Growth, Revenue, Profit: Commercial Challenges in the Chemical Industry for 2019

February 27, 2019

 Growth, Revenue, Profit: Commercial Challenges in the Chemical Industry for 2019

Volatility, innovation, online portals, customer relationships, and mergers and acquisitions (M&A): These are the five trends and issues that chemicals companies must address to increase growth, sales, and profit in 2019.

Despite high operational efficiency, the chemical industry will face a number of obstacles in 2019.

1. Volatility

The volatility of raw material costs, exchange rates, and tariffs continues to create a dynamic environment in the chemical industry. Those who aren’t flexible enough in negotiating contracts or fast enough in adjusting prices will face massive pressure on margins. Digital pricing and data analytics will be important tools to significantly accelerate pricing processes. Agility in contract and price management will be a key success factor in 2019.

2. Innovation

The chemical industry is highly innovative. Innovation is an important pillar of its competitiveness. However, despite major investments and good developments, 72 percent of all new products miss their profit targets, a Simon-Kucher study reveals. Not only are companies considering commercial aspects far too late in their innovation process, they aren’t going far enough either, according to another study. Simon-Kucher recommends nine proven steps to successfully monetizing innovation, which include factoring in the customer’s perspective and willingness to pay early on, evaluating new pricing models and metrics especially for new digital solutions and incorporating behavioral pricing strategies.

Big data and intelligent algorithms, like BASF's super computer Quriosity, further strengthen the innovation power of the industry. Being able to capture the value through smart monetizing strategies will become even more important in future.

3. Online portals

Online portals are becoming a relevant channel for selling chemical products, too. Customers are also looking online for suitable products and suppliers. Chemical companies have traditionally maintained direct relationships with their customers. Online portals will change these relationships. The point of contact with the customer will be taken over by new and, in some cases, non-industry market players, like Alibaba and Amazon Business.

Companies need to ask themselves who the direct contact for customers should be for which products and who will have access to important customer information. Which customers should be served via specific sales channels? Which product offerings make sense online? Which new customer groups can be tapped in a cost-effective way? How can prices be differentiated by channel? And how can companies deal with procurement platforms? These are just some of the central questions companies in the chemical industry need to answer.

4. Customer relationships

Digitalization also enables high-quality interactions along the entire customer journey, providing companies with a competitive advantage. The chemical industry has long had digitalization on its radar, but so far, companies haven’t been able to achieve any breakthroughs in their customer relationships. A Simon-Kucher study found out that 70 percent of chemical companies are dissatisfied with their customer relationship management systems (CRM) because of their limitations in providing certain basic functionalities. Without a fully functioning and comprehensive CRM, it’s difficult to identify and harness untapped potential in the customer journey. This technology would be the key to unlocking new sales opportunities, but only if it works properly. Digitalization takes customer relationships to a whole new level. Companies that aren’t in close contact with their customers are losing out on important information and, in the long term, may lose these customers.

5. Mergers and acquisitions

The industry is facing structural changes. Competitors from China and the Persian Gulf are coming to Europe and put pressure on industrial chemical companies. In addition, capital market pressures are leading to conglomerates splitting into smaller, focused entities specializing in specific applications, as was the case with DowDuPont. Against this backdrop, M&A activities will be another factor to influence the chemical industry in 2019. Over the past few years, we’ve seen transactional multipliers surge to new heights. Expectations of future sales growth are a major driver for this. This is why it’s more important than ever to solidly assess the markets in these transactions. Many companies are therefore conducting extensive commercial or market due diligence to gain additional market insight. In the case of mergers, there will also be much more focus on the commercial side to avoid putting business continuity with customers at risk and fully unlock growth potential as quickly as possible.