July 20, 2010
by Editorial Staff
WASHINGTON — Consumer packaged goods companies looking to grow revenues post-recession will need to focus on innovation that encourages household spending while casting an eye toward emerging markets, according to “Forging Ahead in the New Economy,” the 14th annual financial performance report published by the Grocery Manufacturers Association and PricewaterhouseCoopers L.L.P.
“The C.P.G. industry has a legacy of strong financial performance and resilience in the face of challenging economic times, and 2009 was no exception,” said Pamela G. Bailey, president and chief executive officer of the G.M.A. “However, restrained consumer spending and continued fears about the future of the U.S. economy mean that companies will have to harness the innovation for which they are known as they look to grow sales.”
Lisa Feigen Dugal, North American consumer packaged goods and retail advisory leader at PricewaterhouseCoopers, added that it will be tough to succeed using the same tactics employed during the recession.
“Novel approaches will be crucial — and that includes creating new trade promotions programs for retailers, rethinking how they spend their media dollars, targeting coveted demographic groups like Generation Y with smart social networking campaigns, reaching customers in more places, and tailoring their products for local customer tastes in emerging markets.”
The G.M.A., PricewaterhouseCoopers report was compiled from interviews with senior executives of G.M.A. member companies, including members of the association’s chief financial officer committee as well as company financial data, government statistics, analyst reports and other published materials.
Customer priorities as focus
Understanding customer priorities will be central to innovation moving forward, according to the report. To this end, C.P.G. companies must become more aware of a
consumer base in the United States that is buying more carefully, buying different pack sizes, taking advantage of volume discounts, and trading down to non-premium brands.
Tactics employed by C.P.G. companies during the recession, such as divesting non-core brands, conserving cash and cutting costs, will need to change if growth is to be achieved going forward, the report noted.
Steve Neil, chief financial officer of Diamond Foods, Inc., San Francisco, said a key to innovation is a willingness to approach an old problem with a new perspective.
“We have been successful at bringing product innovation to categories that historically have not been very innovative, and that has differentiated us,” he said. “We work with our retailers to help them position their private label. We want them to be able to offer the bulk big-value proposition, since we are not going to price at parity with them.”
The report suggests manufacturers use their category knowledge to form stock-keeping unit (s.k.u.s) cutting decisions, but the decision of when to cut ties with an s.k.u. may not always be a popular one, said Duane Still, c.f.o. of Coca-Cola North America, Atlanta.
“Sometimes, we’ve held on to a brand longer than we should have because a retailer has asked us to do so — and that really doesn’t work in a business that relies on scale to be successful,” Mr. Still said. “We have to be disciplined in applying our criteria for success.”
Don Mulligan, c.f.o. of General Mills, Inc., Minneapolis, added that while cutting s.k.u.s provides room to innovate, the criteria for selecting new products has changed.
“We’ve been forced to think differently about price and attractiveness to consumers,” he said. “Incremental products, like a new flavor of cake mix, may not achieve the margins we want. Consumers value the convenience and quality of a product like Betty Crocker Warm Delights (single-serving, microwavable desserts). These s.k.u.s will help us achieve greater sales with higher margins.”
Keeping it simple
Addressing complexity in the supply chain is another strategy that will better position companies for post-recovery growth, the report noted. Initiatives such as the Global Packaging Project of The Consumer Goods Forum (see story on Page 30) that help find a common way of measuring environmental and sustainability improvements are one way retailers and manufacturers are working together.
Putting marketers at the center of decisions and linking earnings to investment is another way to eliminate complexity and establish more tightly tailored products, the report found.
“We want to offer products that have real value to the consumer,” Mr. Mulligan said, “and if there are aspects to that product — such as how we make it, the ingredients, or the packaging — that are not adding value or aren’t being paid for by the consumer, we take them out.”
Global markets as growth option
According to the study, many C.P.G. companies are looking to innovate by reaching consumers in more places or tailoring products for local customer tastes in emerging markets. For example, emerging markets such as China, Russia, Brazil, India and Southeast Asia are garnering more interest for C.P.G. companies as capital flows faster and new competitors ramp up quickly. Helping spur the growth is the rapid attachment that the middle classes in emerging markets are forming with new brands.
