Turkish Airlines Turkey T&T 31.3 3.4 23 8 –6 7 0 –1 –21 9 Amazon.com United States Retail 30.7 81.2 32 –3 2 0 –2 2 14 10 Air China China T&T 29.4 14.5 17 5 4 1 –6 9 –6 Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis. Note: n = 192 global consumer companies. 1 Contribution of each factor shown in percentage points of five-year average annual TSR; any apparent discrepancies in TSR totals are due to rounding. 2 Average annual TSR, 2006–2010. 3 As of December 31, 2010. 4 Change in EBITDA multiple. 5 “Share change” refers to the change in the number of shares outstanding, not to the change in share price. 6 As of June 30, 2011. Value Creation at the Consumer Industry Top Ten Versus Industry Sample, 2006–2010 1 1 Total shareholder return Sales growth EBITDA margin TSR index (2005 = 100) Sales index (2005 = 100) EBITDA/revenue (%) 300 289 15 600 12.6 12.8 12.4 12.5 12.3 11.8 432 224 200 400 200 10 308 152 9.9 9.9 10.2 247 121 8.6 9.0 8.0 200 134 100 126 125 131 5 122 117 106 132 143 118 120 93 0 0 0 ’05 ’06 ’07 ’08 ’09 ’10 ’05 ’06 ’07 ’08 ’09 ’10 ’05 ’06 ’07 ’08 ’09 ’10 ƒ 2 1 3 Simplified five-year TSR decomposition EBITDA multiple Dividend yield TSR contribution (%) Enterprise value/EBITDA (x) Dividend/stock price (%) 25 24 30 5.5 6 20 22.2 15 20 17.7 16.8 4 15.3 10 13.3 2.7 11.4 2.8 2.5 6 5 3.3 5 2.0 2 2 10 1.6 1 0 2 2.2 2.3 0 10.2 10.9 10.6 9.8 10.0 7.9 1.9 –1 –5 1.1 1.2 0 0 Sales Margin Multiple Dividend growth change change yield ’05 ’06 ’07 ’08 ’09 ’10 ’05 ’06 ’07 ’08 ’09 ’10 Consumer industry top ten Total consumer industry sample, n = 192 Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis. 1 Industry calculation based on aggregate of entire sample. 2 Share change and net debt change not shown. 3 Industry calculation based on sample average.8 The Boston Consulting Group
  11. 11. The FMCG Sector The FMCG Top Ten, 2006–2010 1 TSR Decomposition Market Sales Margin Multiple Dividend Share Net debt 2011 TSR2 value3 growth change change4 yield change5 change TSR6 # Company Location (%) ($billions) (%) (%) (%) (%) (%) (%) (%) 1 Hengan International Hong Kong 53.4 10.6 35 1 16 4 –2 1 5 2 Tingyi Hong Kong 42.2 14.3 29 –2 10 4 0 1 23 3 AmBev Brazil 27.7 99.0 10 3 7 5 1 2 3 4 Grupo Bimbo Mexico 24.2 10.7 15 1 9 1 0 –2 3 5 ITC Ltd. India 22.3 29.6 19 –2 3 3 –1 0 19 6 Brasil Foods Brazil 21.2 15.0 35 –5 9 2 –21 2 –2 7 Estée Lauder United States 20.8 16.0 4 0 12 2 2 0 30 8 SABMiller United Kingdom 19.1 61.4 6 7 12 3 –8 0 1 British American 9 United Kingdom 18.4 80.9 10 5 –2 5 1 1 15 Tobacco 10 Carlsberg Denmark 16.7 16.4 10 12 –4 2 –9 7 1 Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis. Note: n = 46 global companies with a market valuation of at least $9 billion. 1 Contribution of each factor shown in percentage points of five-year average annual TSR; any apparent discrepancies in TSR totals are due to rounding. 2 Average annual TSR, 2006–2010. 3 As of December 31, 2010. 4 Change in EBITDA multiple. 5 “Share change” refers to the change in the number of shares outstanding, not to the change in share price. 6 As of June 30, 2011. Value Creation at the FMCG Top Ten Versus Sector Sample, 2006–2010 1 1 Total shareholder return Sales growth EBITDA margin TSR index (2005 = 100) Sales index (2005 = 100) EBITDA/revenue (%) 300 281 40 200 179 164 149 208 150 30 26.3 27.4 124 26.1 25.5 25.7 200 24.4 161 110 135 124 20 123 100 115 116 161 106 20.4 20.3 144 139 97 18.8 20.2 18.9 20.0 100 121 110 50 10 0 0 0 ’05 ’06 ’07 ’08 ’09 ’10 ’05 ’06 ’07 ’08 ’09 ’10 ’05 ’06 ’07 ’08 ’09 ’10 ƒ 2 1 3 Simplified five-year TSR decomposition EBITDA multiple Dividend yield TSR contribution (%) Enterprise value/EBITDA (x) Dividend/stock price (%) 15 15 6 12.9 11.8 12.3 12.0 12 10.4 10.2 4.6 4.0 10 11.9 10 11.2 11.2 10.4 11.0 4 3.2 3.2 9.4 6 2.6 3.6 3.1 2.0 5 4 3.0 2.8 3 3 3 5 2 2.5 2 1 1.8 0 0 0 Sales Margin Multiple Dividend growth change change yield ’05 ’06 ’07 ’08 ’09 ’10 ’05 ’06 ’07 ’08 ’09 ’10 FMCG top ten Total FMCG sample, n = 46 Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis. 1 Sector calculation based on aggregate of entire FMCG sample. 2 Share change and net debt change not shown. 3 Sector calculation based on FMCG sample average.Gaining a Value Creation Advantage in Volatile Times 9
