A consumer product company’s profitability in one key market was falling due to sub-optimal distribution structure. August supported in rebalancing distribution channels with the aim of better control and higher profits.
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The consumer product company’s executive had turned from offense to defense in their largest geographic market. Profitability had declined despite strong market share and the future seemed gloomy with declining margins. New players in distribution had turned the dynamics unfavorable. The executive hired August to help recover profitability of the distribution channels.
One root-cause of the unfavorable development in the past was the company’s management and reporting system, which did not provide visibility to the customer and channel profitability. Commercial decisions were made based on volume information without understanding profitability. Thus, the joint client-August team started by creating a multi-dimensional profitability model.
Once understanding the true profitability of products “as distributed to customers”, it became clear how some past commercial decisions had preferred high volume with the downside of very low profitability. Especially the newly established distribution channel controlled by third parties was problematic. Still, within the problematic channel, the team was able to identify a part of the business that was healthy and could be continued.
The team composed a new channel distribution strategy by combining internal profitability understanding and external market insights, such as opportunities to increase share-of-wallet among key customers. This resulted in a plan with clear steps on how the role of each channel would be strengthened, or diminished, in the years to come.
The company’s executive immediately discontinued the past volume-seeking activities but continued using the channel, which was initially considered problematic, in a new healthy way. The distribution channel structure has since been steadily steered towards improved control and higher profits.