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Added Evidence to Structural Business Changes Impacting Consumer Goods Producers

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Supply Chain Matters provides added rather important data point concerning the ongoing significant business challenges associated with many large consumer packaged goods providers and their associated supply chain teams. Multiple U.S. based food producers continue to serve up grim financial and operating news from their latest quarter. Most all of these ongoing challenges are attributed to the industry’s abilities to adapt to fundamental shifts in consumer tastes, changes in previous market growth assumptions and now, the added significant financial implications related to foreign currency effects.

This week, the largest globally focused food manufacturer by revenues, Nestle SA, reported its slowest annual sales growth since 2009 and 2015 will likely provide added challenges. Nestle’s organic sales growth for all of fiscal 2014 was reported as 4.5 percent, a number that perhaps most other large CPG producers would relish at this point.  But, that number fell below Nestle’s declared growth target of five to six percent organic growth. Real internal sales growth was noted as 2.3 percent while operating profit was up 30 basis points in constant currencies but 10 basis points in net.  In terms of quantification, Overall sales in 2014 were down 0.6 percent and Nestle executives indicated that negative foreign exchange shaved that number by 5.5 percentage points, which is a very significant amount.

From a geographic perspective Nestle’s organic growth was described as broad-based and included 5.4 percent for the Americas, 1.9 percent in Europe and 5.7 percent in Asia, Africa and Oceania.  Business media noted that growth in developed and emerging markets is moderating.  The CPG producer indicated the need to adapt with the fast-changing expectations of the Chinese consumer.  In fact, throughout its earnings release, there is a constant theme of continuous product innovation, re-formulation and re-launching, which all impact the underlying supply chain.

Other noteworthy financial numbers were that Nestle’s cost of goods sold (COGS) fell by 30 basis points driven by product mix and pricing actions along with savings generated by Nestle’s Continuous Excellence program which more than offset increases in raw material costs. Distribution costs were up 10 basis points. The global CPG producer has further established a Nestle Business Excellence initiative at the executive board level in an effort to aggregate line-of-business support services. Thus, the pressure on costs, added efficiencies and productivity continue along with needs for continuous innovation and resiliency to global market changes

Campbell Soup also reported financial results this week, along with added plans for a multi-year zero-based cost focused initiative to slash costs and restructure certain operations. CEO Denise Morrison provided another profound quote: “We are well aware of the mounting distrust of so-called Big Food, the large food companies and legacy brands on which millions of consumers have relied on for so long” and further noting that changing consumer tastes remain a key challenge for the industry. Campbell’s has plans to re-organize its businesses by product category as opposed to geographic regions. According to reporting from The Wall Street Journal, Campbell’s has hired Accenture, the same consultancy that assisted 3G Capital with its efforts to consolidate the operations of HJ Heinz, ant those of Mondelez International, to assist in the Campbell initiative.

Supply Chain Matters reiterates that rapidly shifting industry markets and consumer preferences imply a critical need for increased product innovation and quicker introduction of new products. These capabilities need to be obviously enhanced, in spite of continued pressures to reduce costs. Volatile and rapidly changing global markets require that Sales and Operations Planning (S&OP) teams be more responsive and anticipate such changes.  The focus clearly turns toward an outside-in perspective, allowing the supply chain to quickly sense changes in product or regional demand and respond as quickly as possible to market opportunities or threats. Finally, supply chain segmentation strategies, those that orient supply chain resources to the most influential customers, most profitable market segments or highest customer growth opportunities are now ever more essential.

Bob Ferrari

© 2015, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.


The U.S. West Coast Port Crisis and Increased Supply Chain Risk

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Last week, we were reading a recent report produced by the Chartered Institute for Procurement and Supply (CIPS) in the U.K. indicating that its risk index reversed in Q4-2014 and reached a nine month high. According to this report:

The world opened up for procurement managers in Q4 2014 with an abundance of cheap oil and gas making suppliers in far flung corners of the world instantly more competitive. Combined with low commodity prices in everything from gold in Ghana to soy beans in Brazil, manufacturers at the top of the global supply chain have grown the complexity and length of their supply chains whilst reducing their input costs.”

