Viewpoint paper for the Food & Beverage industry. Smaller, nimbler competitors are capturing the majority of the growth in an industry that is being reshaped by fast-changing consumer trends. In order to remain competitive, companies are looking for ways to improve their brand and product portfolios. Some of the more innovative ones have started leveraging SKU Portfolio Optimization to fund profitable brand-building activities and invest in key near-term growth initiatives.

1. APPLYING ZERO-BASED
THINKING TO OPTIMIZE
PROFIT AND DRIVE
GROWTH IN THE CPG
INDUSTRY
Smaller, nimbler competitors are capturing the majority
of the growth in an industry that is being reshaped by
fast-changing consumer trends. In order to remain
competitive, companies are looking for ways to improve
their brand and product portfolios. Some of the more
innovative ones have started leveraging SKU Portfolio
Optimization to fund profitable brand-building activities
and invest in key near-term growth initiatives.
January 2019
Viewpoint paper for the Food & Beverage industry

2. Page | 1
Table of Contents
What CPG Companies Are Realizing About the New Competitive Landscape ............................................................................2
Leveraging Zero-Based (Zero-Loss) Thinking to Optimize Profit and Drive Profitable Growth ...................................................4
Conclusion ...................................................................................................................................................................................7
About the Author.........................................................................................................................................................................8

3. Page | 2
What CPG Companies Are Realizing About the New Competitive Landscape
 Quickly evolving Consumer Trends are reshaping the CPG industry
Consumer preferences are shifting at a faster pace than ever and are having a significant impact on the CPG
industry and its underlying business model.
The new consumer is digitally enabled, conscious about health and wellness, willing to try new products and
brands, values convenience, follows a non-linear (omni-channel) path-to-purchase, has higher service
expectations, and cares about how companies and products impact our planet.
In this new business environment digitally native brands,
1 2
e-commerce
3
and direct-to-consumer are starting to
leave a permanent imprint in the industry, and their growth trajectories
4
are foreshadowing potential market
share losses for companies that are not able to adapt their business models to the new reality.
Exhibit 1: Fast-changing consumer trends in the CPG industry: A Food & Beverage industry snapshot
 Investors are evaluating CPG companies on the basis of the overall strength of their brand and product
portfolios
In an environment characterized by fast-changing consumer trends, new or emerging brands, and fierce
competition from new discount retail chains and their private label products, investors are looking for companies
that have the right portfolio of brands and business strategy to succeed in this new era.
Investors are rewarding companies that have brand/product portfolios with a high mix of share-leading brands,
have exposure to growth categories and business models, distribute their products globally, and address key value
propositions for the consumer.
1
“The Rise of Web-Only Brands: The new Face of Successful Retail,” www.bdc-retail.com, April 2018
2
“Digital Native Brands: The (Almost) New Face of Modern Marketers?,” TotalRetail, May 2018
3
“The Digital Imperative: Why Doing Nothing in eCommerce Is Not an Option,” Profitero, June 2018
4
“The food industry in 2018 - the e-commerce trends to watch,” www.just-food.com, January 2018

4. Page | 3
Exhibit 2: Characteristics of strong CPG product/brand portfolios
5
 A Consumer-centric approach is a must for companies looking to transform their brand and product portfolios
In order to improve the relevancy of their brand and product portfolios, CPG companies are acquiring and/or
investing in brands/products that meet emerging consumer needs, and in business models aligned with consumer
preferences on how they want to interact with the CPG company.
As part of the brand and product realignment, CPG companies are leveraging tactics such as SKU Portfolio
Rationalization to right-size the number of offerings and invest in brand-building activities.
Exhibit 3: Areas of focus for CPGs: A Food & Beverage industry snapshot
5
Source: Adapted from “UBS Global Research – Identifying advantaged/challenged U.S. portfolios,” April 2017

