Situation:
A PE fund had acquired 3 lighting businesses across Europe and sought to improve profitability without harming growth. The lighting market had been grown strongly with innovations in LED lighting attracting new market entrants. However, with a weaker construction market and reduced technology advances market conditions had deteriorated creating a greater focus on profitable operations.
- Had acquired 3 lighting businesses across Europe
- Looking for opportunities to grow EBITDA – too low
- Better understand profitability by customer & product
What we did:
The business understood profitability at a Gross Margin level (sales less manufacturer costs) but did not have visibility of profitability by customer (largely lighting wholesalers) nor at a product contribution level. Our start point therefore was to build a “cost-to-serve” model to allocate relevant costs by customer and product. This included product driven costs such as R&D, technology licensing, shipping, import duties & warehouse costs. And then customer driven costs such as price discounts, rebates, customer deliveries and sales team costs. The end result was a model that could report EBITDA by customer and by product and to show how costs (as a % of sales) varied across customers and categories.
Business Outcomes
Understanding the true profitability of customers and products led to a number of commercial actions including:
- Re-negotiation of commercial terms with customers ensuring price discounts and rebates were proportional to the volume of business
- Review of product pricing (and cost re-engineering) to ensure adequate profit
- Development of a “good, better, best” product segmentation by customer type (national wholesalers, independents, retail, online) to standardise approach to pricing and protect margin
- New rules around minimum order quantities to avoid margin erosion from small orders
Changes to sales team processes to ensure access to profitability information and rules on what level of discounting could be applied