That was in Q4, before the crisis involving U.S. west coast ports has made its cumulative impacts on industry supply chains.  Gantry_Load_4

Now, there are multiple business and general media reports of the severe toll that is cascading from the continuing backlog of ships destined to U.S. west coast ports that cannot be unloaded and reloaded on a timely basis. The latest news this weekend is that President Obama has dispatched the U.S. Secretary of Labor, Tom Perez, to California in an attempt to broker an agreement.

Today, a Reuters syndicated report featured on Business Insider provides ample evidence of the rippling effects beyond retail focused supply chains.  Honda Motor now indicates that it is slowing production at certain North America auto assembly plants because component parts in the replenishment pipeline are now impacting the production of this OEM’s Civic, CR-V and Accord models. Similarly, Fuji Heavy Industries, producers of Subaru cars indicates that it is already air freighting parts to U.S. factories through at least the end of this month.

An AP syndicated report featured on business network CNBC indicates that in addition to car parts, imported furniture, medical equipment, bathroom tiles, shoes and other goods are all impacted.  On the export side, meat, produce and other agricultural foods are not moving to Asia destined markets and are in danger of spoilage.

No doubt, the cumulative impact across industry supply chains will be in the billions of dollars if the current labor dispute is not resolved quickly.

Further reported is that the port crisis is impacting available capacity and shipping rates for both sea and air freight, making it even more expensive to implement contingency shipping and logistics plans. Air freight capacity originating from China and the Asia-Pacific region was reduced in 2013-14 due to declining demand and increased costs. Thus, the current surge in contingency shipping demand is chasing limited supply, and no doubt, bigger more influential shippers will be garnered preferential services.

As is often the case with these types of multi-industry supply chain crisis, small and medium businesses will bear the bulk of the economic burden.

Within the U.S. itself, a current period of severe winter weather featuring unprecedented snowstorms and extreme cold weather have paralyzed the U.S. northeastern and Midwest regions and its economies, adding more economic burden.

Tomorrow (Tuesday), west coast dockworkers are supposed to return to work.  All industry eyes are affixed on a speedy and final resolution of the current crisis. Amen to that!

Industry supply chain teams do not need to concern themselves with supply chain risk indices for this quarter and beyond. They will be off the charts and indeed, the perception of global supply chain risk will be at an all-time high.

Today, sensing and real-time awareness across the end-to-end global supply chain network as to where inventory resides and the daily condition of global transportation networks and contingency plans is far more important.  The current crisis will continue to worsen before it gets better.

Longer-term, once the current U.S. west coast port labor contract is resolved, shipping industry interests had better get their acts together and figure out solutions to a number of current industry choke-points and structural deficiencies.  Larger mega container ships will not address the needs of shippers for reliable and efficient logistics and transportation.

The notion of the flexibility and/or cost effectiveness of global supply chains has reached a critical crossroad.

Bob Ferrari

 


Crisis Among CPG Producers and Their Associated Supply Chains Continue: Three Important Strategies

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Supply Chain Matters continues in our efforts to update readers on the extraordinary market challenges and headwinds impacting large consumer goods packaged food producers. In August of 2014, we called attention to a profound week of statements and blunt reality impacting this industry and specifically, blunt statements from the CEO’s of prominent packaged foods producers. In our predictions for this year, we again cited this sector for continued industry supply chain turbulence.

Unfortunately, the challenges and the implications have once again become rather visible.

Today’s published edition of The Wall Street Journal again reports (paid subscription or free metered view) that several top U.S. based food producers served up grim financial and operating news this week. Once again, all is attributed to the industry’s abilities to adapt to fundamental shifts in consumer tastes.  However, there is far more at-play.

The wave of bad news has battered the stock of Kellogg and Kraft Foods but the news was not all that optimistic from Campbell Soup, ConAgra Foods and Mondelez International.

Kraft, which recently replaced its CEO, indicated that its CFO and a senior R&D development manager were leaving the company. The new CEO of Kraft indicated that his company was not moving fast enough to shift its business to cater to consumer needs for healthier, less processed foods. It was reported that Kraft lost market share in 40 percent of its food businesses in 2014.

Kellogg reported a 7.7 percent drop in comparable U.S. breakfast related sales while its U.S. snacks segment fell by 3.1 percent. Kellogg has subsequently reduced its long-term revenue growth by two percentage points, which is significant for this sector.