  12. 12. The Retail Sector The Retail Top Ten, 2006–2010 1 TSR Decomposition Market Sales Margin Multiple Dividend Share Net debt 2011 TSR2 value3 growth change change4 yield change5 change TSR6 # Company Location (%) ($billions) (%) (%) (%) (%) (%) (%) (%) 1 Shoprite South Africa 44.8 8.0 18 7 16 4 0 0 3 2 Jerónimo Martins Portugal 37.9 10.3 18 –2 14 3 0 6 17 3 Cencosud Chile 31.3 17.9 20 1 9 2 –3 2 –8 4 Amazon.com United States 30.7 81.2 32 –3 2 0 –2 2 14 5 X5 Retail Russian Federation 27.8 12.5 53 –14 18 0 –29 0 –15 6 AutoZone United States 24.3 12.3 5 1 6 0 11 0 8 7 McDonald’s United States 21.3 80.9 3 8 3 3 4 0 12 8 Walmart de México Mexico 20.7 54.4 14 2 5 2 –1 –1 –1 9 Yum! Brands United States 18.1 23.0 4 5 3 2 3 1 14 10 Inditex Spain 17.7 50.2 15 –1 1 2 0 1 13 Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis. Note: n = 52 global companies with a market valuation of at least $8 billion. 1 Contribution of each factor shown in percentage points of five-year average annual TSR; any apparent discrepancies in TSR totals are due to rounding. 2 Average annual TSR, 2006–2010. 3 As of December 31, 2010. 4 Change in EBITDA multiple. 5 “Share change” refers to the change in the number of shares outstanding, not to the change in share price. 6 As of June 30, 2011. Value Creation at the Retail Top Ten Versus Sector Sample, 2006–2010 1 1 Total shareholder return Sales growth EBITDA margin TSR index (2005 = 100) Sales index (2005 = 100) EBITDA/revenue (%) 288 20 300 300 212 202 15.4 15.5 15.3 15.0 15.0 14.5 200 171 200 171 15 160 135 145 134 113 136 136 141 10 100 100 122 131 112 113 116 110 92 8.3 8.6 8.7 8.5 8.4 8.1 0 0 5 ’05 ’06 ’07 ’08 ’09 ’10 ’05 ’06 ’07 ’08 ’09 ’10 ’05 ’06 ’07 ’08 ’09 ’10 ƒ 2 1 3 Simplified five-year TSR decomposition EBITDA multiple Dividend yield TSR contribution (%) Enterprise value/EBITDA (x) 14.7 Dividend/stock price (%) 15 15 13.8 2.9 15 13.2 3 12.7 2.5 11.4 10 9.9 1.9 7 10 10.7 1.8 2.4 2 1.8 5 10.5 1.5 5 9.4 9.0 9.1 2 2 1.7 1.7 7.4 1.5 0 1.4 1.4 0 5 1 –1 –5 –4 0 0 Sales Margin Multiple Dividend growth change change yield ’05 ’06 ’07 ’08 ’09 ’10 ’05 ’06 ’07 ’08 ’09 ’10 Retail top ten Total retail sample, n = 52 Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis. 1 Sector calculation based on aggregate of entire retail sample. 2 Share change and net debt change not shown. 3 Sector calculation based on retail sample average.10 The Boston Consulting Group
  13. 13. The T&T Sector The T&T Top Ten, 2006–2010 1 TSR Decomposition Market Sales Margin Multiple Dividend Share Net debt 2011 TSR2 value3 growth change change4 yield change5 change TSR6 # Company Location (%) ($billions) (%) (%) (%) (%) (%) (%) (%) 1 Turkish Airlines Turkey 31.3 3.4 23 8 –6 7 0 –1 –21 2 Air China China 29.4 14.5 17 5 4 1 –6 9 –6 3 Flight Centre Australia 23.7 2.6 15 –3 5 5 –1 3 –11 4 WMS Industries United States 22.0 2.7 15 15 –6 0 –4 3 –32 5 Wynn Resorts United States 19.4 12.9 42 19 –48 8 –4 2 39 6 Korean Air Lines South Korea 17.5 4.4 9 2 8 1 0 –2 0 7 Aeroflot Russian Federation 16.2 2.9 10 4 3 1 1 –3 –12 8 Cathay Pacific Airways Hong Kong 12.8 10.8 12 3 –5 3 –3 2 –13 9 Shangri-La Asia Hong Kong 11.7 7.8 13 –3 4 2 –3 –1 –9 10 Singapore Airlines Singapore 11.4 14.8 1 –2 6 4 –1 3 –7 Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis. Note: n = 44 global companies with a market valuation of at least $2.5 billion. 