Supply Chain Matters would venture a guess that many of our readers are under the impression that privately held Mars, Inc, the producer of delicious M&M chocolates and Snickers candy bars was primarily a candy and snacks provider.
Mars Pet Care Division which includes brands such as Pedigree and Whiskas is, according to the Wall Street Journal, this company’s largest and fastest-growing division.
Thus, yesterday’s announcement that Procter & Gamble is selling the bulk of its pet food business, with brands such as Eukanuba, Iams and Natura, to Mars is a rather significant development. The value of the deal is estimated to be $2.9 billion, but it does not include distribution of brands in the European Union. The transaction is expected to close in the second half of 2014.
Reuters and other business media reports have indicated that P&G’s current multi-year restructuring program called for the exit of low-growth brands such as the P&G pet food portfolio. P&G CEO A.G. Lafley is quoted that the exit from pet food was “an important step” toward focusing on core businesses.
For Mars, this may well be the opportunity to leverage the company’s supply chain and channel distribution capabilities in the pet food market segment. Both the WSJ and Reuters cite data from Euromonitor, indicating that Mars currently has a 23.4 percent market share in the pet food segment, just slightly higher than Nestle. With the completion of this deal, Mars will have access to specialty pet food retailers as well as club stores and mass retailers. which features the Friskies and Purina pet food brands with a 23.1 market share?
With the addition of P&G’s pet food brands, it will be interesting to observe how both Mars and Nestle supply chain ecosystems respond to a new heightened competition and a changing industry dynamic.
In our recent Supply Chain Matters update on Q1 commodity price trending, we noted that the severe winter conditions that have occurred across the U.S. and Canada, coupled with operational disruptions in the placement and logistics of tank and bulk commodity railcars have led to reported disruptions in supply contracts of inbound bulk commodities. Commodity producers have had to shift to more expensive trucking options to accommodate food production line scheduling.
The government of Canada is now taking more extreme action against its national rail carriers with proposed legislation that would allow bulk commodity producers to switch between Canadian National Railway (CN) and Canadian Pacific Railway (CP) for flexibilities in getting commodity products to designated supply chain customers.
According to reports, Canada’s current conservative government is getting much more concerned about shipment bottlenecks, especially when it concerns commodity shipments to existing and newer export markets, including the United States. According to a report published by the Wall Street Journal, 150 grain elevators would have access to both rail lines under the proposed legislation. Currently only 14 grain elevators have such access. For its part, the CEO of CN is quoted as indicated that this legislation will have little impact when considering the extreme winter weather conditions seen this year across North America.
No doubt, the debates concerning government vs. private industry solutions to logistics bottlenecks will continue. In the end, it’s always a demand and supply imbalance problem that needs a solution.
Last week, Home Depot named Craig Menear to be its new president of U.S. retail operations, assuming leadership of this retailer’s over 2200 retail outlets.
The Wall Street Journal characterized this appointment as a “transfer of power” and marked the end of the previous rebuilding era for Home Depot, including investment in a more streamlined and responsive supply chain capability which Supply Chain Matters has praised.
This appointment is part of the home improvement retailer’s succession planning, paving the way for the eventual retirement of current CEO Frank Blake whose leadership has done wonders for the retailer’s current stock performance. The WSJ, cites in-part, Blake’s achievements as the following: “He ushered in a huge overhaul of the company’s supply chain and technology systems, spending billions of dollars to make its operations more efficient and move more workers out of the back rooms and onto its sales floor.”
Menear previous role was head of merchandising, responsible not only for the assortment and pricing of all Home Depot products but also its suppliers, supply chain and online operations. In essence, if this succession plan comes to pass, we will have another CEO with operations, supply chain and procurement leadership as a part of their resume.
What makes this development more interesting to our community is that Blake’s leadership efforts included the hiring of a new cadre of supply chain management leaders. That included the hiring of Mark Holifield, a highly experienced retail and consumer products supply chain leader. The new appointment of Menear as president of retail operations includes the elevation of Holifield to the role of executive vice president supply chain and product development, reporting to Menear. Another executive brought in to transform U.S. distribution was Charles Armstrong, vice-president of distribution, who has outlined the transformation of Home Depot’s distribution networks at prior CSCMP annual conferences.