Campbell’s has now indicated that it may have to once again reshape its brand portfolio in favor of more organic choices. ConAgra recently indicated to Wall Street that increased market competition, lower prices and customer service issues with its prior acquisition of private-label food producer Ralcorp has motivated that company to lower expectations for the current year.

Supply Chain Matters has further provided reader attention to business challenges at industry stalwarts Procter & Gamble and General Mills, each of which has had cascading impacts related to each of their supply chains.

As noted in our earlier commentary, foreign currency headwinds and specifically the strong U.S. dollar have become an added challenge for U.S. based companies. One of the most stark aspects of this challenge came from Mondelez which reported this week that foreign currency headwinds delivered a $149 million hit to its operating income in it prior quarter, in spite of recently rising prices across the board.  Operating income dropped 42 percent. The WSJ reported that Mondelez currently garners 80 percent of its revenues in currencies not pegged to the dollar, and has further attributed its challenges to increasing commodity costs. Mondelez’s supply chain production and manufacturing resources are much more globally-focused which raises additional concerns. The global convenience foods producer continues with efforts directed at reducing operating costs by $1.5 billion by 2018, incremental to previous wide-spread cost savings including those directly related to its global supply chain. From our lens, Mondelez may well be another candidate for a subsequent CEO change.

The CEO’s of CPG as well as other industry manufacturers are currently caught in an incredible vice. On the one hand, dramatic changes in consumer tastes and a collection of smaller, emerging industry disruptors leveraging advanced technology and more efficient cost structures are rapidly impacting the industry landscape. Activist investors have surrounded industries such consumer packaged goods extracting demands for more short-term stockholder financial benefits, vis-à-vis aggressive stock buyback, higher dividend or increased merger and acquisition efforts. An earnings crisis brings on more activist or short-term oriented investors looking for market opportunities.

Obviously, the ongoing implication to associated supply chain organizations is immense and often painful. On the one-hand strategies to spur revenue and profitability growth in untapped global markets extracts a toll of shuddering U.S. based production or distribution facilities and staff.  The new strength of the U.S. dollar and other currency movements dilutes revenues from overseas operations causing additional pressures for increased profitability and reduced costs. The cycle can often become disabling.

While every company certainly has its own unique challenges, the takeaway for CPG supply chain teams is three-fold.  Rapidly shifting industry markets and consumer preferences imply a critical need for increased product innovation and quicker introduction of new products. These capabilities need to be obviously enhanced, in spite of continued pressures to reduce costs.

Volatile and rapidly changing global markets requires that Sales and Operations Planning (S&OP) teams be more responsive and anticipate such changes.  The focus clearly turns toward an outside-in perspective, allowing the supply chain to respond as quickly as possible to market opportunities or threats.

Finally, supply chain segmentation strategies, those that orient supply chain resources to the most influential customers, most profitable market segments or highest customer growth opportunities are now ever more essential.

Supply chain leaders should insure they educate senior management to these important priorities including the current new wave of CEO’s.

We provide a final editorial note. Our observation is that on many current occasions within today’s CPG industry landscape, new or changed leadership stems from leaders coming from consumer goods financial or sales and marketing backgrounds.  That stands to reason given that in times of business crisis, corporate boards favor such leadership skills. However, as the adage often goes, crisis can present opportunity for new thinking and fresh perspectives brought by those with other backgrounds. By our lens, that would include those with an operational, supply chain and advanced technology backgrounds who understand customer, business and technology investments, tradeoffs and/or rewards.

Bob Ferrari

© 2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.


Yum Brands Challenges Within China Continue: The Importance of Proactive Supplier Quality Management

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Supply Chain Matters often provides our readers education on the costs of supplier non-performance or the risks of supply chain globalization efforts. Such efforts take on critical importance in food and food services focused supply chains.

In the summer of 2014 well-known global restaurant brands such as McDonald’s, Yum Brands (operators of Kentucky Fried Chicken, Pizza Hut, Taco Bell) and Burger King were named by both media and Chinese food regulatory agencies for offering expired meat products to customers. The expired chicken and beef meat products were traced by restaurant operators to food supplier Shanghai Husi Food Company, which was affiliated with U.S. based OSI Group, a $6 billion producer of food products. OSI itself had garnered what is reported to be a solid reputation as a quality focused food supplier. Unfortunately however, wide-scale publicity across China and continued regulatory scrutiny hampered efforts to restore consumer confidence.