5. Page | 4
Leveraging Zero-Based (Zero-Loss) Thinking to Optimize Profit and Drive Profitable Growth
In order to strengthen their competitive standing in the industry, companies are
leveraging a three-pronged approach to improve their brand and product portfolios.
They are: (1) Investing in new product development in the hope of finding the next
winner in an existing and/or new category; (2) Reformulating a significant portion of the
product portfolio to meet consumer demands for health and wellness lifestyle
solutions
6
; and (3) Acquiring companies, or brand/product portfolios with the goal of
quickly improving their responses to changing consumer needs.
Fast-changing consumer trends are driving the compression of product lifecycles, which
in turn is causing companies to have to manage an increasing number of products.
When one layers the addition of newly developed or acquired product portfolios on top
of existing ones, it’s not surprising for a company to come to the realization that
managing a growing set of SKUs is adding measurable complexity and cost to the
business.
The question then is: how can a company analyze this cost of complexity, eliminate it, and leverage the proceeds to invest
in brand-building activities, as well as in game-changing innovation to drive profitable growth? This is where Zero-Based
Thinking can help. Zero-Based Thinking provides the business performance management mindset in which there is no
acceptable level of losses: no SKUs with negative profitability, no SKUs that do not meet margin hurdle rates, no stagnant
inventories of non-performing SKUs, no returns of unsold SKUs, no wasted sales, marketing, and distribution efforts, etc.
Zero-Based Thinking can provide the right philosophy and approach to guide companies through a product/SKU portfolio
optimization exercise/program. It can help them eliminate unprofitable or non-performing products, and in the course of
such exercise, help them uncover what they could potentially improve on in terms of bringing better and more profitable
products to market. Companies on this journey are:
 Leveraging SKU portfolio optimization to reduce unprofitable SKUs and improve brand productivity
7 A
SKU portfolio optimization (also known as “SKU rationalization”) is a process that leverages SKU-specific
information such as revenue, margin, sold-to data, demand transfer characteristics, and the strategic relevance of
a product in a given geography, among other information, to make decisions on which SKUs should be kept, and
which ones should be eliminated (retired) from a product portfolio. Over the past few years a select number of
CPG companies have begun to tackle this issue and have announced rationalization programs targeting 10% to
50% of their SKUs, with the goal of focusing on profitable growth.
8
A properly executed SKU portfolio optimization process will allow companies to classify its SKUs into three
categories: “A Items” – Candidates for Increased Investment in Resources and Brand-Building Activities, “B Items”
– Candidates for Margin Improvement Strategies, and “C Items” – Candidates for Rationalization (please refer to
the following figure “Illustrative profitability analysis of a portfolio of SKUs.”) Candidates for Margin Improvement
should be further evaluated for the possibility of:
6
“Five Challenges for the CPG Sector in 2018,” Retail.eMarketer.com, January 2018
7
“Hain Celestial benefiting from s.k.u. rationalization, cost savings,” Food Business News, August 2017; “SKU Rationalization – Finding the SKU Sweet Spot
at Hershey’s,” demand-planning.com, January 2018
8
Coca-Cola Hellenic Bottling Co. Investor Day – “Entering the growth era,” 2016; Unilever Investor Event – “Setting the Scene,” 2015; Imperial Brands –
“Strengthening our Portfolio,” 2017
Zero-Based
Thinking asks:
“Knowing what you
know now, what
would you do
differently, start, or
eliminate in your
business?”
Brian Tracy, CEO of Brian
Tracy International

6. Page | 5
‒ Repricing the product to improve and optimize its profitability;
‒ Reengineering the product to improve its cost structure;
‒ Renegotiating raw materials, sub-components and/or manufacturing costs;
‒ Renegotiating price and/or sales allowances; and/or
‒ Increasing their Direct-to-Consumer business.
Exhibit 4: Illustrative profitability analysis of a portfolio of SKUs
9
 Investing in new processes and capabilities to understand true product profitability, in order to make better
business decisions
In today’s world, one would think that the vast majority of consumer goods companies would have a relatively
granular view of how costs impact the profitability of any of their products. But the reality is that at many
companies SG&A costs are still being allocated with the help of arbitrary or ad-hoc cost-allocation models that do
not provide a true view of a product’s profitability. In some cases, one can still find companies that spread costs
evenly across SKUs without truly knowing how cost consumption patterns vary by product.
One can then argue that any pricing, promotions, customer and/or channel decisions that are based on these types
of methods could potentially be flawed and lead to sub-optimal profits and shareholder value.
To make sound SKU portfolio optimization decisions, leading-edge companies are investing in:
‒ The collection of accurate cost data;
‒ The implementation of an analytics-enabled, structured approach for the allocation and roll-up of costs
based on well-defined business rules; and,
‒ The requisite organizational change management elements to ensure there is cross-functional
organizational buy-in for the new solution and processes, as well as trust in the underlying cost data.
9
Adapted from “Leveraging Analytics to Manage Supply Chain Complexity in Highly Innovative Companies,” Will Ruiz, TCS, 2016

