Top 100 Consumer Goods Companies 2006

 

 

It's okay to step off from the ledge because things really aren't that bad. Every January the industry Chicken Littles pull out the soap box and prognosticate about the demise of an industry that has grown for more than 150 years, followed by the November capitulation that things didn't turn out as bad as they initially thought. Going into 2008,with $80 oil, Wal-Mart slowing, U.S. housing turmoil, and fears of consumer down trading and private label growth, it is easy to once again paint the annual doomsday scenario. The problem with that thesis is it just isn't true. International growth is and will continue to be robust, cost savings are accelerating,supply chains are getting shorter and more dynamic, and the industry is sitting on a pile of cash that can be used for a rainy day. So, going into 2008, we believe the industry's salad days should continue, even with high and increasing input costs.

 

First, over the long-term, rising input costs could actually be good for the industry.While rising oil, resin and transportation costs in developing markets are troubling and require disciplined reformulations and price increases, wealth creation in places that export these materials is robust. High, single-digit GDP growth should mean greater household income and an emerging middle class, much to the delight of marketers of branded consumer products that are using media and other awareness building activities to spur demand.

 

Moreover, after several years of restructuring charges, organizational overhauls, and supply chain and shared services optimization initiatives, the profit pool for higher marketing spending and cash flow growth is becoming increasingly robust. Increasing prices 1 percent increases pre-tax profits for the industry almost 6 percent, while a 1 percent reduction in costs only drives pre-tax profits 2 percent. Furthermore, smart retailers actually want a little bit of inflation, it allows for less price comparability and drives crucial same store sales. Plus, the trade often keeps some manufacturer pricing for itself when it passes the rest through, and a happy retailer should mean a happy manufacturer.

 

We believe 2008 industry earnings per share could grow more than 10 percent, which should keep investors happy by exceeding the growth of the overall market. So while outsourcing, downsizing and offshoring may be painful at the time, it only proves that the industry can adjust to the external environment, which is a welcome change for this risk-averse, consensus-driven industry. And while it may seem like the sky is falling, it is often just an acorn -- perhaps a larger one this year and next, but still just an acorn.

 

 

 

 

Food:

Nestle completed the acquisition of Gerber in August 2007. The acquisition -- which came in the wake of the Jenny Craig and Novartis Medical Nutrition purchases -- was another major step in Nestle's transformation to become the world's leading nutrition, health and wellness company. Also in August, Nestle announced its selection of Cognos 8 Business Intelligence (BI) to complement its SAP Business Warehouse reporting solution. Having already deployed SAP Business Warehouse as its global standard for data warehousing and analytical reporting, Nestle will use Cognos 8 BI will give users the ability to handle ad hoc reporting and grouping of data. It also provides the ability to merge external data from any source with data from SAP Business Warehouse, push pre-formatted and easily printable reports to end users, and adapt reports in line with different user needs.

 

March 30, 2007 marked the first day of trading as a fully independent company for Kraft Foods Inc., which was spun off from Altria Group Inc. earlier in the year. Since then, Kraft has made strong progress in the execution of its long-term growth strategy. The company is spending an incremental $300 to $400 million in 2007 on product quality improvements, new products and increased marketing. Kraft is also making significant changes to its leadership, reward systems and structure to rewire the organization for growth. More recently, Kraft announced that it aimed to create long-term shareholder value by selling, rather than investing in, Fruit2O water and Veryfine juice brands to Sunny Delight Beverages Co.

 

The ability to listen to the consumer, create new products and deliver them to the marketplace is enabling Tyson Foods Inc. to remain at the forefront of product innovation. The company's newly opened Discovery Center, a research and development facility, is designed to enhance its ability to collaborate with customers to bring newly created foods to market more quickly. The facility includes 19 research kitchens and a multi-protein USDA-inspected pilot production plant. In the past six months almost all of the company's major customers have spent time in the facility, gaining first hand knowledge about its unique capabilities.

 

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A VIEW FROM WALL STREET
BY JONATHAN P. FEENEY, CFA, EQUITY RESEARCH ANALYST -- FOOD & BEVERAGE, WACHOVIA CAPITAL MARKETS, LLC

Inflation Trumps Costs: An Attractive Entry Point for Food Investors

The Q307 earnings season marked the sixth in a row of strong operating performance for food stocks. Generally, large cap packaged food companies are posting positive surprises, keyed by superior pricing, offsetting commodity pressure. Retail data, retailer results and macro indicators show that the packaged food group is not alone in this inflation. After a "head fake" upward in grain costs and producer pricing in 2004, the highly correlated jump in food costs points to the beginning of a broad inflation paradigm across the entire supply chain, which could be sustainably constructive to food fundamentals.