1 Contribution of each factor shown in percentage points of five-year average annual TSR; any apparent discrepancies in TSR totals are due to rounding. 2 Average annual TSR, 2006–2010. 3 As of December 31, 2010. 4 Change in EBITDA multiple. 5 “Share change” refers to the change in the number of shares outstanding, not to the change in share price. 6 As of June 30, 2011. Value Creation at the T&T Top Ten Versus Sector Sample, 2006–2010 1 1 Total shareholder return Sales growth EBITDA margin TSR index (2005 = 100) Sales index (2005 = 100) EBITDA/revenue (%) 300 200 30 173 222 156 220 145 150 136 19.4 200 116 20 17.7 16.4 17.4 153 161 15.1 132 133 14.3 100 122 123 111 16.2 16.1 16.2 91 14.8 128 133 10 13.3 12.5 100 118 50 84 63 0 0 0 ’05 ’06 ’07 ’08 ’09 ’10 ’05 ’06 ’07 ’08 ’09 ’10 ’05 ’06 ’07 ’08 ’09 ’10 ƒ 2 1 3 Simplified five-year TSR decomposition EBITDA multiple Dividend yield TSR contribution (%) Enterprise value/EBITDA (x) Dividend/stock price (%) 15 15 6 5.2 12 11.6 10.8 10.9 10 9.9 9.7 3.8 6 10 4 10.7 7.9 10.0 10.0 2.9 2.8 5 8.9 3 7.8 2 2 2 2.0 3.2 0 5 6.7 2.6 1.5 2.7 0 2 1.6 2.1 –2 –5 0.9 0 0 Sales Margin Multiple Dividend growth change change yield ’05 ’06 ’07 ’08 ’09 ’10 ’05 ’06 ’07 ’08 ’09 ’10 T&T top ten Total T&T sample, n = 44 Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis. 1 Sector calculation based on aggregate of entire T&T sample. 2 Share change and net debt change not shown. 3 Sector calculation based on T&T sample average.Gaining a Value Creation Advantage in Volatile Times 11
  14. 14. The Durables and Apparel Sector The Durables and Apparel Top Ten, 2006–2010 1 TSR Decomposition Market Sales Margin Multiple Dividend Share Net debt 2011 TSR2 value3 growth change change4 yield change5 change TSR6 # Company Location (%) ($billions) (%) (%) (%) (%) (%) (%) (%) 1 Deckers Outdoor United States 54.0 3.1 30 6 18 0 –1 0 11 2 Titan Industries India 35.1 3.5 34 –7 6 1 –1 2 19 3 Fossil United States 26.8 4.6 14 11 –1 0 1 1 67 Far Eastern New 4 Taiwan 25.7 8.2 8 –7 11 5 0 9 –9 Century 5 Burberry United Kingdom 24.1 8.0 11 –3 11 3 2 –1 29 6 Groupe SEB France 23.5 5.4 8 4 4 3 0 4 –6 7 NCsoft South Korea 23.0 3.8 14 8 0 1 0 –1 40 8 Hasbro United States 21.4 6.5 5 3 9 3 5 –5 –6 9 Tupperware United States 20.2 3.0 12 5 –6 4 –1 5 43 10 Richemont Switzerland 19.4 35.7 7 7 2 2 0 1 0 Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis. Note: n = 50 global companies with a market valuation of at least $3 billion. 1 Contribution of each factor shown in percentage points of five-year average annual TSR; any apparent discrepancies in TSR totals are due to rounding. 2 Average annual TSR, 2006–2010. 3 As of December 31, 2010. 4 Change in EBITDA multiple. 5 “Share change” refers to the change in the number of shares outstanding, not to the change in share price. 6 As of June 30, 2011. Value Creation at the Durables and Apparel Top Ten Versus Sector Sample, 2006–2010 1 1 Total shareholder return Sales growth EBITDA margin TSR index (2005 = 100) Sales index (2005 = 100) EBITDA/revenue (%) 300 277 200 30 155 140 144 150 19.5 19.7 127 18.3 18.5 200 171 111 20 18.3 18.2 153 128 100 123 107 116 112 113 139 96 13.3 100 128 10 11.7 12.0 12.7 12.0 119 11.0 100 50 72 0 0 0 ’05 ’06 ’07 ’08 ’09 ’10 ’05 ’06 ’07 ’08 ’09 ’10 ’05 ’06 ’07 ’08 ’09 ’10 ƒ 2 1 3 Simplified five-year TSR decomposition EBITDA multiple Dividend yield TSR contribution (%) Enterprise value/EBITDA (x) Dividend/stock price (%) 10 9 15 4 13.0 7 3.2 10.7 10.6 9.8 9.3 5 10 3.1 3 2.3 2.3 2.1 2 2 2 9.4 9.8 9.6 1.9 6.1 9.1 8.2 2 1.6 2.2 0 2.0 0 1.9 5 1.7 –1 1.4 4.7 –5 0 0 Sales Margin Multiple Dividend growth change change yield ’05 ’06 ’07 ’08 ’09 ’10 ’05 ’06 ’07 ’08 ’09 ’10 Durables and apparel top ten Total durables and apparel sample, n = 50 Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis. 1 Sector calculation based on aggregate of entire durables and apparel sample. 2 Share change and net debt change not shown. 3 Sector calculation based on durables and apparel sample average.12 The Boston Consulting Group
