Packaged goods firms face future in doldrums

Packaged goods companies are in crisis with traditional routes to market breaking down. What is a chief executive to do? asks Alan MItchell.

Is there a packaged goods company out there that’s not in the doldrums? Last week, Procter & Gamble took the limelight when it ousted chairman Durk Jager, but not long ago Coca-Cola – another icon of the consumer goods industry – was unceremoniously dumping its former chief executive officer Doug Ivestor.

But these are just some of the most spectacular thrills and spills from a sector where crisis now seems endemic. To put things in perspective, take a look at how investors are regarding these so-called blue-chip branded goods companies in the US, where most of this crisis atmosphere is being generated.

Over the past two years, the Standard & Poors index (the equivalent of the FTSE 100 in the US) has risen by about 30 per cent. Over the same period Heinz stock has dropped by 20 per cent (although a few months back it was down 30 per cent), Kellogg by 30 per cent, Gillette by 40 per cent, and Campbell Soup by 50 per cent.

It’s the power of P&G’s reputation – and a measure of its current crisis – that until earlier this year it was keeping track with the S&P. Now it has joined its peers, at 30 per cent down. And despite its bold Bestfoods buy (question: did it pay too much?) Unilever is also down 40 per cent (having flirted with 50 per cent at times).

Meanwhile, big corporate names going the way of all flesh include CPC (now part of Unilever as Bestfoods), United Biscuits and Reckitt (now Reckitt Benckiser), with Nabisco currently in play.

Investor sentiment (which, once it gets going has a habit of being self-fulfilling) has a big part to play in the current crisis. Investors once looked to blue-chip packaged goods companies as a source of low risk but steady growth. Now they’ve got doubts about the growth bit, and share prices have fallen. As a result, the low risk bit has disappeared through the window. This is causing a “fundamental rethink” of investment priorities, warns Prudential Securities chief investment strategist Greg Smith.

Investors, however, have had to cope with a slew of bad news. Campbell has issued four profit warnings on the run. Sara Lee has its first new chief executive for 25 years and has committed itself to a radical restructuring, including major sales, to try to revive its flagging share price. Heinz is improving, but only on the back of its crisis-driven Operations Excel restructuring. Likewise, Kellogg, whose chief executive officer was ousted in April of last year.

Fact is, these companies’ problems go much deeper than a temporary wobble in investor attitudes: they strike deep into the marketing system of which they are a part.

Basically, in the packaged goods sector, unless you have massively superior economies of scale (and therefore lower unit costs) or superior and proprietary technology, own label is a superior model: it delivers better value at lower cost. The system itself is built around a holy trinity of players: the manufacturer and its brand, the retailer as the brand’s distribution channel, and the media as the brand’s communications channel.

Now, instead of acting as a distribution channel, the trade increasingly acts as a barrier or obstacle course. Dealing with Wal-Mart isn’t easy. TV advertising, which is supposed to deliver the audiences that get consumers flocking to buy brands, is simply too expensive for most packaged goods brands nowadays. In other words, the holy trinity is more unhealthy dependency: brands need retailers and advertisers, but feeding this need is costing ever more, for less benefit.

Meanwhile, magic bullet solutions such as innovation and globalisation are proving to be less magic than once thought. All too often, innovation degenerates into innoflation, with companies throwing ever more not-so-new products at the market, at ever greater expense, with ever less success. And globalisation is turning out to be a lot more expensive and complicated than people once thought. Consumers in places such as eastern Europe, India and China are not so desperate to buy western brands as was once believed.

Back home, markets are mature. And packaged goods don’t loom as large in people’s lives as they once did. Exciting people with a new variant of soap powder or a change in packaging isn’t so easy any more. Increasingly, what consumers want is not only value for money (quality, plus price), but value for time: solutions rather than mere ingredients to solutions. That’s why the US packaged foods industry has lost 50 per cent share to the food-to-go brigade with the UK following suit, fast.

The question is, what are chief executives supposed to do? One answer which we can see all around us is to rationalise. Nowadays in packaged goods, it’s cost-cutting and dog-eat-dog time – classic mergers and acquisitions activity to rationalise the supply base and eliminate overcapacity to become a lower cost producer. Chief executives are also pressing ahead with technology-driven innovation and globalisation, despite the difficulties. They are also focusing resources on winner categories and brands, and cutting their losses on the rest. They are working to recreate – or create new – win-win relationships with retailers, for example through efficient consumer response.

And chief executives are experimenting with new non-retailer-dependent channels to market as they try to find new ways to reach and communicate with consumers, whether through the Web or public toilet doors. One method is to enhance the solution aspects of offers by staging or sponsoring events which embed their brand in experiences that grab a bigger share of consumers’ emotional lives.

The good news is that the industry’s products are needed and wanted. And the winners in the current consolidation – the likes of Nestlé, Kraft, P&G and Unilever – could emerge even more powerful. So at some point, investor sentiment will swing back from its current extreme. The bad news is that while each of the above initiatives is important and valid in its own right, they still add up to a piecemeal response. They don’t replace the holy trinity win-win-win system that marked the heyday of the packaged goods brand. And until some genius comes up with an answer at a system level – to create an alternative win-win system – in packaged goods, the doldrums will never be far away.

Alan Mitchell

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