 

This renewed food company pricing power is not new, but a return to the familiar food supply chain paradigm prior to Wal-Mart's entry into the grocery business in 1988 -- the effects of which may finally be fully absorbed. The retailer consolidation ushered in by Wal-Mart was disastrous to pricing, and implicitly, to food company investors that had enjoyed an inflation hedge before 1988.That several industry leaders now boast Wal-Mart as a more profitable-than-average customer is purely a function of painful periods of productivity improvement (1996-2002) that created much better leverage to volume -- the silver bullet of Wal-Mart suppliers. It should not disguise the reality that Wal-Mart's accumulation of an estimated 18 percent of the $650 billion U.S. Food at Home industry, and the consolidation among competitor grocers that it triggered, created a tremendous shift of bargaining power from food processors to food retailers. Currently, the top 10 food retailers in the Unites States represent roughly 60 percent of total Food at Home sales. They represented roughly 20 percent just 15 years ago. Food retailing consolidation may continue, but it will never again triple.

 

Part of today's excessive caution in food stocks is due to a focus on food cost inflation, however we have found little to no correlation between food company gross margins and company specific cost indices tracked weekly.

 

Food stocks are at the high end of their typical relative valuation to the S&P 500.The disconnect between recent EPS growth rates in market-leading S&P sectors relative to staples explains this phenomenon.While Staples hummed along at +10.5 percent earnings growth, other groups have left it in the dust, temporarily. Perhaps the market is reticent to pay historical median multiples off the earnings base of leading segments after five years of extraordinary earnings growth.

 

 

In 2006, PepsiCo's international business performed particularly well, delivering double-digit revenue and operating profit growth. In a press release, President and CEO Indra Nooyi reported that PepsiCo made good progress on its strategic initiatives: providing greater choices to consumers in the area of healthier snacks and beverages; strengthening its international presence and advancing its business process transformation project, including an SAP implementation. In 2007, PepsiCo expanded successful partnerships with Unilever and Starbucks internationally. The company also closed the acquisition of Sandora Beverages and, with Pepsi Americas, became a leading Ukraine beverage company.

 

To compete more effectively in the increasingly competitive U.S. market place, SABMiller plc (No. 6) and Molson Coors Brewing Company (No.15) will combine the U.S. and Puerto Rico operations of their subsidiaries, Miller and Coors, to create a stronger, brand-led U.S. brewer. The new company, MillerCoors, will have annual pro forma combined beer sales of 69 million U.S. barrels and net revenues of approximately $6.6 billion. SABMiller and Molson Coors will each have a 50 percent voting interest in the joint venture and have five representatives each on its Board of Directors. SABMiller will have a 58 percent economic interest in the joint venture and Molson Coors will have a 42 percent economic interest.

 

Cadbury Schweppes is demerging its Americas Beverages business, which generates more than 80 percent of its revenues and profits in the United States. Ahead of a demerger, the company took control of a number of third party bottlers, most notably Dr Pepper/Seven Up Bottling Group, to create a fully integrated beverage business. More recently, Cadbury Schweppes announced further simplification of its Americas Beverages organization, which will result in a reduction of 470 employees. Meanwhile, the company's confectionery business is going strong. Revenue growth resulted from another excellent performance in gum and improved results from chocolate.

 

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A VIEW FROM WALL STREET BY KAUMIL S. GAJRAWALA, DIRECTOR, SENIOR BEVERAGE ANALYST, UBS

We are Entering the Age of Execution

In 2007, the beverage industry has gone through a variety of game changing events.In 2007, Anheuser-Busch signed an importing deal with Inbev (and entered into several other deals),The Coca-Cola Company purchased Glaceau for $4.1 billion, and Miller and Coors announced a U.S. joint venture. For years, the consumer, driven by a fragmented media world, has been abandoning large brands and looking for premium-priced, healthy, functional, niche-type products.In our view, 2007 was the year when the large beverage companies responded. As we look forward, we believe the focus will shift to execution as these companies deal with the difficult task of integrating businesses and managing a more complex portfolio.