  15. 15. The Changing Dynamics of Value CreationT he further the world moves from the finan- normal will be characterized by below-average economic cial crisis of 2008, the clearer it becomes growth, painful deleveraging, and potential stagflation. that the event marked a fundamental turn- The impacts of these changes on how consumer compa- ing point in the global economy. Although nies create value and how much value they create will be the economy has improved somewhat, profound.many of the problems associated with the crisis andsubsequent Great Recession—too much debt, sluggish Below-Average Economic Growth in a Two-Speedgrowth, a fundamentally weakened financial sector— World. In last year’s Value Creators report for consumerremain unresolved. As a result, the evolution of the mac- companies, we predicted that even with recovery fromroeconomic environment remains uncertain, equity the Great Recession, the world is entering an extendedmarkets are highly volatile, and the dynamics of value period of below-average economic growth. (See The 2010creation are shifting. Value Creators Report for Consumer Companies: Finding the Sweet Spot, October 2010.) Nothing has happened in theTo navigate the turbulence, executives will need to un- time since to cause us to revise that prediction. True, ac-learn many of the lessons of the past quarter century. cording to the International Monetary Fund, global GDPCompanies will need to revisit their strategies for value grew by a healthy 5 percent in 2010 and is expected tocreation, rethink their targets for TSR, and revise their increase by an additional 4 percent in 2011. But these av-strategy and planning process to manage uncertainty and erages disguise broad disparities between strong growthrisk. This year’s Value Creators report for consumer com- in emerging markets and weak growth in most developedpanies is designed to help them get started on these three economies.essential tasks. What’s more, signs of a recovery are mixed. Early third- quarter reports indicate positive growth in GDP in 2011,The New Normal but the second quarter was anemic, and challenges with the debt in Greece and other markets still remain. The J.P.From about 1982 until the downturn of 2008, the world Morgan Global Manufacturing Purchasing Manager In-economy enjoyed an unprecedented period of economic dex, a key leading indicator of economic recovery, fell inexpansion with low and stable rates of inflation. Known September for the seventh consecutive month this yearas the Great Moderation, it was characterized by a credit to its lowest level since July 2009. Economist Lawrenceboom fueled by low interest rates and the easy availabil- Summers, former chief economic advisor to U.S. Presi-ity of debt, high rates of economic growth both in the dent Barack Obama, has even warned that the U.S. wasdeveloped world and in emerging markets, and above- halfway through a “lost decade” similar to Japan’s in theaverage TSR, largely in the form of capital appreciation. 1990s.2 To the degree that companies are overexposed toSince the downturn, however, signs have been accumulat- 2. See “Running Out of Road,” The Economist, June 18, 2011,ing that the era of the Great Moderation is over. The new pp. 77–78; http://www.economist.com/node/18834323.Gaining a Value Creation Advantage in Volatile Times 13
