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.
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.
© 2015, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
In our Supply Chain Matters commentaries focused on the challenges that are currently impacting consumer goods industry supply chains, we have called attention to the damaging effects that certain investor activism efforts have inflicted through mandates to either dramatically reduce costs, shed underperforming brands or consolidate CPG companies.
To clarify, an objective investor voice demanding excellence is and should be expected. Insuring shareholder return is always an important business outcome objective for supply chain initiatives and transformational activities. However, when that voice comes in the context of demands for short-term results regardless of consequences that is far different challenge. Years of transformational efforts can literally be destroyed by the effects of wholesale cost cutting mandates.
In our Twitter stream, we came across a re-tweet link from Huffington Post blogger David Weaver, referencing United Kingdom’s Daily Mail.com posting: The supply chain bullies: The giant household names that stand accused of hurting small suppliers. The commentary describes how consumer goods giant Heinz has doubled the time it takes to settle and pay supplier invoices imposing upwards of a 97 day wait for payment. Similarly, AB InBev is reported to have routinely taken up to four months to pay its suppliers. These payment terms are written into supplier contracts and according to the commentary, most suppliers have little influence for pushing-back. It is a literal pay to stay practice. The commentary cites one source as indicating that a staggering £46 billion was overdue to suppliers in 2014.
While larger sized suppliers may have the financial means to borrow additional funds or adsorb such impacts, it is far more challenging for smaller suppliers who obviously lack such leverage. Once more, because of such practices, the EU community issued a prompt payment directive in 2011 requiring supplier payments within 60 days. As the commentary’s title implies: “It is a total abuse by certain large companies of their supply chain.”
We commend the messages of the Daily Mail commentary and would add that it further serves as a de-valuing of supplier relationships and needs for co-innovation. During the severe global recession that began in 2008-2009, there were continual reports of large companies tending toward such practices to preserve cash, causing some suppliers to financially succumb. It is literally throwing your problem “over the wall” to make your supplier your banker. Today, while the Eurozone sector continues to struggle to bounce back to growth from the same great global recession, news of such continuing practices is disheartening.
Disappointingly, it continues to be a practice that spans other industry supply chains, ones that have far higher margins.
As a community of supply chain analysts, we often echo the superior rankings of certain supply chains because of their extraordinary financial ratios or the productive benefits of advanced technology applied to procurement and other supply chain focused business processes. However, neither superior financial metrics nor advanced technology application be predicated on passing the burden of cost down the subsequent tiers of the supply chain in order to secure even more short-term financial benefits. After all, that’s the far more-easier approach. Ignoring any longer-term implications, collect your performance bonus and moving on to the next short-term challenge or promotional opportunity seems to be a continuing norm, and that remains tragic.
We want to hear from our readers. What’s your view on why such practices continue? Is it out of the control of supply chain senior leadership or a manifestation of today’s leadership?
In conjunction with last week’s Annual National Retail Federation (NRF) Conference held in New York, retail sales figures were released for the previous November-December 2014 holiday sales period. With the price of gasoline plummeting in the last two months of 2014, there were a lot of pent-up expectations that holiday retail sales would exceed the NRF’s original forecast of a 4.1 percent increase in 2014. The actual NRF figures came in at $616.1 billion, a 4 percent increase which shook Wall Street investor confidence for about a day before economists and forecasters eased speculation that consumers held back spending more than expected. According to NRF, the November-December sales data marked the first time since 2011 that sales has reached this level.
A separate ShopperTrak report, which tracks primarily brick and mortar sales at malls and retail outlets reported growth of holiday sales at 4.6 percent, higher than that firm’s initial forecast of a 3.8 percent increase and representing the largest increase since 2005.
From a supply chain lens, 4 percent retail sales growth was very good, given the challenges of retail inventory either arriving earlier or far later than expected because of the backlogged slowdown conditions among U.S. west coast ports. Online and brick and mortar focused retailers were influenced to run product promotions earlier rather than later, with some retailers kicking off holiday promotions in October. Other reports indicate that retailers were conservative on their overall holiday inventory investments, not wanting to end-up with overly excessive unsold inventory by the end of December. Considering another short holiday shopping interval between the Thanksgiving and Christmas holidays, coupled with all the logistical challenges that occurred, B2C supply chain teams deserve a pat on the back.
Of course, the real benchmark comes in the coming weeks when retailers begin to formally report their financial performance spanning the critical holiday period. The question is whether logistical challenges led to higher unexpected costs and lower margins.
Obviously, the most sensitive metric affecting global supply chain planning and budgeting activity is the cost of energy. The economics related to the cost of energy drive global product sourcing, transportation and forecasts of retail sales spending on consumer goods. What about all of the fuel surcharges currently tacked on existing transportation rates?
The most significant question for supply chain leaders, planners and sales and operations planning forums in 2015 is how long will the extraordinary lower cost of oil last? Will it be the rest of 2015? How will it impact product demand and product margins?