“You can’t ignore the growth rates in the emerging markets,” said Gordon Stetz, c.f.o. of McCormick & Company, Inc., Baltimore. “Asia Pacific represents about 7% of our sales outside the U.S., and we want to double that.”
For General Mills, finding the right message and price point has helped propel the company’s Wanchai Ferry dumpling brand in China, said Mr. Mulligan.
“We began with a dumpling, a product form that is indigenous to the local eating habits, and we expanded to a full range of dim sum offerings,” he said. “This is a product that a Chinese grandmother would have spent all afternoon making by hand. Now middle-class housewives don’t have the time for that — but they do have the money to go out and buy it.
“This product has a great heritage because we’ve involved a local Chinese entrepreneur. It has great taste appeal, real authenticity, and it’s at a price point that, while premium, is affordable for the emerging middle class. You have to start with a product that works in the local culture. And you apply your foundational capabilities in terms of product technology, route to market, and marketing to provide consistency across your offerings.”
Inside sector success
WASHINGTON — Looking at the three major consumer packaged goods sectors — food, beverage and household products — each experienced a median net sales decline during 2009, according to “Forging Ahead in the New Economy,” the 14th annual financial performance report published by the Grocery Manufacturers Association and PricewaterhouseCoopers L.L.P.
The decline for the food category was the smallest, as food purchases overall are much less discretionary than purchases of beverages and household products. The report found that food companies responded to the drop in sales in several ways, most significantly in a cut back in spending, as evidenced by a nearly 2% drop in media selling, general and administrative expenses as a percentage of sales. By comparison, the beverage and household sectors kept S.G.&A. spending relatively stable in 2009.
But the search for growth in food is expected to be challenging, especially if emerging markets are to be counted on.
“The challenge is that all food is local,” said Don Mulligan, chief financial officer of General Mills, Inc., Minneapolis. “There is no global food customer. The product is individual to the local eating habit.”
Although the beverage sector sustained its first net sales decline in five years due in part to consumers trading down from more expensive energy drinks and bottled teas, the segment had the best quantitative performance with shareholder return up 49% and median EBIT growth up 33% in 2009. According to the report, the beverage sector benefited from shareholder-value-building deals such as the Anheuser-Busch/InBev merger and moves by Coca-Cola Co., Atlanta, and PepsiCo, Inc., Purchase, N.Y., to purchase their North American bottling companies.
Duane Still, c.f.o. of Coca-Cola North America, said global beverage companies are pushing hard to gain competitive advantage by operating more cost-effectively and efficiently.
“A huge opportunity for us is in better coordination across our network around the visibility and availability of inventory,” Mr. Still said.
Product innovation to drive revenue growth
NEW YORK — Food and beverage manufacturers most frequently cited product innovations and innovative merchandising strategies as the top factors that will drive company revenue growth during coming years, according to a survey conducted by KPMG L.L.P.
“Food and beverage executives are seeing a better economic picture this year relating to their overall business,” said Patrick Dolan with KPMG. “However, significant concerns remain over the employment outlook and continued challenges of heightened competition and aggressive pricing and discounting practices.
“The executives tell us they are also focusing on innovation — in products, in services and in branding and promotions — to drive growth. A clear illustration of this is the skyrocketing use of mobile Internet and on-line shopping. Food and beverage executives will need to meet the challenge of marketing to a consumer base growing more technologically savvy every day.”
Specifically, 89% of executives said product innovations would be a top driver of growth and 82% of executives said merchandising strategies also would be a top factor. The survey found two-thirds of executives said revenue and profitability were better now than a year ago, and 39% of respondents were more optimistic about employment in their sector over the next year. In addition, 59% of respondents believe their sector will recover ahead of the U.S. economy as a whole, with them believing the timeline for overall economic recovery being about 2.2 years away.
“While there is an uptick in the level of optimism this year from the food and beverage execs, they are pushing their recovery outlook even further out from last year’s predictions,” Mr. Dolan said. “These results illustrate that the economy will most likely not recover as rapidly as hoped, placing additional emphasis on food and beverage companies to continue to employ strategies to manage costs and improve productivity. Companies are trying to achieve sustainable margin improvement in the face of continuing challenging times.”