Supply Chain Matters has devoted quite a number of commentaries reflecting on dramatic ongoing change occurring among consumer product goods firms and consequently their respective customer demand and supply networks.
Consumers have not waivered in their quests for buying and consuming health-conscious and sustainable food. They are now far more digital savvy in the way they evaluate, shop for or consume food.
This is an industry that remains surrounded by activist investors seeking the next era of growth but at the same time, added dividends and increased short-term returns for shareholders. A further dark wave surrounding this industry was often termed “3G Effect”, that being the presence of 3G Capital’s Kraft Heinz model of acquire and squeeze out all forms of cost which has further fueled broader activist sentiments.
In January, the Financial Times published a sobering industry perspective: Out with the old, in with the new in the consumer goods sector (Paid subscription or complimentary metered view), which noted the significant amount of industry CEO churn and turnover, now numbered as a dozen. Most of the industry has responded to the 3G Effect by imposing steep cost cuts, often because of the pressures of activist investors. In the report, a Jefferies analyst states: “The next generation of managers will need to be digital savvy in ways the current ones perhaps could not be.”
We have been on-record with our viewpoints. In a May 2017 Supply Chain Matters industry opinion commentary, we stated the following:
The wave of activist investors surrounding the CPG food and beverage industry is destructive to supply chain capability and innovation, and the timing could not come at the worse time. CPG industry supply chains and their network of food suppliers require the ability to support a business need for healthier and more organic food choices for consumers. This wave of zero-based budgeting and cost cutting will not likely achieve that objective, and we as consumers, will have limited choices for healthier food. It is a race to the bottom with notions that the survivors gain the spoils.
The Startling News of Kraft Heinz
This week, business and industry specific headlines are abuzz with startling financial disclosures from Kraft Heinz. In capsule, the company will have to:
- Write down the value of its Kraft and Oscar Mayer brands by a whopping $15.4 billion and slash its quarterly dividend to shareholders by 35 percent.
- Respond to an ongoing SEC investigation regarding the company’s procurement practices that led to a $25 million charge in the latest quarter for reported higher inbound direct material and other costs that should have been recorded in prior quarters. Reports indicate that supplier relationships are strained.
- Recover from reporting sharply lower revenues and earnings that were far lower than consensus estimates. That included a 14 percent decline in adjusted earnings before interest, taxes and restructuring costs (Adjusted EBITA) in the latest quarter on total revenue growth of a mere 0.7 percent.
- A Statement by the company’s CEO : “The core of our shortfall in 2018 was forecasting the pace and magnitude of our savings curb.”
- A sudden turn in equity analyst viewpoints on the 3G Model- more focused on cost and less on innovating and building brands.
Our translation: Four years since initiation, the zero-based budgeting squeeze yielding a cumulative $1.8 billion in annual spending has cut to the core of product innovation and the ability to be able to respond to changing market needs.
The news has resulted in a significant double-digit tanking of the company’s stock as we pen this blog, a $16 billion loss in market value. The company’s sixth largest shareholder, Warren Buffet’s Berkshire Hathaway is staring at a single day value loss of upwards of $5 billion.
Supply Chain Matters Perspective
We have elected the title of this commentary to be a watershed development for the industry and for its respective customer demand and supply network capabilities.
The giant has stumbled, and the thud will hopefully, be far reaching.
In our May 2017 perspective, reflecting on what was occurring across the industry’s supply chain management capabilities, we declared:
The winners are supply chain leaders who educate senior management on the differences of supply chain as a cost center vs. a business innovation enabler. They will also be those that can keep a laser focus on the end-goal, meeting and accommodating far different consumer preferences with changed thinking and distribution methods. By our lens, industry supply chains that invest in talent that can bring forward new creativity, collaboration and thinking for a supply chain model that leverages both online and in-store buying needs will likely benefit.
We are now actively conducting research on the industry’s efforts to respond to the new digital age of agility to a constantly changing and more dynamic set of consumer products market requirements. We are finding evidence that prior moves to reduce costs are leading to added opportunities to involve contracted manufacturing and packaging partners in process innovation and quicker time to market.
Indeed, perhaps the industry can and will move forward beyond the 3G Effect, with new leadership, bolder vision and a broader strategic perspective that includes an understanding that supply chain management can contribute to enhanced market responsiveness needs. That should include augmenting the process and technology enabled capabilities of demand and supply response networks with higher agility, responsiveness and joint-innovation
Bob Ferrari
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