Academic journal article The McKinsey Quarterly

May the Sales Force Be with You

Academic journal article The McKinsey Quarterly

May the Sales Force Be with You

Article excerpt

Lessons from McKinsey's 1998 packaged-goods survey

Packaged-goods manufacturers in the United States have great expectations. A McKinsey survey of 24 of the country's leading manufacturers (see boxed insert, "The customer and channel management survey," on page 112) showed that they had average revenue growth targets of 7 percent for 1999, and Wall Street is projecting double-digit annual growth in earnings per share (EPS) over the next three years.

Given the difficult environment facing packaged-goods companies, these are ambitious targets. In most categories, consumption has grown slowly or not at all over the past five years and shows no sign of picking up. Meanwhile, retailers are becoming increasingly powerful. Domestic grocers are consolidating, which gives them the clout to demand larger discounts and slotting fees. They are also reducing their in-store inventories and the number of store employees available for resets and merchandising. Retailers based outside the United States are expanding their presence in it and demanding global--and typically lower--prices from manufacturers.

In addition, private-label and prepared foods are threatening the branded manufacturers' long-established relationships with consumers. In 1994, 50 percent of all consumers had purchased a private-label food product during the previous month; by 1998, that figure had jumped to 88 percent. Indeed, private-label products now seem to be capturing all of the consumption growth in the consumer packaged-goods industry (Exhibit 1). Supermarket sales of prepared foods rose at a rate of 9.7 percent annually from 1992 to 1997 while sales of packaged groceries rose by only 2.7 percent.

Finally, the packaged-goods industry is being transformed by the emergence of new and different customers, including supercenters and retailers, such as Toys "R" Us and Home Depot, that in the past were not associated with food sales.

Do branded packaged-goods manufacturers have what it takes to sustain growth in such a difficult operating environment? Much of the industry's recent growth in profits came from cutting costs--specifically, sales and supply chain costs. We believe that these expedients have now been largely exhausted, since there is nothing more to cut. Manufacturers must therefore grow internally by selling more goods more profitably--which in large measure means relying on the caliber of the sales force.

So the key question is whether today's sales forces are equipped to help their companies grow in a sustainable way. To find the answer, McKinsey conducted its survey of the sales forces of leading packaged-goods manufacturers. Our studies of a host of packaged-goods companies suggest that new approaches to selling can secure margin improvements of up to 8 percentage points, as well as increased volume and market share. Yet the survey shows that current sales force practices at many companies will not produce such returns.

The obstacle is the way sales forces are perceived and managed: businesses should treat them as investments, not as cost centers. A cost mentality concentrates on minimizing expenditures. An investment mentality treats the sales force as an engine driving profitable growth. A company with an investment mentality measures the performance of the sales force by its return on investment and compensates salespeople accordingly. Ultimately, the biggest rewards will go to those companies prepared to break the mold. Merely adjusting the way the sales force operates, without changing its mindset, will not deliver substantial growth.

Companies that have the best position for sustaining growth use their sales forces to improve margins on their existing businesses, to increase their top lines by winning market share from competitors and expanding their categories, and to drive new business in the more distant future by experimenting with new approaches.

Improving margins

Over the past five years, the cost (as a percentage of sales) of maintaining a sales force has dropped by almost 1 point as manufacturers have focused on making their retail coverage less expensive. …

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