Since that time Yum Brands as well as McDonalds have attempted to recover from potential damage to their brands by China’s consumers in the wake of this incident.

This week, in conjunction with reporting fourth quarters earnings, Yum Brands who derives almost half of its revenues from China operations, reported an 11 percent sales declines for China with sales for established stores down 16 percent. Revenues for the December-ending quarter fell 4.4 percent and the firm reported a loss of $86 million compared with a year earlier profit of $321 million.

By now, readers are also aware that McDonald’s has initiated a CEO change based on continued disappointing revenues and earnings for both China and U.S. outlets. McDonald’s has since encountered and overcome a shortage of French-fried potatoes within its Japan outlets.

Strategic sourcing and procurement teams are often well aware of the critical importance of proactive supplier quality management. Continued incidents such as those that occurred in China bring that awareness to the executive suite and boardroom.

Bob Ferrari

 


Evidence of a New Business and Supply Chain Headwind: A Stronger U.S. Dollar

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During this period of earnings announcements for the December-ending quarter, a new and significant headwind, the effects of the U.S. dollar, has appeared for industry supply chains with operations anchored in the United States.  That was significantly delivered to Wall Street by yesterday’s earnings announcement from Procter and Gamble, which currently has nearly two-thirds of its revenues coming from outside of the U.S. Procter and Gamble was not alone, even the likes of Apple encountered the same headwinds.

P&G reported a 31 percent drop in profit as the stronger U.S. dollar diluted the effects of a modest 2 percent organic sales growth. Net income dropped nearly a billion dollars from the year earlier quarter. According to business media reporting, foreign exchange pressures reduced net sales by 5 percentage points. Once more, P&G indicated that these currency effects will continue to be a drag within 2015, potentially cutting net earnings by 12 percent or in excess of another billion dollars.

The implications are obvious including a continued selloff of underperforming brands and businesses.  One published financial commentary report by The Wall Street Journal implied the continuance of “ruthless cost cutting” and a continued slim-down of brands. P&G has further undertaken ongoing efforts to source more production among emerging global regions, and those efforts are likely to accelerate in momentum.

The strong headwinds of currency were not just restricted to consumer product goods. Today’s WSJ reports that it is now evident that:

“The currency effects are hitting a wide swath of corporate America- from consumer products giant Procter and Gamble Co. to technology stalwart Microsoft Corp.  to pharmaceutical company Pfizer Inc.. Those companies and others have expanded aggressively overseas in search of growth and now are finding that those sales are shrinking in value or not keeping-up with dollar-based costs.”

Further cited was a quote from the CEO of Caterpillar indicating: “The rising dollar will not be good for U.S. manufacturing or the U.S. economy.” The obvious fears for investors and economists alike is that the U.S. dollar’s explosive gains will backfire for U.S. based companies by reducing the price attractiveness of goods offered in foreign countries as well as reducing the value of foreign-based revenues.

The implications to U.S. centered industry supply chains are the needs for yet further shifting of strategies and resources. The existing momentum for U.S. manufacturing may well moderate with these latest developments. Initiatives directed at supporting increased top-line revenue growth now have the added challenges for more flexible, global-wide sourcing of production and distribution needs. Operations, procurement and product management teams that believed that they could get a breather from draconian and distracting cost-cutting directives will once again face the realities of having to cut deeply into domestic focused capabilities and resources.

We often cite the accelerated clock speed of business as a crucial indicator for agility and resiliency for industry supply chain strategy. Here is yet another example where perceptions of a  booming U.S. economy quickly change to the overall business and supply chain implications of the subsequent currency effects.

Bob Ferrari


Breaking: Cereal Producer Post Holdings to Acquire MOM Brands

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The merger and acquisition churn involving consumer product goods producers continues, and with that CPG supply chains must continue to adapt to such changes. Today’s announcement from Post Holdings is yet another example of the constantly changing challenges for CPG focused supply chains having to adapt to both rapidly changing end-market as well as internal industry forces.

