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.
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