Beyond retail and online B2C supply chain product demand planning, assumptions on the cost of energy are going to be fundamental aspects of this year’s business plans.
Adhering to One’s Declared Standards for Quality: Chipotle Mexican Grill Suspends Regional Pork Supplier
In today’s restaurant and fast food industry, consumer impressions about one’s brand are more and more governed by the quality and standards of the food supply chain. Chipotle Mexican Grill has incurred explosive market growth because of its branding emphasis on “food with integrity” translating to higher quality, ethically based food ingredients served at its various restaurants.
Thus, business and general media were quick to feature the headline that on Friday, Chipotle suspended the use of pork sourced from an unnamed regionally based pork supplier. According to Chipotle, a routine audit discovered that the supplier violated declared humane-based standards for the housing of pigs with access to the outdoors. The restaurant chain, which was decisive in its decision to stop supply, indicated that this was the first time it had suspended supplies because of a violation of standards. A spokesperson indicated to media outlets: “This is fundamentally an animal welfare decision, and is rooted in our unwillingness to compromise our standards where animal welfare is concerned.”
The result is that an estimated one-third of its current 1700 restaurants now feature signs indicating that the Carnitas menu item is temporarily suspended due to a shortage of supply. This evening, this author visited a suburban Boston area outlet and witnessed such a sign, along with a very long line of queued patrons.
One has to admire a company that is willing to adhere to its supply standards in spite of the consequences, especially in the light of the realities of mass food production and of Wall Street’s short-term focus on profits. A published report from Reuters indicates that move could possibly hurt the chain’s first-quarter results. The report indicates that the move underscores the clash among the U.S. agriculture industry, commodity brokers and food companies as consumers continue to become increasingly concerned about the sources and practices of food supply. One equity analyst has already cut first quarter earnings expectations for the chain. Readers may recall that global restaurant chain McDonalds recently terminated the Chinese subsidiary of a long established beef supplier after discovering the altering of food expiration date labeling.
For its part, Chipotle is now hard at work seeking added supply from other existing suppliers. One AP syndicated report indicates that Niman Ranch, Chipotle’s oldest and largest pork supplier insists that it is not the supplier in question. Instead, it is working to get additional supply to fill-in for the current shortages.
We often are reminded on today’s realities that consumers and customer have more power and influence in buying decisions. This development concerning Chipotle Mexican Grill is certainly a testament to the meaning of such power.
In our recently published Supply Chain Matters 2015 Predictions for Industry and Global Supply Chains, Prediction Five identified specific industry supply chain challenges. One of the industries we cited was consumer products industry (CPG) where a shifting market and multiple years of stagnated growth have precipitated added emphasis on increased efficiencies and further cost reductions across specific brand owner supply chains.
Last week provided yet more evidence of this trend with the sudden unexpected announcement of the retirement of Kraft Foods CEO Tony Vernon. The current chairman, John Cahill will take over the CEO role with a mandate to speed-up business change.
According to a published report from the Chicago Tribune (paid subscription or free interval viewing): “Kraft has struggled with a portfolio that focuses on the United States and a string of price increases that rivals didn’t match.” The Tribune speculates that with this senior leadership change, Kraft could embark on bigger changes including a restructuring or a breakup of the company. Other business media reports indicate the possibility of increased deal activity involving the selling-off of under-performing brands. Cahill, who will assume both roles at the end of this month joined Kraft almost three years ago as the Executive Chairman, North American Grocery, and became Executive Chairman when Kraft was spilt from the now Mondelez International. Former roles included three year tenure at a private equity firm, and nine year executive stints at PepsiCo. and Pepsi Bottling Group.
From our lens, the criticism that Kraft was hampered by a product portfolio too anchored in the U.S. is a bit of a misnomer since the Kraft split resulted in the most attractive global growth brands moving over to Mondelez. For that matter, the declared strategic intent of the split was to create two smaller consumer products companies focused on different growth objectives, one being international snacks and convenience foods and the other, North American cheese and food brands. In a September 2013 Supply Chain Matters commentary related to Kraft’s supply chain profile at that time, we outlined the significant business process and systems challenges that the Kraft supply chain team had to inherent after the 2011 split. We were tremendously impressed with the leadership of Bob Gorski, Kraft’s Executive Vice President for Integrated Supply Chain. Our readers should consider re-reading this commentary since it paints a picture of the starting point to some corporate splits within the industry.
Supply Chain Matters has noted in previous CPG industry focused commentaries that Mondelez itself has struggled with its growth objectives since the split. In late July, that company announced a CEO level restructuring eliminating the role of chief marketing officer and subsequently more aggressive re-structuring and cost efficiency efforts. That restructuring came after considerable amounts of cost savings was extracted from supply chain operations in order to fund more aggressive marketing efforts.
No doubt our community can expect further developments concerning Kraft, perhaps even Mondelez in the year ahead. These are continued examples of the unique challenges being undertaken by large CPG companies and their respective supply chain organizations in the year to come.