7. Page | 6
Exhibit 5: SKU Operating Margin Model
 Using freed-up cash and resources to drive additional profitable growth
Well-executed SKU portfolio optimization programs free up resources that companies can utilize to grow their
businesses profitably. Investments and efforts that had been allocated for the production, marketing, and
distribution of unprofitable or non-performing products, can be redirected to focus on profitable segments of the
business and near-term growth initiatives.
10 11 12
Exhibit 6: Reinvesting Savings to Drive Profitable Growth
10
“Look at the tremendous improvement we are making here now that we have a stronger set of SKUs on the shelf, and that we are supporting these SKUs
and brands with sufficient brand building,” Kellogg (K) Q1 2018 Results - Earnings Call Transcript
11
“Streamline portfolio with focus on highest velocity, truly incremental SKUs,” Kraft-Heinz – Post Integration Business Update, February 2018
12
“We’ve moved from a tendency towards SKU proliferation to being clear-eyed about SKU optimization,” ConAgra Brands, Inc. (NYSE:CAG) Q4 2017
Earnings Conference Call

8. Page | 7
For example, companies could choose to redeploy a portion of their freed-up cash on advertising campaigns to
drive incremental sales lift for key/profitable brands or products. Data from a Nielsen Catalina multimedia CPG
benchmark report suggests that for every $1.00 spent on advertising of marquee brands, companies could drive
$3.63 in incremental sales for those products.
13
Another option could be to invest in capabilities to enable and support sales in the industry’s fastest growing
channel: e-Commerce. At a 15% global value annual growth rate, it is significantly outpacing the growth rate in the
Superstore/Hypermarket, Traditional and Convenience channels.
14
The most likely scenario is that companies are investing in multiple concurrent programs and initiatives to drive
additional profitable growth. They are not only investing in brand-building activities, they are also channeling
resources into new or enhanced capabilities in areas such as Direct-to-Consumer e-Commerce, New Product
Development, Analytics & Insights, and Automation, as well as investing in, or acquiring, Digital Native Brands.
It should be noted, however, that the immediate initial effect of an SKU optimization program might be a relatively
light reduction in overall revenues, as the company abandons the manufacture and sales of non-performing SKUs.
Even so, the health of the remaining business, the overall brand productivity, as well as the company’s prospects
for growth, will be better for it.
Conclusion
After years of debating where the CPG-Retail balance of power resides, it has become increasingly clear that it is now in the
hands of the consumer. Today’s digitally savvy consumer is less loyal to big brands, values authentic and personalized
experiences, and dictates when and where they want to gain access to, or consume a product. New, smaller and nimbler
competitors are successfully tapping into this knowledge to create brands that address what consumers need and value, in
the context of an overall experience that resonates with them. These smaller brands are outperforming their competitors:
while they represent approximately 19% to 33% of overall CPG sales in mature markets, they account for 53% to 59% of the
growth in those markets.
15
In this fast-changing, competitive environment, legacy CPG companies can ill-afford to spend any time and resources
supporting brands or products that are not meeting profitability targets and add complexity to their businesses. They need
to figure out a way to eliminate this wasted effort and redeploy those resources on activities that can deliver profitable
growth and improve the company’s competitive standing in a consumer-centric world. Successful ones will leverage a Zero-
Based-Thinking approach, coupled with a sound, analytics-driven SKU portfolio optimization process, to do so.
13
“From Ad to Aisle: The CPG Advertising Benchmark Report,” Nielsen Catalina Solutions, 2016
14
“Winning Omnichannel – Finding Growth in Reinvented Retail,” Kantar Worldpanel, 2018
15
“Amid the FMCG Downturn, Small Manufacturers Are Tapping Big Growth,” Nielsen, July 2017; “What the Fastest Growing CPG Companies Do
Differently,” BCG and IRI, June 2018

