CPG Industry Seize Innovation, New Growth Opportunities: Report

Consumer packaged goods (CPG) companies will need to adopt different tactics than those employed during the recent recession — divesting non-core brands, conserving cash, and cutting costs — to preserve shareholder value as the economy rebounds. To grow revenues in this new climate, companies will need to focus on innovation to encourage household spending, particularly for products in mature segments and to offset lower spending by baby boomers nearing retirement, according to “Forging Ahead in the New Economy,” the Grocery Manufacturers Association (GMA) and PricewaterhouseCoopers, LLP (PwC) 2010 Financial Performance Report released yesterday.

The study found that many CPG companies are looking to innovate by reaching consumers in more places or customizing products to local customer tastes in emerging markets. Further, understanding customer priorities is key to innovation as U.S. consumers are buying more carefully, purchasing different pack sizes, availing themselves of volume discounts, and trading down to non-premium brands.

The latest installment of the annual industry report issued by GMA and PwC, now in its 14th year, “Forging Ahead in the New Economy” is culled from interviews with senior leadership of GMA members, including members of the GMA CFO Committee; publicly reported company financial data; government statistics; analyst reports; and other published material relating to 152 CPG companies.

“The CPG industry has a legacy of strong financial performance and resilience in the face of challenging economic times, and 2009 was no exception,” noted Pamela G. Bailey, president and CEO of Washington-based GMA. “However, restrained consumer spending and continued fears about the future of the U.S. economy mean that companies will have to harness the innovation for which they are known as they look to grow sales.”

The report additionally found that gaining a foothold in such emerging markets as China, Russia, Brazil, India, and Southeast Asia has become imperative for CPG manufacturers as capital flows faster than ever and new competitors spring up swiftly. The middle classes are growing and forming attachments to new brands and products just as rapidly. As a result of this, product growth cycles in emerging markets have quickened, with the success or failure of a product launch or brand introduction apparent in just 12 or 18 months.

Among the other important findings from “Forging Ahead” in the New Economy are:

—CPG company median shareholder returns stood out as strong compared with the rest of the market
—With shareholder returns up 49 percent in 2009 and median EBIT (earnings from continuing operations before interest and taxes) growth up a whopping 33 percent, the beverage sector saw the best quantitative performance among the three major CPG sectors of beverage, food, and household products
—Median net sales growth fell in all three sectors, and beverage’s 1.6 percent decline was the first time in five years that the sector declined
—The food sector as a whole reduced spending, with a nearly two percentage-point drop in median selling, general, and administrative (SG&A) costs as a percentage of sales
—The food sector’s median five-year shareholder return metric of 6 percent led thesectors, with beverage logging 5.3 percent, and household products 2.7 percent
—While household product companies’ median net sales decreased for the first time in five years, they offset this decline with the highest one-year median return on invested capital of any of the sectors, the highest median sales per employee and the highest median gross margins
—The CPG sector lagged the S&P 500 by five index points and the Dow by one index point last year

“These food, beverage, and household product companies are part of a true counter-cyclical industry, as it performs better than other industries during recessions, but tends to balance the scales with slower growth during expansions, as was the case in 2009,” remarked Susan McPartlin, U.S. consumer packaged goods industry leader at New York-based PwC. “This may reflect the fact that CPG companies have been adapting to market conditions and sacrificing a bit of short-term growth to get their houses in order through increasing sales per employee, paying down debt, trimming workforces, and paring brand and product portfolios. We expect CPG companies to emerge much stronger as we move through 2010.”

“CPG companies are operating in a new environment, characterized by more cautious, value-driven consumers and volatile commodities,” added Lisa Feigen Dugal, North American consumer packaged goods & retail advisory leader at PwC. “It will be tough to succeed using the same tactics employed during the recession. Novel approaches will be crucial — and that includes creating new trade promotions programs for retailers, rethinking how they spend their media dollars, targeting coveted demographic groups like Generation Y with smart social networking campaigns, reaching customers in more places, and tailoring their products for local customer tastes in emerging markets.”

“Forging Ahead in the New Economy” will be presented via webcast by PwC and GMA on tomorrow 1:30 p.m. EDT. For registration information, visit www.meetpwc.com/GMA_PwC_webcast. For an electronic copy of the complete report, visit www.pwc.com/us/retailandconsumer or www.gmaonline.org/publications.