GMA/PwC: Digital Key In Driving CPGs' Recovery
Despite rapidly rising commodities costs, the consumer product goods industry is clearly in recovery mode, with international expansion -- plus digitally enabled consumer insights and operating efficiencies -- chief among the growth drivers, according to the new edition of the annual industry financial benchmarking report from the Grocery Manufacturers Association and PwC.
The value of total CPG-industry shipments rose 6% last year, to nearly $124 billion. Improvement over 2009 was seen across the key metrics, including strong median one-year shareholder returns of 15% for the manufacturing sector. In addition, overall growth of median earnings before interest and taxes (EBIT) improved from 4.3% percent to 12.9%, and EBIT growth for the bottom quartile improved significantly (from negative 25% to negative 1%). Both margins and liquidity showed strong overall performance.
Every one of the 148 food/beverage/consumer products companies analyzed (using publicly available information) showed sales growth in 2010, with 2.9% growth for top performers and 1.5% growth for the bottom quartile. Most sales growth came organically and from acquisitions, with the strongest organic growth coming from emerging markets in Latin America and Asia.
Top performers both generated and "hoarded" more cash than poorer performers (18% cash flow-to-sales versus the bottom quartile's 3.8%), and top performers on average paid out four times more dividends per share during 2010.
Beverages, Food, HHP All Showed Net Sales Growth
Food, beverages and household products (HHP) all showed growth in median net sales last year -- a decided positive for the latter two categories, in particular, which experienced net sales declines in 2009.
Beverages saw a 5.6% increase in median net sales in 2010, increased gross margin (from 43.1% to 47.1%) and reduced SG&A expense (from 29.7% to 27.7%). These offset poor cash conversion (that cycle increased from 38.0 days to 46.1 days).
Food CPGs also had a strong year, although the sector's median sales growth of 4.5% was somewhat lower than beverages, reflecting both its comparatively strong (slightly positive) net sales growth in 2009, and consumers' continuing propensity to trade down to store brands and buy national brands on promotion.
Food CPGs' median sales per employee were up nearly 10% (to $400,000-plus per employee, an unprecedented level in any category in this study's history). In addition, their median cash-conversion cycle declined from 50.9 days to 45.8 days.
Household products realized median net sales growth of 3.3% and substantial 15.4% EBIT growth, despite a small decline in median gross margin (from 49.5% to 47.5%).
The big picture: CPGs were "hard-pressed" to generate overall sales growth last year, but their growth in emerging markets, combined with smart cost management (balanced by long-term investment), resulted in "very healthy" margins, cash flow and other positive financial results for some, summed up Lisa Feigen Dugal, PwC's North American advisory retail and consumer industry leader.
CPG executives are "guardedly optimistic" despite a fragile economy, high unemployment and volatile commodity prices, but will need to "aggressively take these risks into account" in their planning processes to fully realize domestic and international growth opportunities this year and beyond, she added.
Harnessing Digital Capabilities
CPGs are now harnessing digital capabilities to realize substantial marketing, product innovation and operational advantages, stresses GMA president/CEO Pamela G. Bailey.
"Today's consumers are more empowered, with greater control of their shopping choices with the growing array of digital technologies like smartphones, tablets and social media," adds PwC retail and consumer industry leader Susan McPartlin. "And they aren't shy about posting their feelings online about products, where they literally are handing over reams of potential insights that can create a tremendous opportunity for CPG companies that can find the patterns in the noise."
"Just a few years ago, digital information meant one thing to senior executives: risk," McPartlin observes, but CPGs have shifted from defensive mode to employing digital data to "advance their competitive positions, help improve all aspects of operations and get smarter about international expansion plans."
Digital and mobile capabilities are of great value in China and other emerging markets, where CPG companies have lacked detailed insights about consumers. Many of the norms in developed markets -- including point-of-sale SKU numbers, predictable pricing models, and accurate contact/operating hours information for stores -- don't necessarily apply in emerging markets. Connecting with consumers "on their own digital terms" is now enabling companies to learn how these markets work, the report points out.
However, it also stresses that to keep up with consumer demands for more product information that's accessible wherever and whenever they want it, CPGs and retailers will need to collect, share and analyze data cooperatively, rather than hold back out of fear about data security.
Digital data and business mobility are also boosting productivity in sales, supply chains, distribution centers and stores and enhancing individual employees' productivity. (On the cost front, overall median selling, general and administrative, or SG&A, expense for CPGs studied was nearly flat with 2009.)
As devices and wireless data networks proliferate and expand, CPGs will be able to further enhance productivity, efficiencies and workflows with rich multimedia capabilities.
The report recommends optimizing workforce use of mobile devices on the floor (to provide workers with instantaneous information); in the field (to enhance on-the-spot decision making); and "in flight" (to reduce the need for costly, time-consuming physical travel for management purposes).
Other key insights/recommendations:
- Maximizing multichannel growth is critical. Brick-and-mortar stores haven't gone away, but consumer product manufacturers and retailers recognize the need for multichannel strategies that optimize high-growth opportunities in digital channels.
- "Roiling" commodities prices are increasing the importance of risk management. Prudent companies have a systematic, holistic risk-management framework that considers operational, financial and strategic levers.
- International markets require focus on leveraging consumer insights. To maximize growth in these rapidly evolving, fast-growing markets, CPGs have to target the right markets with the right messages.
- China's 12th five-year plan calls for revising strategies in this region. This recently codified plan means that companies need to "indigenize" their models, to create growth strategies that reflect both Chinese and multinational "lenses."
- More large companies are verifying their sustainability momentum. PwC's own 2011 survey of 64 large CPG companies ($4 billion or more in annual revenues) found that 57 (89%) are now issuing formal sustainability reports -- up from 51% as of 2010.
- Green product efforts should be prioritized. Companies should apply ROI discipline to identify and prioritize consumer sustainability demands and preferences that drive purchase decisions.
- Food safety efforts should be reassessed and strengthened where necessary. Companies should respond to the Food Safety Modernization Act (FSMA) by assessing their current food safety policies, evaluating their suppliers' safety programs, and establishing a food safety/FSMA steering committee.
- CPGs should gear up to influence tax reform. Fundamental reform of the U.S. tax system is now working its way to "front and center" in Congress and the White House, according to the report. Even if a major reform package does not get voted on this year, CPG companies should start lobbying now to influence the eventual outcome, advise GMA/PcW.