A leaner share

Unilever’s attempted buyout of Bestfoods is another step in the end game of consolidation in the packaged goods industry. The move has seen share prices rally among competitors such as Heinz, as investors lick their lips over the latest round of takeover bids.

Observers believe companies are desperate to make acquisitions to boost flagging profits in a stale market. But the consequence of turning focus on buying and restructuring has squeezed marketing budgets and is creating uncertainty at multinationals, as employees wonder which will be the next company to be swallowed up. It has never been a worse time to be a marketer at a packaged goods company, and many are jumping ship.

Two senior marketing insiders say that wherever they look in the packaged goods industry, there is confusion and fear. Procter & Gamble is undergoing a complete and somewhat perplexing restructure, Bestfoods is fighting for its survival, Unilever is digesting acquisitions and slashing product lines, and HJ Heinz and Kellogg are under the cosh.

With the sale of United Biscuits to a European consortium led by Danone now complete, speculation is mounting over the next takeover target, with Golden Wonder, Ranks Hovis MacDougall and even Heinz among names in the frame.

Unilever refuses to comment about the Bestfoods deal, and its packaged goods rivals are equally reluctant to reveal their own acquisition and spending plans.

What is known is that P&G, traditionally a front-runner in marketing spend, is trimming budgets across markets. Grocery giant Heinz is believed to be a prime target for a takeover and insiders suggest it is seriously cutting back on its ad budget.

Heinz has now called on Bestfoods – owner of brands such as Knorr soups and Hellmanns Mayonnaise – to enter into a friendly merger. The call is seen by the City as an attempt by Heinz to fend off a hostile takeover.

By slicing marketing budgets, companies aim to improve their bottom line, boost share ratings and fend off aggressive takeovers – or at least make sure if they do occur they will happen at an acceptable price.

One analyst says: “Consolidation is required. The packaged goods market is difficult at the moment and companies see takeovers as the best way of making money.

“But Unilever is quite busy already with its restructuring plans. The Bestfoods bid may make people at the company nervous.”

Unilever would like to own international brands, such as Knorr, which cross markets from the US to Asia. Observers feel Unilever could justify the offer as a way to increase its underdeveloped food service business. Food companies are increasingly looking at food service, or catering, to squeeze out more profits.

But the analyst adds: “Buying Bestfoods will allow Unilever to access different markets and help rationalise the company’s distribution.

“But talking about food service smacks of desperation. Bestfoods already has good margins and Unilever will find it hard to increase them.” This could result in further trimming of marketing budgets.

Unilever chairman Niall FitzGerald announced in February that the company’s marketing spend was set to increase by £1bn to about £4.5bn over the next five years – though this extra seven per cent a year may only be enough to keep up with increases in media inflation, at least in the UK. Independent media auditor the Billett Consultancy predicts at least six per cent TV inflation for the whole of this year.

FitzGerald’s “less will be more” strategy will focus on Unilever’s 400 key brands, including Calvin Klein, Dove and Magnum ice cream.

But up to 1,200 brands, such as Brut and Timotei, will disappear from the shelves –

proving that companies can no longer throw endless pots of money behind products without secondary and tertiary brands suffering.

Recent internal restructuring at Unilever has seen a shift away from local marketing in the UK, with brands set to have a more pan-European focus. Eight food and beverage categories have been created, each with a marketing director.

Unilever has also spent time, money and energy acquiring Ben & Jerry’s ice cream and Slim-Fast in the first few months of the year.

But many observers feel that while the company is looking to its nuts and bolts, it cannot maintain its huge commitment to, and spend on, advertising.

Many of the leading global packaged goods manufacturers seem to be turning the spotlight away from marketing in order to focus on rationalising their businesses.

Last year, recently-installed P&G chairman Durk Jager announced a new initiative, Organisation 2005. It involves making savings of $900m (£562.5m) every year for each of the six years of the programme and increasing long-term sales growth by six to eight per cent a year.

The company has already announced thousands of job cuts, on top of an expected 25 per cent drop in ad spend to £12.5m for the first half of the year.