It has long been the contention of Supply Chain Matters that companies with critical value-chain dependencies are increasingly seeking senior management teams with solid grounding and understanding in principles of operations and supply chain management. These firms often desire that the supply chain continues to serve as a competitive differentiator for business outcomes. There are many industry examples. We can reflect on the CEO’s of firms such as Apple, General Motors, McCormack Foods, and global apparel retailer Zara, part of Spain’s Inditex Group. Each came to their role with solid supply chain wide leadership experience and grounding. There are others as well.
The takeaway for those future leaders aspiring for a path to the top leadership role within an industry with critical value-chain dependencies is that focusing your career in cross-functional supply chain leadership can indeed be favored over backgrounds in solely financial management or sales, marketing or merchandising. Responsive product lifecycle management is an added experience differentiator, especially when coupled to integration to value-chain needs.
These trends continue to reinforce how important responsive and resilient supply chain business processes, supported by differentiated enabling information technology capabilities, are becoming paths to the top. While some in supply chain leadership may feel, at-time, unappreciated, your experience and insights really do matter.
In B2C supply chain environments, the term “Amazon Effect” has particular meaning, mostly all of which revolves around how to best compete against this online juggernaut. Sometimes, tactics can get a bit nasty, with strong gestures sent, even if it involves one of the most prominent collections of global brands. The field of competition has become much more acute.
Readers can recall that back in October, news leaked out that Amazon is partnering with global consumer product goods producer Procter & Gamble in an ambitious pilot program termed Vendor Flex that involved Amazon co-locating its online pick and pack customer fulfillment of bulk consumer goods such as diapers or household staples directly within a P&G distribution center. Goods literally move across the aisle from P&G to Amazon fulfillment.
Today’s edition of the Wall Street Journal provides additional information (paid subscription or free metered view) concerning the immediate response from one particular retailer, Target Stores, who happens to be a preferred customer partner to P&G. The WSJ quotes sources familiar with the situation as indicating: “Several months ago, the discount chain started to give some P&G products less-prominent placement in stores, including less space on “end-caps”- the coveted shelves where featured items are highly visible to shoppers and tend to sell quickly ….” Target additionally removed some P&G brands from their “category captain” status, and encouraged P&G competitors to work together on offering promotions on combined purchases.
The WSJ was quick to point out that its sources indicated the dispute among P&G and Target has since de-escalated with P&G products returning to their end-cap status and preferred status.
From our view, the recent credit card security breach that impacted Target removed Target’s clout, and perhaps the tables are turned.
None the less, this report gives us evidence that CPG companies who collaborate closely with Amazon can sometimes bear the chagrin from other influential brick-and-mortar retailers and that ugly tactics exist when it comes to competing with Amazon.
Would your company dare to take on a key partner who collaborates closely with Amazon?
In our Supply Chain Matters 2014 Predictions Research Report (full research report available for complimentary downloading in our Research Center) we specifically addressed consumer product goods supply chains where combinations of external forces are providing unique challenges. These forces include, among others, contraction of global growth rates and margins from previously expanding emerging markets, a certain group of activist investors demanding more cash value, and now, increases in key commodity costs.
While we have already provided a previous specific CPG supply chain commentary, an event held last week provided stronger evidence for additional thoughts.
One of the premiere events for consumer product goods companies is the Consumer Analyst Group of New York (CAGNY) Annual Conference, traditionally held in February. For those unfamiliar with CAGNY, it represents an organization of Wall Street analysts, investment bankers and others whose focus is specifically on CPG industry investment and performance. The conference which was held last week, is where a number of CPG senior executives provide a detailed business overview of their companies’ strategic goals.
Since 2008, Supply Chain Matters has utilized the content presented at this conference as reliable indicators for the upcoming challenges for CPG supply chains, and this year was no exception.
Thus far, we have reviewed presentations from Campbell Soup, Mondelez International, The Hershey Company and PepsiCo. We elected this initial grouping because these firms are exercising product growth strategies predicated on higher growth and margin businesses such as snacks, and because this grouping represents differences of corporate size, culture, as well as different perspectives, positive or otherwise, on supply chain challenges, capabilities or accomplishments.