 

We saw the biggest changes in beverage alcohol.In three to five years, we believe we will witness the transition of Anheuser-Busch from a U.S. beer company to a global beverage company, as the brewery looks around the world to diversify its earnings base, while looking for opportunities to leverage its distribution in the United States beyond beer. For Miller-Coors, the focus for 2008 will be on integration, but we could see sales disruption and integration issues early in the process, especially as Anheuser-Busch gets aggressive to gain share and lock-up retail before the deal closes. For the beer category, we expect imports and crafts to gain share at a higher rate as price spreads between domestic and high-end categories are likely to narrow. We forecast the U.S. beer market to grow 1 percent in 2008.

 

Wine and spirits are likely to continue to gain share from beer, but at a decreasing rate. We believe the "easy gains are over," but would expect premium products to continue to flourish given an increasing 25 to 29 age demographic (versus a declining 21 to 24 year old population).

 

Separately, we also believe that a potentially more economically challenged low-end consumer could impact the value category for spirits.

 

For non-alcoholic beverage, both the Red and Blue systems have been aggressively expanding their portfolios (Fuze, Izze, Glaceau, Naked). The key for 2008 will be on coordination with the bottling network with a focus on execution of an ever-expanding portfolio.At retail, we believe it will be interesting to assess which system best manages this proliferation of SKUs. From a focus standpoint,we would expect the Red system to prioritize Coke Zero and Glaceau, while the Blue system will likely focus on expanding Pepsi Max, Mountain Dew Amp and Sobe Lifewater. Finally, we expect an interesting 2008 as attention around Olympic coverage from China provides unique coordinated marketing campaigns around the world.

 

 

In 2007, French retailer PinaultPrintemps-Redoute (PPR) made a $7.07 billion bid to add German sportswear company Puma (No. 10) to its line-up of Gucci and Yves Saint Laurent iconic fashion brands. Today, PPR owns 62.1 percent of Puma, while the remaining 37.9 percent of shares are free flowed. As a result of the friendly acquisition, Puma is backed by a financially strong and leading international company as it enters Phase IV of its long-term oriented business plan, launched in 2006, to reinforce its position as one of the leading multi-category/Sport lifestyle brands.

 

October 2007 marked the opening of Nike Inc.'s first NIKEiD Studio, a consumer destination for designing, personalizing and customizing Nike performance and sport culture footwear, apparel and equipment. This new permanent installation on the fifth floor of Niketown in New York City puts the consumer in control of the design process and extends the NIKEiD experience beyond the computer screen where it has lived at www.NIKEiD.com almost exclusively since its inception in 1999. "The world has changed. Consumers interact with brands on their own terms," says Trevor Edwards, VP, Brand and Category Management for Nike. "The NIKEiD Studio enables consumers to create their expression of the Nike brand."

 

Levi Strauss & Co. is expanding its RFID strategy to improve inventory management and enrich the customer purchasing experience by expediting the checkout process -- especially during peak seasons. The brand-name apparel marketer chose to deploy UHF readers from TAGSYS in 40 Levi Strauss retail outlets in Mexico. The TAGSYS reader combines UHF reader technology with an embedded antenna design that inventories multiple stacked garments while not erroneously reading nearby items -- a critical requirement in point-of-sale applications.

 

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A VIEW FROM WALL STREET
BY BY MARIE DRISCOLL, CFA, AND ESTHER KWON, CFA, STANDARD & POOR'S EQUITY RESEARCH

Still Some Positives Looking Ahead for Selected Apparel Companies

Retail consolidation in the past few years, which has increased emphasis on private label and customer migration, forced apparel wholesalers to overhaul strategies in 2007. Federated Department Stores' purchase of the May Company in 2005 (re-branded to Macy's) has been pivotal in accelerating changes in the industry, as floor space shrank with the closing of duplicative stores, and as department stores emphasized proprietary store brands to differentiate from competitors.

 

Consumers have increasingly fled mall-based retailers for specialty retailers in off-mall formats and lifestyle centers. In response, wholesalers have become more focused by selling slower growth, moderate or ancillary businesses, and have concentrated investment in a few key brands, with many opening their own branded retail stores and shop-in-shops, or developing diffusion brands to be sold in other channels.

 

S&P believes apparel companies with a stable of lifestyle or aspirational brands will be able to grow sales faster than the industry as they help department stores drive traffic and improve store productivity. We continue to see luxury goods and accessories driving growth. Greater interest in fitness and health by aging baby boomers has increased demand for fitness wear, and top designers partnering with athletic brands creates additional category excitement.

 

Year to date through October 19, stocks of apparel, accessories and luxury goods underperformed the broader market, posting a decline of 10 percent compared to an increase of 6 percent for the S&P 1500.