Certainly, its current prospects don’t look too bright. Its most recent earnings revealed a drop of 11 per cent to $753m (£470.6m) for the quarter ending March 31. Jager called the results “disappointing” and blamed them on increased costs.

In turning its attention to internal structure, P&G has also been accused of rushing products to market, in order to cut costs and boost sales. Two recent launches have resulted in P&G fending off claims that it made errors.

On a small scale, the company relabelled infant product Pampers Care Mats, following fears from consumers that the product could suffocate babies. The company was forced to put stickers on the packaging in January warning parents they should not be used in cots for babies under 12 months old “to avoid the risk of suffocation”.

One observer said the oversight was caused by the heavy pressure P&G executives are under to reduce product testing times and bring products quickly to market.

A more serious problem occurred in March, when P&G’s UK launch of Charmin toilet tissue raised a storm of protest from competitors, who demanded an investigation into claims that the tissue did not break down properly in the UK sewerage system.

Like Unilever, P&G is cutting spend across its range of brands in order to branch out into new forms of advertising. As the cost of buying television airtime continues to rise, companies must look to other media to market products.

According to the Billett Consultancy, food’s share of UK TV advertising expenditure fell from 27 per cent to 21 per cent between 1995 and 1999. A report published earlier this year linked the fall directly to an increase in the cost of airtime. In 1995, food advertisers paid an average housewife cost per thousand of £7.97 across all channels, rising to an all-time high of £10.59 in 1999. The consultancy also maintains 125 food brands were forced off TV in that time.

Chairman John Billett says: “It appears that some media owners are asking major packaged goods advertisers to spend less on their stations because they prefer to take new money at a higher rate instead.”

New ad platforms

Unilever launched the first interactive food ad for Chicken Tonight on SkyDigital. Though initial results are still pending, the company is optimistic about the outcome, which could herald a flood of similar ads.

Unilever recently invested in Wowgo.com, an Internet portal aimed at teenage girls, and has made a foray into the online services market with Myhome – a domestic cleaning and laundry service.

But other forms of advertising, such as sponsorship of TV programmes, appear to be a passing fad. One of the most successful deals, which saw Jacob’s Bakery sponsor Carlton quiz Who Wants To Be A Millionaire? for two years, was ended by the Danone-owned food company earlier this year. And although Cadbury still sponsors Coronation Street, the latest deal was only struck after extended consideration by the chocolate giant.

Branching out into online services, such as Myhome, may be the way forward for companies looking for innovative ways of marketing new products.

Marketers’ discontent

As packaged goods advertising budgets are cut, marketers are becoming increasingly frustrated with their lack of room to innovate.

Adrian Cox, a former marketer at Golden Wonder and Cadbury, and most recently marketing director at St Ivel, has been appointed vice president of marketing for Internet infrastructure service Ask Jeeves UK.

Cox believes there is an exodus of disaffected marketers from packaged goods companies to dot-coms. The most recent example is Heinz European director of sauces Stefan Barden, who has quit to become chief executive of Internet customer management company iForce.

Cox says: “Any marketer worthy of the name wants to be involved at the forefront of changing consumer behaviour. There are an awful lot of people moving from the old to the new economy.

“Traditional bricks and mortar companies are focusing much more on cost reduction. Instinctive marketing is very much taking a back seat and the fun is going out of it rapidly. Dot-coms by comparison are very dynamic.”

Cox is sceptical about the view that packaged goods marketing is becoming a dead duck. But he does admit the packaged goods giants will take the knife to ad spends in an essential cost-cutting drive.

“Packaged goods ads will always form the backbone of revenue in commercial television – I don’t see that changing. But I think we are going to see ad budgets pared in traditional businesses where margins are under extreme pressure.”

In recent years, marketers have become acutely aware that top brands need to be given maximum exposure to stay in consumers’ minds, as the media scene becomes ever more crowded.

But if they can no longer justify spending hefty budgets on even their headline brands, many brands could be squeezed off the shelves altogether.

As one insider says, in five years’ time when restructuring at companies such as Unilever and P&G is complete, many of these problems may have been ironed out. People may wonder what all the fuss was about.

But for the time being, confusion reigns as multinationals scramble to stay ahead of the field in a world of consolidation.