Case Study

Changing portfolio management at a cosmetics company

Leveraging complexity costing to help a leading cosmetics company unwind complexity to regain profitability

A cosmetics and beauty products company had grown from humble beginnings into a multibillion-dollar enterprise operating in over 25 international markets. Over the previous years, as the global economy began to cool, growth for the company began to stagnate. In an effort to reignite growth, management continued to introduce new SKUs. Recognizing the unsustainable growth of their portfolio, the company leadership asked WP&C for assistance in understanding the impact the growing number of SKUs were having on the complexity and profitability of their business.

Company leadership realized their approach to international expansion and SKU growth was not sustainable and likely hurting profitability. As the company continued to grow internationally, the company introduced products to match a larger array of skin tones and trends of different regions. Although measures were in place to ensure only major international markets initiated the development of a new product, any market could later include the SKU in their portfolio. The result was ballooning portfolios all over the globe. This ‘one size fits all approach’ to international expansion enabled smaller markets to inflate their portfolio with the belief that offering additional SKUs provided opportunities for increased revenue with no additional costs. However, this approach only considered product development in the cost of bringing a new product to market and failed to take into consideration highly impactful costs such as marketing and inventory management which significantly burden the profitability of a portfolio as variety grows.

Like many of its competitors, the company was looking at product profitability at the gross margin level where every SKU appeared profitable. WP&C challenged leadership to broaden their perspective and consider costs beyond those captured by gross margin. Through plant and distribution center observations, corporate interviews, and extensive data analysis the team built a comprehensive understanding of cost drivers by product. Leveraging WP&C’s Complexity Costing, the team built a new view of profitability at the SKU level accounting for the true impact of increased product and portfolio complexity. The analysis exposed the cost to manage the company’s highly varied portfolio by revealing inventory, distribution, and marketing costs that were previously not considered and had a dramatic impact on product profitability. Accounting for these costs was the first step in identifying how the company could set a strategy for profitable variety in all markets.

Complexity Costing exposed that larger markets are more profitable as they commonly sold fewer products resulting in increased revenue density and scale. Understanding cost drivers and their impact on profitability enabled WP&C to pinpoint which variables predict success for geographic and portfolio expansion. Leveraging these variables which predict success, WP&C conducted a multivariate regression analysis demonstrating that pricing power, market size, and portfolio efficiency significantly drove total profit and operating margin. When average revenue density (revenue per SKU) for a region was higher, markets were able to leverage this scale to grow revenue faster than the growth of complexity. Armed with this information, WP&C continued by building a targeted product-market strategy and country level “playbooks”. The company’s leadership was then able to chart a path forward for opportunities in SKU rationalization, investment, pricing, and service level changes to enable profitable growth.

WP&C fundamentally changed how the company approached portfolio management. Equipped with a deeper understanding of product complexity and the associated costs that are driven by variety, the company was able to transform its offerings by market. Recognizing the difficulty in supporting large portfolios in small markets, the company reoriented its strategy to incorporate a market-centric view of new product introduction. Additionally, the company was also able to improve upon its strategy of bundling products thereby reducing cost and improving pricing power. Finally, the ‘playbooks’ helped leadership to identify and leverage more targeted investment resulting in a sustainable methodology for targeting fewer, more profitable SKUs each season. This simultaneously resulted in reduced time to market and increased innovation which drove greater product attention and sales with equivalent R&D funds. 

Company leadership realized their approach to international expansion and SKU growth was not sustainable and likely hurting profitability. As the company continued to grow internationally, the company introduced products to match a larger array of skin tones and trends of different regions. Although measures were in place to ensure only major international markets initiated the development of a new product, any market could later include the SKU in their portfolio. The result was ballooning portfolios all over the globe. This ‘one size fits all approach’ to international expansion enabled smaller markets to inflate their portfolio with the belief that offering additional SKUs provided opportunities for increased revenue with no additional costs. However, this approach only considered product development in the cost of bringing a new product to market and failed to take into consideration highly impactful costs such as marketing and inventory management which significantly burden the profitability of a portfolio as variety grows.

Like many of its competitors, the company was looking at product profitability at the gross margin level where every SKU appeared profitable. WP&C challenged leadership to broaden their perspective and consider costs beyond those captured by gross margin. Through plant and distribution center observations, corporate interviews, and extensive data analysis the team built a comprehensive understanding of cost drivers by product. Leveraging WP&C’s Complexity Costing, the team built a new view of profitability at the SKU level accounting for the true impact of increased product and portfolio complexity. The analysis exposed the cost to manage the company’s highly varied portfolio by revealing inventory, distribution, and marketing costs that were previously not considered and had a dramatic impact on product profitability. Accounting for these costs was the first step in identifying how the company could set a strategy for profitable variety in all markets.

Complexity Costing exposed that larger markets are more profitable as they commonly sold fewer products resulting in increased revenue density and scale. Understanding cost drivers and their impact on profitability enabled WP&C to pinpoint which variables predict success for geographic and portfolio expansion. Leveraging these variables which predict success, WP&C conducted a multivariate regression analysis demonstrating that pricing power, market size, and portfolio efficiency significantly drove total profit and operating margin. When average revenue density (revenue per SKU) for a region was higher, markets were able to leverage this scale to grow revenue faster than the growth of complexity. Armed with this information, WP&C continued by building a targeted product-market strategy and country level “playbooks”. The company’s leadership was then able to chart a path forward for opportunities in SKU rationalization, investment, pricing, and service level changes to enable profitable growth.

WP&C fundamentally changed how the company approached portfolio management. Equipped with a deeper understanding of product complexity and the associated costs that are driven by variety, the company was able to transform its offerings by market. Recognizing the difficulty in supporting large portfolios in small markets, the company reoriented its strategy to incorporate a market-centric view of new product introduction. Additionally, the company was also able to improve upon its strategy of bundling products thereby reducing cost and improving pricing power. Finally, the ‘playbooks’ helped leadership to identify and leverage more targeted investment resulting in a sustainable methodology for targeting fewer, more profitable SKUs each season. This simultaneously resulted in reduced time to market and increased innovation which drove greater product attention and sales with equivalent R&D funds. 

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