Pivoting to Momentum

Three weeks quarantined arguably a boring experience but the last night’s session triggered my excitement. a midnight class from Wharton business school about Excellence in Finance and Strategy. It reminds me that I may “accidentally” applied one of its important concepts before.

In FMCG, it always a hot debate between selling low price (low margin) products with more volume or premium ones but with much less quantity. For many price-sensitive markets like Indonesia and India, it’s even more relevant. Last night’s class taught me the business logic behind it and show that the choices should beyond that. Prof. David Wessels taught us, several important key drivers of value creation, the first two are “Organic growth” and “Return of Capital”.

“Where, not Share” is the mantra for the first point. Picking the right product or market to play is more important than chasing market share to drive growth. Swimming on “the upstream of river” of consumers is smarter than driving top-line through price reduction. Identifying the emerging trend and pivot our business toward that momentum is the key.

The second point is related to GMROI (gross margin return of capital). Why GM instead of Net profit? because indirect cost often wrongly allocated. Selling high-margin items should be complemented with decent turnover (even though it’s not the best one). Often we feel proud to sell premium SKUs but we should not forget that product turnover is the real-deal for capital return so that. A similar trap can happen on selling “cheap product”, we should not enjoy buying sales in long term. So it’s important to strike the balance.

That dilemma struck me when I was challenged to handle the Coffee category as marketing manager. The single expectation is clear, improve profitability without sacrificing revenue. It’s a damn tough task indeed, especially in the red ocean category of Indonesia instant coffee. To add the complexity, back then the business heavily relies on unfiltered coffee (kopi ampas) which not only low margin but also losing its relevancy due to emerging of dreg-less coffee. Being backbone in more than decades, the mental-set was to secure the legacy product first by supporting with heavy marketing investment. 

Blessed with a risk-taker yet measurable mindset, I tried to propose “Pivoting toward Momentum” (at that time I not using this sophisticated term though :). The key change is by significantly reduce the marketing investment from the backbone and channel it to the Cappucino variant. The reason is the category got its momentum with the increasing trend of younger people drinking coffee. Despite not the fastest turnover, not even the top two positions in the portfolio, the market growth is fascinating. The second consideration is its high gross margin due to was sold at a price that 1.5 times higher than the unfiltered. 

The process got many pushbacks. Reducing the support to the backbone created turbulence on the topline initially as we pulled off its “life-vest” which mostly the trading scheme. The operation team was also not that convinced to sell high-priced items and keep teasing me to provide more budget to the legacy. But good strategy is about decisions on what we should not do instead of what we should do. And we choose not to after the falling category even though it was the backbone.  

A wise man once told me, “Result never betray the process”. After six months and many late-night efforts, the strategy starts to show its muscle. With the support of the new brand repositioning TVC, the “Star” SKU shinning even more. Booked more than 30% sales growth and for the 1st time in history, it became no.1 sales contributor. The bottom line also smiling, as the revenue growth now also reflected to increasing business profit due to its high gross margin. The combination of margin and turnover increased the return of capital. But the most important still is the momentum.