  16. 16. developed markets and underexposed to emerging mar- companies in the developed world. Inflation in emergingkets, they will be facing a growth crisis. markets averaged 6.7 percent in May 2011.3 On the other hand, quantitative easing programs established by centralInvestors seem to share this perspective. In BCG’s most banks around the world to boost growth have strongly in-recent annual investor survey, the majority of respon- flated the monetary base, creating a perfect breedingdents estimated that GDP growth in Europe and the U.S. ground for future inflation. The longer the developedthis year would be a relatively modest 2 to 3 percent, economies suffer from slow growth, the more money thewith earnings per share (EPS) growing central banks will need to print to stimu-only 3 to 4 percent. (See “All That Cash: late the economy and, therefore, the big-The BCG 2011 Investor Survey,” BCG ar- Consumer companies ger the risk that inflation will get out ofticle, May 2011.) So, too, their estimates for are better positioned control.TSR: nearly half of respondents (46 per-cent) estimated that TSR would be in the to thrive in the The Impact on Value Creation. All theseneighborhood of 6 to 8 percent—well be- difficult days ahead. trends will have a major impact on valuelow the long-term historical average of 9.5 creation, and companies need to start pre-percent. Although nearly a third of respon- paring for the consequences.dents (31 percent) said that they thought that TSR wouldbe higher, a significant portion (22 percent) thought that ◊ Lower GDP growth will put pressure on corporate rev-it would be even lower. enues and profits. For many companies, maintaining historical levels of revenue growth will only come byUnsustainable Debt. One of the side effects of the Great winning market share. Competitive intensity will in-Moderation was an unprecedented build-up of private- crease, and real winners (and losers) will emerge.sector debt, on the part of both households and compa-nies. Now, that debt has been joined by the nearly $6 tril- ◊ After a period in which valuation multiples have beenlion in fiscal stimulus spent worldwide by governments above the long-term historical average, lower growth isin response to the global financial crisis and subsequent also likely to mean lower multiples as investors factorrecession. In many developed economies, the result has lower growth expectations into a company’s stockbeen a situation in which combined public and private price.debt as a percentage of GDP has reached unsustainablelevels. (See The Debt Monster, BCG Focus, May 2011.) ◊ Inflation also will have a negative impact on equityClearly, these high levels of debt will need to be reduced, values. History shows that stocks underperform duringbut that is much more easily said than done. If govern- inflationary periods. (See “Time to Get Ready for Infla-ments and central banks embrace austerity policies, as tion,” BCG article, March 2011.) Companies with bothmany are now doing in order to cut their debt-to-GDP ra- high debt and significant capital-expenditure programstios, they run the risk of stalling GDP growth still further, are hit especially hard.which could end up making things worse, not better. Yet on most counts, consumer companies are in a betterIncreased Risk of Inflation. The more likely option is position to thrive in the difficult days ahead than arethat governments and central banks will keep interest companies in other industries. For one thing, consumerrates low in order to further stimulate the economy and companies tend to be more profitable than other compa-minimize their interest burden—but at the risk of setting nies. With lower leverage, on average, than other compa-off an inflationary spiral. To be sure, inflation in devel- nies, they are better able to service debt. However, thisoped economies is currently low, but there are clear indi- does not mean that consumer companies face no risks.cations that inflation