Net sales growth rates for consumer packaged goods (CPG) companies slowed last year amid challenges including tepid economic recovery in the U.S. and elsewhere, commodities cost inflation, and U.S. consumers spending more of their food dollars on eating meals out, according to the 2013 Financial Performance Report on the CPG sector from the Grocery Manufacturers Association (GMA) and PwC U.S.
Both CPG companies and retailers are dealing with "new rules of consumer engagement" as they push to leverage digital marketing and consumer data and technology opportunities, points out the report -- which in addition to financial analyses, offers in-depth looks at trends in identifying consumers and their needs, connecting and engaging with consumers, and advancing "direct-to-consumer" innovation.
On average, food, beverage and household product companies saw net sales growth of 7%, 5.5% and 3.2%, respectively, in 2012 -- compared to 2011 median net sales growth rates of 9.5%, 10.5% and 7.5%, respectively.
While net sales had been slowly increasing since the recession, both top- and bottom-performing CPG companies experienced a slowdown in net sales growth last year.
Median EBIT (earnings before interest and taxes) growth rates for household product and beverage companies were 11% and 6.8%, respectively, but -3.4% for food companies. Household products' EBIT performance was a marked turnaround from 2011's -5.6%. 2012 was the third year of EBIT decline for food companies, although their average gross margin rose from 25.7% in 2011 to 26.9% last year. (Median gross margins at beverage and household products companies were identical in 2012: 46.8%.)
One-year median shareholder returns for beverage companies, at 17.4%, outperformed food and household products returns, at 15.2% and 13.7%, respectively. Overall, CPG companies' one-year median total shareholder return increased from 8.7% in 2011 to 15.2% in 2012.
Overall, the financials show that despite the challenging economy, the food, beverage and household product industry "continues to show great resiliency,” said Pamela G. Bailey, president and CEO of GMA.
The report's financial analyses are based on public information from 144 large, medium and small companies in the food (74), beverage (35 ) and household products (35) sectors, as well as 69 retailers.
Economic and Other Challenges
“Both the U.S. and global economies are marginally stronger than they were [in 2011], and the continued slow recovery has led to correspondingly modest growth for the CPG industry,” summed up Lisa Feigen Dugal, PwC’s North American advisory leader, retail and consumer industry.
In the U.S., while household spending and per-capita income grew in 2012, after adjusting for inflation, neither metric has returned to pre-recession levels, the report points out. Average real consumption per person in the U.S. was $30,563 in 2012, versus $30,703 in 2007. Disposable income was $32,788, versus $33,228 in 2008.
Furthermore, consumer spending growth seems to be concentrated among the affluent and to some degree the lower-income end, with little growth in the middle.
For food and beverage manufacturers, significant increases in commodities costs in 2012, driven by last year's drought affecting 60% of U.S. farms, exacerbated the last several years' challenges in balancing margins versus pricing/volume-growth strategies, as once-fairly stable input costs have become volatile.
"There is a limit to how much of these raw material increases the consumer is willing to bear, and as a result, the industry has seen a large and growing gap between the prices they must pay for raw materials and the prices they can charge for finished goods," sums up the report.
In addition, consumers shifted a larger share of food dollars from groceries to restaurants last year, continuing a trend seen for several years.
Fully $530 billion of 2012's total $1.1 trillion in overall retail sales were generated in food service/drinking establishments --not too far below the $568 billion spent in grocery stores. That put restaurants' share of retail sales at 48.2% (including a one-percentage-point jump between 2011 and 2012 alone), up from 44.1% in 2002.
Despite the challenges, given that current projections call for modest economic growth in 2013, and that the U.S. is economy is still performing better than the economies of other developed countries, CPG companies are by and large cautiously optimistic about the U.S. market -- although they are also seeking to further streamline operational efficiencies to moderate price increases to the consumer. (The report also details CPGs' performance trends in global markets.)
Increased Focus on Direct-to-Consumer Innovation
Not surprisingly, CPG companies are focused on harnessing ever-more-plentiful (i.e., "big") consumer data and social and other digital media to enhance product development and marketing strategies and build consumer loyalty in the face of increasingly fragmented consumer segments whose behaviors and preferences are changing with unprecedented speed, thanks to digital and mobile.
Research and development -- to enhance new-product development with particular focus on "breakthrough" innovations, as well as to better understand changing consumer and market needs -- is one key way that CPGs are responding to shifting economic and consumer behavior trends.
Large, top-performing companies have shown significantly larger increases in investment levels in R&D versus SG&A (selling, general and administrative) over the past three years, compared to bottom-performing companies. In addition, bottom performers are "starting to hold onto their cash, which means they could be ready to start making more investments" in R&D and marketing to launch new products, notes the report.
More notable in terms of trends emphasized in the report -- particularly from the retailer's perspective -- is CPGs' growing push to pursue direct-to-consumer innovation not only in terms of direct contact with consumers through digital channels, but through direct sales to the consumer.
“CPG companies that engage with consumers directly through digital channels and build out their direct-to-consumer processes will have the best advantage for creating new growth,” said Steven Barr, PwC’s US leader, retail and consumer industry. “52% of U.S. consumers are already buying directly online from brands they trust, proving that CPG companies now have far greater opportunities to walk alongside their shoppers in real time while driving sales of existing and new products.”
In fact, in 2013, more than 40% of CPG companies expect to sell products directly to consumers -- up from 24% in 2012.
"Direct-to-consumer is a potent vehicle for testing new products and reaching out to new consumers faster and more effectively than ever before, making the retail store aisle no longer the last mile in the purchase journey," declares the report.
What Do Consumers Want?
When it comes to navigating rapidly shifting consumer preferences, one key insight within the report's articles is that people are "less willing to pay on impulse and more willing to hunt for 'value' as they define it."
"How you reach the consumer, and how you interact with the consumer, is completely different" today, notes Colgate-Palmolive CFO Dennis Hickey. "The consumer today is more discerning, they are seeking greater value; however, value does not always mean lowest price. Consumers are willing to pay more for those products that meet their specific needs or desires."
Consumers are making purchase decisions based on far more information than they had in the past, and they are "increasingly distinguishing between what they need and what they want, and placing a specific price/value relationship on each category," the report points out.