The biggest challenge facing CPGs is how to offset rising commodities prices while preserving long-term growth prospects, and their three main points of leverage are sustainability strategies, global growth and partnering with retailers, concludes the report, "The Food, Beverage and Consumer Products Industry: Achieving Superior Performance in a Challenging Economy 2008." Maximizing these three factors was critical in enabling CPGs as a whole to perform in line with the Dow Jones and S&P 500 indices last year, despite soaring raw materials/input costs and consumer spending cutbacks in response to rising costs and other economic challenges, the study points out.

CPG's input costs rose at a much higher rate than anticipated last year. In addition to spiraling gasoline and oil prices, egg prices have jumped 30% since last year--in part because of major cost increases for feed corn. Large food companies such as Kraft Foods and Sara Lee Corp. now attribute 45% to 55% of their products' prices to raw materials costs.

Some 2007 financial highlights:

• CPG sales grew at 10.6%, and median EBIT grew at 15%+.

• CPGs delivered shareholder return of 7.3%, on average, continuing positive three- and five-year trends.

• Large and medium-sized CPGs saw higher returns on sales, average assets and market capital.

• Small companies showed the highest median net sales growth.

Sustainability Pays
On the sustainability front, "the strong effect that sustainability reporting can have on corporate value" was a "particularly exciting" finding of this year's report, says Lisa Feigen Dugal, PwC's North American consumer packaged goods and retail advisory leader. "It's well known that sustainability initiatives can be a great brand and reputation enhancer, but now we've discovered that they're much more. Positive reporting on these initiatives can enhance a company's bottom line and shareholder value."

Examples cited include:

• General Mills, which has been recycling since the 1930s, is more focused than ever on employing sustainability practices to improve its bottom line. For instance, changing the case configurations for Progresso soup removed 2,000 tons of steel from Progresso's annual steel input total, reducing costs and making consumers happier with lighter cans at the same time.

• "If you can make the jump from sustainability being a cost to a contributor to margin growth, that's the key," commented General Mills VP/corporate communications Tom Forsythe, one of many CPG executives interviewed by PwC as part of its research.

• Clorox Company is now measuring its carbon footprint, and moving toward naturally based products is proving even more important, according to CFO Dan Heinrich. "The consumer trend toward sustainable cleaning products is one that we are very committed to," he stated. "At the end of the day, our reputation with the consumer is huge."

• Early adapter DuPont saved over $3 billion in energy costs between 1994 and 2006, while reducing greenhouse gas emissions by 72%. The sale of eco-friendly products is also spurring the company's goal-surpassing financial performance, accounting for $5 billion in 2006 revenue.

Smarter Global Expansion, Retailer Collaboration
CPGs are not only increasingly focused on tapping the greater-than-domestic growth potential in global markets; they are increasingly sophisticated about merchandising and marketing in non-U.S. markets, mitigating and managing risks such as international materials sourcing and "indirect taxes," and integrating international with domestic operations.

Examples:

• Hormel Foods Corp. saw double-digit increases in international sales of its SPAM products in first-quarter 2008. The company is balancing the costs of its overseas push and its increasing grain and fuel costs with product mix improvements and manufacturing efficiency measures in the U.S.

• The Hershey Company is becoming more aggressive about overseas expansion, but is being cautious about finding the right product mixes before it starts leveraging its joint venture relationships in India and China. "You can't replicate [product mix] overseas," said Hershey CFO Bert Alfonso, stressing the need to tailor selections to each market. Hershey is also looking into lower-cost production options in international markets (it recently built a manufacturing facility in Monterrey, Mexico).

• Campbell Soup spends years doing "ethnographic research" before launching any product overseas. "We live with the people and understand how they make soup," explained CFO Bob Schiffner. "We get a feel for some of the cultural and emotional factors involved in serving soup in their families." Campbell is now targeting Russia and China.

At the same time, CPGs are learning to mitigate high indirect taxes--taxes incurred during cross-border transactions such as custom duties, value-added and excise taxes, and customs processing and port fees--by improving the efficiency of how their raw materials and finished goods move through the global trading system, according to the study.

In addition, CPGs are getting more creative about collaborating with retailers to reduce costs and increase performance.

Examples:

• Clorox is working with retailers to "engineer out" unneeded input costs that can occur when companies jump into new packaging/design initiatives that must later be undone because of retailer or consumer pushback. "When we do a project launch, we try hard not to embed costs that just have to be taken out later," noted Heinrich.

• Campbell spent $75 million over the past six years and used consumer feedback and retailer data to integrate its trade promotions with other marketing initiatives and eliminate its most unprofitable events. "You want to have events with meaning that drive enough volume to offset their costs," observed Schiffner.

• Kimberly-Clark's Business Planner software tool builds predictive models for promotions, which the company shares with its retail customers.