Today, Post Holdings, a self-termed a consumer packaged goods holding company operating in the center-of-the-store, active nutrition, refrigerated and private label food categories, announced that it had agreed to acquire privately-held MOM Brands Company for a reported $1.15 billion. This deal brings together both the No. 3 and No. 4 players in cereal based on dollar sales value. Together, they are expected to have an 18 percent share of the U.S. cold cereal market measured by revenue. Post currently has an 11 percent share.

Under the terms of this announcement, St. Louis Missouri based Post will pay MOM $1.05 billion in cash and issue MOM stockholders 2.45 million shares of Post stock. The deal is expected to close by the third quarter.

According to the announcement, MOM Brands is noted as a leader in the ready-to-eat (“RTE”) cereal value segment, with over 95 years of experience in providing high quality RTE and hot cereal products, strategically targeting the value segment in branded RTE cereal, private label, and hot wheat and oatmeal. Various business reports indicate this deal will provide Post a presence in the growing bagged cereal and hot cereal businesses, two of MOM Brands’ strongholds. MOM Brands now joins Post’s other brands of Honey Bunches of Oats®, Grape-Nuts Cereal®, PowerBar® Raisin Bran Cereal®, and a larger variety of other brands.

The acquisition announcement was timed with Post’s better-than-expected financial outlook issued for its December-ending quarter.

Supply Chain Matters has highlighted today’s announcement since the history of Post Holdings provides a pertinent example on the continuous changing state of CPG focused supply chains.

The Company’s web site provides an historic capsule upon which we have extracted important milestones:

“Post is over 115-year old with (to borrow a phrase) “a new birth of freedom1.” Post traces its heritage to C. W. Post who introduced Grape-Nuts®, the first natural ready-to-eat cereal marketed to enhance health and vitality, in 1897. Our history serves as a reflection of strategy, marketing, finance and governance during much of the 20th century. C. W. Post invented a cereal and a drink at a time when brands were beginning to resonate with the American consumer. His son-in-law, E. F. Hutton, saw the value of bringing together several brands under one corporate owner and General Foods Corporation was born.”

“General Foods was acquired by Philip Morris in 1985. Subsequently, Philip Morris purchased Kraft and merged it with General Foods…..Kraft sold Post to private-label manufacturer Ralcorp. Post was spun off into a separate, independent company on February 3, 2012.”

Ralcorp itself was acquired by ConAgra Foods in January 2013.

Since its spinoff as an independent company, Post has been an active acquirer of small and larger producers. Acquisitions have included peanut butter producers American Blanching Co. and Golden Bay Foods, eggs and diary producer Michael Foods, snack foods producers PowerBar and Musashi Brands. The Michael Foods acquisition was reported to have exceeded $2.4 billion.

A published report from the Minneapolis Star Tribune reports that the 95-year-old MOM Brands has grown steadily over the past 15 years, particularly capturing share in the low-price or “value” segment of the cold cereal business. That report indicates that MOM will continue to operate as a separate business under Post.

As is often the case in CPG deals, the Post acquisition comes with the usual expectations of added cost synergies, specifically $50 million in run-rate savings by the third year, including sharing of administrative services, infrastructure, sales and marketing. The Star report points out that MOM Brands employs 251 at its Lakeville corporate office and that some jobs there might be in jeopardy, as they often are in post-buyout cost cuts. We would not be all surprised if cost synergies are further applied to supply chain related input costs, functions and services. Such acquisitions often burden the acquirer with added debt or stock dividend expectations which, in-turn, fuel the need for additional cost savings.

While Post continues with its acquisitions spree, the top two producers in this cereal category, namely General Mills and Kellogg have each declared multi-year cost cutting or capacity consolidation initiatives. Supply Chain Matters has provided a focused commentaries on General Mills, the latest being September of last year. In early January, this producer announced the closure of two of its Pillsbury dough factories, adding to the elimination of another 500 jobs over the more than 1000 job cuts announced last year. In 2013, Kellogg announced a billion dollar Project K cost-savings plan that would extend over four years shedding an estimated 2000 supply chain jobs.

CPG supply chains do indeed have their own unique set of challenges. Producers riding the wave of consumer changing tastes and demands for healthier products must continue to innovate or grow or be consumed themselves by producers needing to fuel market growth expectations.

Bob Ferrari

© 2015, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.

 


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