 

S&P believes the retail environment will continue to be difficult, but vendors diversified through channels, demographics and geographies will be able to weather retail consolidation and the rapid maturation of multiple apparel brands to emerge as winners in a less crowded marketplace. For instance, VF Corp.'s 11 lifestyle brands acquired over the past five years will allow the company to expand in the department store channel as well as in other channels and geographies.

 

Additionally, Nike, Under Armour and Warnaco have strategies to go direct to consumers via retail locations and shop-in-shop concepts in other retail stores over the next few years to take more control of merchandising and branding and offer better productivity to retail partners.

 

 

L'Oreal SA made a number of big announcements in 2007. Most recently, the world's leading cosmetics manufacturer enhanced its philanthropic initiatives with the launch of the L'Oreal Corporate Foundation, through which it intends to foster education, promote scientific research and help vulnerable people. In September, L'Oreal USA broke ground for a new office facility at Connell Corporate Park in Berkeley Heights, New Jersey. The new building, which is scheduled to open in 2009, will enable L'Oreal USA to bring together groups of employees that are currently sited in different locations, allowing for better communication, teamwork, team spirit and more efficient work practices. In May, L'Oreal acquired, through L'Oreal USA, PureOlogy Research LLC, a luxury American brand sold in the professional haircare market with annual sales of $57 million. And earlier, in February, L'Oreal UK implemented Cognos Planning to automate exist ing spreadsheet-based business processes and improve reporting efficiencies.

 

Driven by an entrepreneurial spirit, passion, innovation and creativity, Coty Inc. has developed a portfolio of notable brands and delivers its products to consumers in 91 markets worldwide. To ensure delivery of critical business information across the enterprise and increase competitive advantage amid growing regulatory parameters and narrowing margins, Coty enlisted Information Builders in 2007 to enhance its business intelligence capabilities. Earlier in the year, Coty created Coty Beauty, a new global business unit combining the businesses of the Americas, Europe and Asia to further strengthen the portfolio's success while performing toward global dimension, and creating new opportunities in Asia. Coty Beauty supplements the Coty Prestige brand portfolio, including L.A.M.B. fragrance by Gwen Stefani, which is distributed in prestige and ultra-prestige stores.

 

 

 

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2006 was a momentous year for Johnson & Johnson's (J&J) consumer healthcare business. The acquisition of Pfizer Consumer Healthcare (PCH) -- a deal valued at $16.6 billion in cash -- expanded its coverage from 13 consumer health categories to 22. With approximately half of PCH's sales outside the United States, the acquisition also expanded J&J's reach into high-growth markets. Further, the addition of Listerine, the world's No. 1 mouthwash, transformed J&J's oral health care business by more than tripling it into a franchise well in excess of $1 billion. A combined portfolio of OTC brands, including PCH brands Sudafed, Zantac, Benadryl and J&J's Tylenol, also solidifies a global market-leading position. Aside from the acquisition, J&J's consumer healthcare division reached nearly $10 billion in sales and introduced more than 400 new products and line extensions in 2006, helping to drive total sales growth to 7.5 percent. This growth trend continues in 2007 as J&J reported worldwide consumer segment sales of $3.6 billion in the second quarter, representing a 48.6 percent increase over the previous year.

 

GlaxoSmithKline's (GSK) consumer healthcare products play in three major areas -- OTC medicines, oral care and nutritional healthcare - which together experienced a 6 percent spike in sales over 2005. Top performers include Lucozade energy and sports drinks; Panadol paracetamol-based pain relievers; Aquafresh toothpaste and mouth wash; and Ribena, a blackcurrant juice-based drink. GSK's portfolio was expected to be further strengthened in 2007 with the U.S. launch of alli, a new treatment for weight loss, which was approved by the US Food and Drug Administration (FDA) in February. alli is the only FDA-approved weight-loss product available to consumers without a prescription, and it is the first clinically-proven OTC product to be combined with a comprehensive support program. In October 2007, alli - non-prescription orlistat 60mg - had been accepted for review by the European Agency for the Evaluation of Medicinal Products (EMEA). "So far, alli is performing well in the U.S. and, if our application is successful, we will commit to rolling out a similar responsible marketing campaign with the same level of support for consumers in Europe as we have done in the U.S.," says John Clarke, president, GSK Consumer Healthcare. If the regulatory process is successful, GSK would be granted a license to market non-prescription orlistat 60mg in all 27 EU member countries, although initial launch markets have not been confirmed.

 

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