is a serious medium-term risk. On Rising and volatile commodity costs represent a real riskthe one hand, rapid growth in emerging markets is push- to profitability, and weak consumer confidence could low-ing commodity prices higher, and inflationary pressures er demand.in emerging markets (which produced more than four-fifths of global real GDP growth over the past five years) 3. See “Economics Focus: Some Like It Hot,” The Economist, July 2,are beginning to push the cost of inputs upward for many 2011, p. 65; http://www.economist.com/node/18895150.14 The Boston Consulting Group
  17. 17. The Retreat from Risk Increased Importance of Dividends. Another major shift from trends during the era of the Great ModerationThe recent developments in the macroeconomic environ- is that stock price appreciation is becoming relatively lessment have produced a corresponding sea change in in- important as a component of TSR, while dividends andvestor sentiment and priorities. Investors have become other direct distributions to investors are becoming rela-more conservative. Compared with the past two decades, tively more important. During the past 25 years, dividendthere has been a wholesale retreat from risk. yield at S&P 500 companies accounted for only 2.5 per- centage points out of an average annualIncreased Sensitivity to Risk. Given the return of 9.9 percent. But a higher reliancevolatility and uncertainty of the current Professional investors on dividends happens to be a reversion toenvironment, professional investors are are becoming a longer-term historical trend. An analysisbecoming increasingly sensitive to risk. In of the composition of TSR of the compa-order to keep their assets under manage- increasingly nies making up the S&P 500 from 1900ment (AuM) constant or growing (remem- sensitive to risk. through 2010 shows that dividend yieldber, fund managers make their money accounted for nearly half of total TSR—from the fees that their AuM generates), 4.6 percentage points out of an averagethey are looking for companies that deliver low risk and annual return of 9.5 percent.consistent returns at or slightly above the market aver-age. Of course, there will always be some investors with Direct distributions of cash to shareholders will becomea greater appetite for risk. But even those who are pre- a bigger part of TSR, in part because capital appreciationpared to invest in riskier opportunities in order to gain will be down, a function of lower growth and lower valu-outsized returns will be on the lookout for companies ation multiples. But they are also likely to rise for the sim-that have a deep understanding of the risks involved and ple reason that companies have accumulated so muchthat know how to manage them. cash on their balance sheets that investors are clamoring for a share of it. One beneficial effect of the Great Reces-Emphasis on Value. As investors become more conser- sion was to push companies to cut costs in order to im-vative, there are fewer genuine “growth” funds in the prove profitability in an extremely difficult economicmarket. A fund may use the word growth in its name or environment. As a result, companies worldwide are show-list itself as a growth fund. But upon close analysis of ing trillions of dollars of cash on their balance sheets.their investment criteria, such funds are not so different And despite improvements in the economy, many com-from traditional “growth at reasonable price” (GARP) panies have yet to start deploying their cash to createfunds or even “alpha value” funds. In effect, we are wit- shareholder value.nessing an overall shift to more of a value orientation. The Coming Impact of Baby-Boom Retirement. AllFocus on “Stock Picking” over Broad Market Trends. these trends will be exacerbated by the investment