Ca$h is king

by Keith Nunes
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In recent years health and wellness was the dominant trend discussed at the Consumer Analyst Group of New York conference, the annual event where consumer packaged goods companies present their strategies for the coming year and beyond to financial analysts. This year the focus remained on health, but in a different manner. The theme of this year’s meeting, held in mid-February in Boca Raton, Fla., was about how C.P.G. companies plan to maintain the health of their balance sheets in the current difficult economic environment, and it was clear cost savings and cash availability is the measure of any good or bad diagnosis.

"Right now what keeps me up at night is this economy," William R. Johnson, chairman, president and chief executive officer of the H.J. Heinz Co., Pittsburgh, told Food Business News. "I worry about consumers, I worry about the angst, the fear, the lack of confidence and I worry about it manifesting itself in behavior that I don’t think is in anyone’s best interest.

"If you talk about what is going on right now. Yes, unemployment is up, but fundamentally, 93% of Americans are working. And in the U.K., 92% to 94% are working. And yet there is this fear, this lethargy that’s building on itself and that is what I worry about."

With the economy as a stark backdrop, presenters at the CAGNY conference focused on their operations and, as Richard Goodman, the chief financial officer of PepsiCo, Inc., Purchase, N.Y., said, a "maniacal focus on cash."

Several strategies have been implemented by companies to manage costs, with most focusing on savings that require little or no capital expenditure.

David Mackay, president and chief executive officer at the Kellogg Co., Battle Creek, Mich., said the company hopes to have $1 billion of annual savings in 2011 that it currently does not have in 2009.

"We believe we can achieve this goal, but I would caution that with inflation and our desire to invest back in the business, that we have plenty of opportunities to actually spend the savings when we make them," Mr. Mackay said.

In order to achieve the savings, Mr. Mackay said Kellogg plans to draw from K-LEAN, which stands for Lean, Efficient, Agile, Network. The project, which started in two U.S. plants and now is being rolled out through much of North America, Europe and Latin America, is focused on driving process optimization, asset utilization and waste management.

Sara Lee Corp., Chicago, has embarked on a similar initiative with its Project Accelerate. The program will require Sara Lee to take about $150 million of one-time charges between fiscal 2009 and 2011, with the majority coming in 2009. The company expects Project Accelerate to yield about $200 million to $250 million of benefits when the full-year run rate is achieved by fiscal 2011.

The effort will involve such actions as outsourcing, supply chain improvements and rationalizing stock-keeping units. Sara Lee is implementing an outsourcing model that leverages standardized processes and I.T. infrastructure.

"We are setting up a global transactional procurement process and expanding our strategic sourcing capabilities, which will improve our visibility into how and where we spend and create standardized processes to leverage our scale," said Brenda Barnes, chairman and c.e.o.

Ms. Barnes also cited Sara Lee’s experience with LEAN manufacturing that was implemented at the company’s Claryville, Ky., meat processing plant. She said managers there were able to increase production 25% with little capital outlay. The company is exploring expanding the effort to other facilities.

In a discussion with Food Business News, Ian R. Friendly, executive vice-president and chief operating officer of General Mills’ U.S. retail business, said his company’s efforts to reduce the costs of its products has paid dividends today.

"Two or three years ago we shifted our R.&D. resources to work on productivity, because a lot of the gains from productivity does not just come from making a factory run better," he said. "It also involves redesigning products to take cost out but keep the quality the same. We fairly dramatically shifted our R.&D. resources to fuel that effort and it has turned out to be fairly prescient."

Ken Powell, the c.e.o. of General Mills, Inc., Minneapolis, added that the R.&D. effort was a part of the company’s Holistic Margin Management program, which focuses on removing costs from processes and products that do not add value for consumers.

"We have had it in place for four years and we have a head of steam," he said. "We have expanded it to our international businesses and it has really become the DNA of what we do at General Mills and it serves us very well."

The value equation

From a product development standpoint, value was the trend du jour at CAGNY this year, supplanting health and wellness. In past years the focus also has been on expansion into new demographic markets as well as emerging international markets such as China and Russia.

"We would have still launched Ore-Ida Steam n’ Mash, but we might not have launched a few other items that would be less day-to-day than consumers are used to," said Mr. Johnson of Heinz when discussing recent product launches. "We are going to focus more on our core businesses and creating value through packaging, whether it’s in sizes or recipes. We are going to do lots of things to really focus on value.

"But we will continue to break some news with things like Steam n’ Mash and we have some things we are looking at in Western Europe and Canada. But there is no doubt you will see the industry refocus over the next couple of years around this whole value equation for the consumer."

All food manufacturers presenting at this year’s CAGNY addressed the issue of value and where their product portfolios fit within the trend. Whether it was Douglas Conant, the president and c.e.o. of the Campbell Soup Co., Camden, N.J., discussing how soup is one of the most affordable meals, or Mr. Powell promoting the value of a bowl of cereal.

"Right now, our packaged food business is on trend as food expenditures in the U.S. have shifted to favor at-home meals," Mr. Friendly said. "Consumers are responding to the steady stream of bad economic news with changes in how much they spend and what they spend it on. Traffic is up at recipe web sites and down at restaurants."

Ms. Barnes said her company’s efforts also will focus on value, but not just on cost.

"Our marketing will also place greater emphasis on the value proposition of products," she said. "We’re focused on affordable innovation delivering new versions of products at lower price points.

"Whether it’s a cup of single-serve Senseo coffee, the re-sealable package for Hillshire Farm deli meats, the individually wrapped Jimmy Dean breakfast sandwiches, or pre-sliced food service pies, we have a portfolio that lends itself well to tough times, and we’re featuring those attributes in our marketing."

Beyond the short term

Managing corporate financial health requires both a short-term and long-term perspective. Beyond the immediate issues of a difficult economic climate and the value trend, commodity costs and emerging markets were other topics of discussion at this year’s CAGNY conference.

"I certainly think over the foreseeable future we’re going to see some lessening impact in terms of commodity costs," Mr. Johnson said. "I think ultimately the things that drove it up the first time, ex the speculation, are still there.

"You still have these rapidly emerging markets with huge populations that need to be fed so the demand cycle is going to change and I just think as we go forward it is likely to create pressure. I don’t think you will see the rapidity or magnitude of what we saw.

"I think long term you may make a very strong argument commodity costs, once we get through a period of 12-months to 24-months, will start to return to inflation."

It is that kind of notion that led many presenters at this year’s CAGNY to reject the idea of making across the board pricing cuts as commodity costs decline.

"In the last five years our input cost inflation has gone up about 25% and our prices have gone up about 10%," Mr. Powell said. "I think we have been able to explain to them (retailers) very convincingly that we are very interested in keeping our brands as supportable as possible."

Mr. Johnson also emphasized the importance of investing in emerging markets.

"I think ultimately you cannot ignore the fact that long term there are more mouths to feed and more consumers in these markets than there are in developing markets," he said. "I think the U.S. has been and will always be in our lifetimes the strongest economy in the world and I think it is a critical place to do business, but in my view long term those companies that are well positioned in these emerging markets will benefit disproportionately."

This article can also be found in the digital edition of Food Business News, March 3, 2009, starting on Page 23. Click here to search that archive.

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