9. Page | 8
Author
Will Ruiz
Will Ruiz is a Managing Partner and Leader of TCS’ North America Consumer Goods & Retail Consulting Practice.
A
SKU Optimization in the Food & Beverage Industry Endnotes
Source Date SKU Optimization Focus/Initiative(s)
Hain Celestial benefiting from s.k.u.
rationalization, cost savings (Food Business
News)
August, 2017 “Key corporate initiatives outlined this past June included a focus on products and brands that
represent 90% of the company’s business, stock-keeping unit (s.k.u.) rationalization and cost
elimination through its Project Terra program.”
Starbucks Corporation (SBUX) Q1 2018
Earnings Conference Call Transcript
January, 2018 “One specific example relates to product simplification: we are removing over 200 SKUs from
our U.S. retail stores, primarily merchandise in the front lobbies of our stores, representing over
30% of total lobby items.”
Coca-Cola Hellenic Bottling Co. Investor day –
Entering the growth era
June, 2016 “Removal of 8-10% of poor performing SKUs“
Kraft-Heinz – Creating a Global Food &
Beverage Leader
March, 2015 “SKU rationalization to focus on profitable growth”
Kraft-Heinz – Post Integration Business
Update
February,
2018
“Streamline portfolio with focus on highest velocity, truly incremental SKUs”
Kellogg (K) Q1 2017 Results - Earnings Call
Transcript
May, 2017 “…culling SKUs in preparation for the DSD transition”
Kellogg (K) Q1 2018 Results - Earnings Call
Transcript
May, 2018  “Keep in mind that this organic growth comes in spite of the impact of last year's DSD exit,
specifically SKU rationalization and the elimination of the price premium we used to charge
for DSD services.”
 “Look at the tremendous improvement we are making here now that we have a stronger
set of SKUs on the shelf, and that we are supporting these SKUs and brands with sufficient
brand building.”
SKU Rationalization – Finding the SKU Sweet
Spot at Hershey’s (demand-palnning.com)
January, 2018 “Demand Planners at Hershey’s Mexico implemented SKU rationalization to identify items to
cut and which could be improved”
Snyder’s Lance – Driving a Step Change in
Profitability
September,
2017
“Reduce business complexity through SKU
rationalization and ongoing portfolio maintenance”
ConAgra – Barclays Global Consumer Staples
Conference; ConAgra Brands, Inc.
(NYSE:CAG) Q4 2017 Earnings Conf. Call
September,
2017; June,
2017
 From “SKU Proliferation” to “SKU Optimization”
 “We’ve moved from a tendency towards SKU proliferation to being clear-eyed about SKU
optimization.”
PepsiCo North America Focuses More on
Data and Insights To Drive Growth
May, 2017 “Optimization of SKUs and planograms”
General Mills, 2016 Annual Report;
Nasdaq.com
June 2016;
August 2017
 “…we will only pursue selective growth investments and will focus on reducing SKU
complexity, optimizing commercial investments, and prioritizing profitable volume…”
 “…by fiscal 2018, the company expects to achieve cost savings through increased efficiency,
reduced complexity through SKU optimization, supply chain optimization and continued
expansion of zero-based budgeting across the business…”
Imperial Brands – Strengthening our
Portfolio
June, 2017 “In simplifying our portfolio, we’re aiming to cut complexity by half, moving from 250 unique
brands to 125…. and 5,000 SKUs to 2,500.”
Unilever Investor Event – Setting the Scene November,
2015
“Supply chain efficiency…” “...~20% SKU reduction”
UBS Global Research – Identifying
advantaged/ challenged U.S. portfolios
April 2017 “…we favor reductions in unprofitable SKU’s…”