deci-A more “value-based” investment strategy requires pick- sions of millions of baby-boom retirees. The coming re-ing individual stocks, sector by sector. This has created a tirement of the baby-boom generation is usually dis-strong focus on individual company performance, eco- cussed in terms of the eventual withdrawal of massivenomic fundamentals, the nuts and bolts of competitive amounts of cash from the equity markets. But for thestrategy and financial structure, and the quality of the next five to ten years, the impact is likely to be rather dif-management team. When we asked respondents to our ferent. The baby-boom generation has accumulated ainvestor survey to rate the criteria that would lead them great deal of wealth and, as it ages, it will be looking forto invest in a company, the top three choices were a com- places to invest that wealth in order to preserve capital.pany’s “management credibility,” its prospects for “three- The priorities are likely to be income, preservation of cap-to-five-year revenue growth,” and its “ROIC (return on ital, low risk, and tax avoidance (which means fewerinvested capital) improvement potential.” In short, these bonds and more income-producing equities). These goalsinvestors were looking for companies with strong man- will reinforce the market for companies that deliveragement teams, solid sources of competitive advantage, low risk and attractive capital gains or high dividendsand good prospects for future growth. or both.Gaining a Value Creation Advantage in Volatile Times 15
  18. 18. As we noted above, consumer companies have a number environment, a company could easily squander these ad-of advantages in light of these fundamentals. FMCG com- vantages—for example, by chasing unprofitable growth,panies, in particular, generally start with higher gross by engaging in share wars that erode margins and profit-margins than most companies in other industries, be- ability, or by agreeing to mergers and acquisitions thatcause the branded products they sell give them pricing may improve EPS but do not increase TSR.power in a challenging environment. Therefore, costshocks have a smaller impact on overall profitability than Navigating the new environment requires confrontingthey would for other companies. In addition, consumer three key challenges: resetting value creation strategy,companies generate more cash than most companies, on translating the strategy into realistic TSR targets andaverage. And with lower amounts of financial leverage plans, and managing uncertainty and minimizing risk.than other companies, consumer companies face fewerclaims on the cash they generate and are better able to Resetting Value Creation Strategy. The first challengewithstand economic shocks without risking default. (See exists at the level of value creation strategy. Senior execu-Exhibit 1.) As a result, they are able to offer investors a tives need to understand how the new environment ispackage that includes cash returns as a key component. likely to affect their aspirations and ambitions for deliver-Investors tend to see such cash returns as “safe.” As a re- ing shareholder value. Consumer companies need to ad-sult, consumer companies appear to be relatively attrac- dress questions such as: What level of TSR would consti-tive investments in markets in which professional inves- tute a “win” in today’s environment, given our startingtors have greater sensitivity to risk. point and our peer set? What TSR can we deliver with confidence over the next three to five years? How should we deploy our capital against the various drivers of valueThe High Costs of Being Wrong creation—investing in organic growth, improving mar- gins, repaying debt, or returning cash to shareholders inIn one respect, however, all companies face