Our initial analysis was to screen for common messaging regarding industry challenges and required business outcomes. That was not difficult, at all.
Mondelez, which has its sole business focus on a global snacks business, addressed the potential of a $1.2 trillion global snacks market, yet has experienced some realities of declining growth rates among snack categories in 2013. Hershey, a company that traditionally has been grounded in North American markets addressed a growth plank indicating that geographic expansion will be the key to growth and become Hershey’s #2 market by 2017. Campbell Soup, a company demonstrating positive results of late, stated its goals as growing faster in snacks and healthy beverages and expanding international presence.
As each CFO addressed his or her company’s segment it was clear that current signs of slowing growth among emerging markets has placed a pointed emphasis on improved operating margin and cost savings. Once more, such savings are to be re-purposed into product innovation, acquisition and/or increased sales and marketing initiatives to accelerate consumer demand. A clear common message was increasing stockholder value and operating cash flow, the obvious response to activist investors circling the industry. As examples: Mondelez expects to deliver an additional $3 billion in gross productivity savings, $1.5 billion in net productivity, and $1 billion in incremental cash; Campbell Soup stated its restructuring programs have yielded $160 million in annualized savings.
That leads to the stated priorities for each company’s supply chain.
Mondelez addressed four current supply chain priorities:
- Step change in leadership talent and capabilities, articulated as changing 40 of 115 key leadership roles;
- Transform global manufacturing platforms with an emphasis on new biscuit, chocolate and gum platforms across a global presence;
- Redesign the supply chain network- with 30 plants already “streamlined”, closed or sold and 3000 FTE’s reduced; and
- Drive additional productivity and margin improvement programs to fuel growth.
Hershey, which has demonstrated positive supply chain successes to-date, addressed its supply chain goals as:
- End-to-end supplier integration focused on increased on-shelf availability, improved freshness, and localized regional production;
- Strategic procurement partnerships for product innovation, sustainability and cost control;
- Insights-driven supply and value-chain stressing deeper analytics; and
- Global shared-services
Campbell Soup and Pepsico similarly articulate expansion of on-shelf availability, innovative direct-store delivery programs, leveraging direct online commerce and expansion in faster growing markets as supply chain priorities.
We highlight CPG industry challenges because our industry readers need to quickly internalize the implications, both for their organizations and for their careers.
CPG supply chains have always been driven by sales and marketing, along with efficiency and responsiveness. That is not, obviously, going to change. What is changing is the need for bolder leadership skills which is now articulated by talent management being ranked as a top goal. There are many implications to talent management, too many to articulate in this singular commentary. Suffice to state, it implies a far broader set of management skills that span international business markets, translating required business outcomes for margin improvement into prioritized strategies, and in-depth understanding of what is required to be both market and business outcomes driven.
Emerging CPG supply chain leaders will require more depth in the tradeoffs of incremental business process improvement with cost-conscious information technology investments that enable the best end-to-end network response capabilities grounded in more predictive insights as to what to expect. They will now have to manage with less fixed capital and resources, with no choice but to have more reliance on partners and suppliers, including third-party logistics providers. That unfortunately, will lead to the dynamic of passing more cost and risk burden lower into the supply chain. We maintain that this will require total visibility to what’s occurring across the global supply chain, and that implies an end-to-end B2B platform integrating suppliers, contractors, trading partners and other key value-chain participants.
The notions of striving for product forecasting accuracy, driving incremental improvements in business performance based on historic metrics, or elongating timetables for achieving certain levels of supply chain maturity no longer make the cut, and are a relic of the past.
We, as thought leaders and/or consultants, need to stop feeding these fallacies and deliver more straight talk on what skills and competencies supply chain leaders, and their teams, need to be more successful in their efforts, keep teams motivated as well as enjoy coming to work every day. Technology vendors need to stop the endless re-purposing of supply chain visibility or competency acronyms and get to the essence of supporting CPG supply chains with more cost-effective and responsive solutions to immediate needs.
Finally, CPG firms themselves in need to quickly come to the realization that the supply chain leaders and individuals they require, today and in the future are indeed scarce, and be willing to recognize such leadership and technology savvy skills in compensation, incentives and management development and mentoring opportunities.
