Tips for Post-Recession Innovation

To grow revenues as the economy recovers, consumer packaged goods (CPG) companies must focus on innovation to encourage household spending, especially for products in mature segments and to offset reduced spending by Baby Boomers who are nearing retirement, according to the Grocery Manufacturers Association (GMA) and PricewaterhouseCoopers LLP (PwC) 2010 Financial Performance Report released today, titled "Forging Ahead in the New Economy".

 

The report, now in its 14th year, is compiled from interviews with senior leadership of GMA members, publicly reported company financial data, government statistics, analyst reports and other published material on 152 companies in the food, beverage and consumer products sector.

 

According to the study, many CPG companies are looking to innovate by reaching consumers in more places or tailoring products for local customer tastes in emerging markets. Additionally, understanding customer priorities is central to innovation as consumers in the United States are buying more carefully, buying different pack sizes, taking advantage of volume discounts, and trading down to non-premium brands.

 

"CPG companies are operating in a new environment, characterized by more cautious, value-driven consumers and volatile commodities," says Lisa Feigen Dugal, North American consumer packaged goods & retail advisory leader, 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."

 

To her last point, taking hold in emerging markets -- especially in China, Russia, Brazil, India, and Southeast Asia -- has taken on a sense of urgency for CPG makers as capital flows faster than ever and new competitors can ramp up quickly. The middle classes are growing and forming attachments to new brands and products just as fast. Consequently, product growth cycles in emerging markets have accelerated and the success or failure of a product launch or brand introduction now can be determined in a matter of just 12 or 18 months.

 

Additional key findings from the report include:

-- CPG company median shareholder returns stood out as strong relative to the rest of the market.

 -- With shareholder returns up 49 percent in 2009 and median EBIT growth jumping a remarkable 33 percent, the beverage sector had the best quantitative performance among the three major CPG sectors (beverage, food, and household products).

-- Median net sales growth sank in all three sectors, and beverage's 1.6 percent decline was the first time in five years that the sector experienced negative growth.

-- The food sector as a whole cut spending with a nearly 2 percentage point drop in median selling, general and administrative costs as a percentage of sales.

-- The food sector's median five-year shareholder return metric of 6 percent led the way for all three sectors, with beverage coming in at 5.3 percent and household products at 2.7 percent.

-- While household product companies saw negative median net sales growth for the first time in five years, they mitigated 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 in 2009.

 

For an electronic copy of the complete report, visit www.pwc.com/us/retailandconsumer or www.gmaonline.org/publications.