the new nor- the form of dividends or buybacks?mal from a position of strength. Cash on the balancesheet is at record highs. So is profitability. Margins and Translating Strategy into Realistic TSR Targets andROIC are strong after all the downturn cost-cutting. But Plans. The second challenge is to translate a company’swithout consciously planning how to navigate the new high-level aspirations for value creation into a detailed Exhibit 1. FMCG Companies Generally Have Higher Gross Margins and Lower Leverage Gross margin (%) Net debt/enterprise value (%) 60 40 FMCG companies have ~1,500 basis points FMCG companies have ~400 basis points higher average gross margins lower average net debt/enterprise value 30 40 20 20 10 0 0 2005 2006 2007 2008 2009 2010 2005 2006 2007 2008 2009 2010 FMCG companies All other companies in our sample Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis. Note: We analyzed the weighted-average gross margin and the net debt/enterprise value of 46 FMCG companies and 749 nonconsumer companies.16 The Boston Consulting Group
  19. 19. plan for the company as a whole and for each part of more conscious of the portfolio choices they make andthe business, including clearly defined TSR targets. their implications for growth. The following questions areCompanies need to answer questions such as: What will among those that consumer companies should seriouslybe the role of each part of the company in meeting our consider.TSR target? What are the capital and resource require-ments for each to fulfill that role? And what are the im- ◊ How big a footprint should the company have inplications of those requirements for the company’s finan- emerging markets, and how much will its presence incial policies? those markets contribute to the company?Managing Uncertainty and Minimizing Risk. The third ◊ Are there pockets of growth in the developed worldchallenge exists at the level of both strategy and plan- that the company can exploit?ning: to incorporate in-depth considerations of uncertain-ty and risk into the target-setting process, while simulta- ◊ In a portfolio of category and brand positions, what isneously taking a more agile and flexible approach to the short list of positions in which the company shouldplanning in order to adapt quickly to unanticipated cir- invest in order to grow share? Will the impact be suf-cumstances. (See The Art of Planning, BCG Focus, April ficient to achieve the target corporate growth rate?2011.) The key questions include: What will be the im-pact of broad macroeconomic trends on our ability to de- ◊ Is there an opportunity to acquire a direct competitor?liver on our TSR target? Do we know how increased infla- Even if the deal does not fundamentally change thetion, for instance, will affect our cash flows and enterprise company’s growth rate, would the cost synergies andvalue? In a volatile environment, how do we get our en- potential profits be sufficiently substantial, and the di-tire organization to maximize the predictability of our rect impact to top-line growth suitably attractive, toTSR and minimize the risks? make this option worth pursuing?Consumer companies, especially, need to be clear about For most consumer companies today, managing theirtheir optimal rate of growth, because in most cases it will portfolios as they have in the past (investing everywherebe different from what they have become accustomed to. to leverage strong profitability and market growth)In the past, consumer companies were able to rely on will no longer suffice to meet investors’ growth aspira-market growth alone in order to deliver the top-line tions.expectations of investors. Now, they need to be muchGaining a Value Creation Advantage in Volatile Times 17

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