Throughout 2014, Supply Chain Matters will do our part in hard-hitting straight-talk commentary.
© 2014, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog, All rights reserved.
In the industry-specific section of our 2014 Predictions for the current year, (full research report available for complimentary downloading in our Research Center) we specifically addressed consumer product goods supply chains where combinations of external forces are providing unique challenges. That force includes contraction of growth rates and margins from previously expanding emerging markets, a certain group of activist investors demanding more cash value, and now, increases in key commodity costs.
Some CPG supply chains are rising to the task while many continue to deal with challenges on multiple fronts.
Global CPG giants such as Nestle and Unilever have managed to meet investor quarterly earnings expectations yet continue to report growth headwinds concerning emerging markets along with currency challenges. The CEO of Unilever recently told business network CNBC that emerging markets use to be in the range of 6 to 8 percent but now range 5 to 6 percent. Nestle’s organic growth targets of between 5 to 6 percent are currently trending at 4.6 percent. Unilever currently garners 60 percent of its revenues from China, India and other emerging consumer markets. Mondelez International reported its fiscal fourth quarter earnings this week and reported that organic sales rose declined 6.1 percent in the Asia-pacific region while revenues specifically in China declined by the mid-teens. Supply Chain Matters featured a previous commentary regarding the Kellogg Company.
Noted exceptions of late have been Procter & Gamble and Kimberly-Clark. P&G recently reported that demand for its products in emerging markets such as Brazil and China remains strong. However, P&G reported a 16 percent drop in profits largely due to unfavorable exchange rates. Kimberly-Clark reported that its emerging market business continues to grow strongly. Today, Campbell Soup indicated a solid quarterly performance including growth in certain emerging markets.
The U.S. market further presents its own challenges as economically distressed consumers continue to opt for price-sensitive products in their purchases. Today’s edition of the Wall Street Journal reports that many European based consumer goods companies had relied on sales in Brazil, China, Mexico and other Asian countries to maintain revenue and profitability momentum while developed markets remained sluggish. We would add that these same companies made significant investments in supply chain fulfillment networks in these regions as well.
On the activist investor front, PepsiCo indicated this week that it continue to focus on expanding its soft-drink product revenues instead of taking actions to split-up the company, which certain activist investors are demanding. To continue its course, the company indicated it was investing $8.7 billion in stock buybacks, increasing its cash dividends by 35 percent in the current year, and will initiate $1 billion in productivity gains, including job cuts, through 2019.
There is now the additional challenge of increased commodity costs. On the occasion of Valentine’s Day here in the United States, the Wall Street Journal featured a report that growing demand for chocolate products, particularly from emerging consumer markets, has driven commodity prices for cocoa up 9 percent this year, to levels not reached since 2011. Once more, an industry trade group boasts that demand will outstrip limited supply for the next five years, the longest shortfall since 1960. This week, U.S. cocoa futures hovered in the high $2900 a ton range, a 29 month high. The implication is that with these current signposts, chocolate makers such as Hershey Foods, Mars, Mondelez, Nestle and others will face decisions for raising prices, adding more pressure to existing product demand and profitability trends.
Indeed, consumer product goods industry supply chains have extraordinary challenges to overcome. Supporting emerging market growth objectives requires laser-focused investments in channel customer fulfillment and distribution capabilities. Companies such as P&G provide evidence that such a laser focus can provide benefits and continued growth.
Continued relentless pressures for continued productivity and cost reductions are impacting the marrow of people resources, and further require out-of-box thinking. A dependence on past efforts at continuous improvement or past industry productivity benchmarks will not help in the current environment. With added challenges for increased input materials costs for certain key commodities, the challenges become ever more dynamic.
In 2014, CPG supply chains will require bold leadership and innovative thinking. Business-as-usual has long passed, and so has continuous improvement mentalities. Integrated supply chain management, more timely and responsive decision-making and the laser-like investments in productivity and cost management loom large.
We certainly encourage our readers residing in consumer goods supply chains to share learning from the current environment in the Comments section below.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.
Disclosure: The author of this posting has a modest holding in Unilever stock.