Same Old Story

Life isn’t easy for consumer packaged goods manufacturers.

Though their stocks are on the rebound, and though everyone has to eat (and drink, and bathe), there remains one fundamental issue steering their course.

Food and household goods consumption goes up as the population goes up. According to the 2000 U.S. Census, the U.S. population grew 13.2 percent to 281.4 million in the previous decade. That equates to a compound annual growth rate of 1.24 percent. So assuming “status quo,” a company could expect to grow 1.24 percent annually, since they have 1.24 percent more users each year.

However, companies are aiming for returns for greater than 1.24 percent a year.

The Dow Jones Industrial Average grew from 2,633.66 in 1990 to 10,786.85 at the end of 2000. That’s a change of 310 percent, or 15.1 percent compound annual growth rate. Much of the growth came through the creation of new technologies and new technology companies. For companies like AOL, returns on investment were stratospheric.

Since big-old packaged goods companies are known quantities, they did not benefit from the “new, new thing” mentality ascribed to dot-coms. Established companies were, and are, judged on revenue (top-line sales growth) and profit (bottom-line growth), not potential.

To look attractive to Wall Street, a company typically must deliver 10 percent or greater bottom-line growth. The more top-line revenue growth the better, because if a company delivers a 10-percent return from cost-cutting alone, can it cut costs as much the following year to provide the same growth? Not easily.

By the Numbers

So, when the population is growing only one percent per year, and you need to deliver a 10-percent return, what do you do?

1. Innovate. Create something new that meets underlying needs and desires. This is what all CPGs should do, but few accomplish. Innovations boost long-term sales and are the growth engine most preferred by Wall Street and the companies themselves.

2. Get people to consume more. We have done much of this: The average American’s weight has increased so much that insurance tables have been modified to protect the nourished. But there is only so much of anything one person can consume.

3. Persuade people to use your product instead of someone else’s. This is called “going for share.” The problem is that everybody is trying to get more share. And the differences between brands and brand perceptions are narrowing. So fights escalate and money is spent reducing prices — and manufacturer profitability decreases while trade spending goes through the roof.

4. Reduce costs. This is the strategy that caused many of the layoffs we’ve seen in the past, and are seeing now. If nine plants are working 16 hours a day to produce a product, you’ll save a lot of money if you close one and have eight produce round the clock. Pooling your clout to get a vendor to lower its price by promising them all of your business — this is called a “strategic sourcing initiative” — is effective. There are many creative ways to reduce costs.

5. Buy other companies. If you can’t build enough with existing brands, buy more brands. Another benefit: You can put one-time expenses into a bucket and call them a result of the purchase. Poor results weren’t your fault, they were left over from prior management.

This issue, and these solutions, aren’t new. Growth targets have been higher than population growth for more than a decade. For many people in the CPG industry (at least those who still have jobs), today’s struggles are no different than yesterday’s. It is still about selling more products, producing them more cheaply, and making more money.

In many ways, things are easier for packaged goods companies now. After years of fantasizing about the dot-com bandwagon, we’re now happy to be selling products that will never go out of style. Everybody still consumes.

So no matter how difficult you think your life might be, if you’re on a good brand, and you have a good boss, and your company continues to send you a paycheck instead of consulting lawyers about the rules of Chapter 11, life at big-old packaged goods companies isn’t so bad.

Sara Owens is president of Promo Pros, Inc., St. Louis. Reach her at [email protected].