Last week, Supply Chain Matters featured a commentary regarding the blunt business realities that are impacting many consumer product goods focused businesses and supply chains. Multiple corporate earnings reports bring home the compelling reality of an industry undergoing profound external and internal business challenges. Our conclusion was that invariably, CPG supply chains will bear the brunt of changes and needs required for more market adaptability and responsiveness while having to deal with continued pressures to reduce costs.
Another compelling evidence point is the latest announcement from Procter and Gamble which indicates that this CPG icon plans to divest, discontinue or merge more than half of its global brands as it once again, initiates an effort to focus on its most profitable brands.
This is a similar strategy that former CEO A.G. Lafley has initiated in times of profitability challenges and comes almost a year after he was compelled to return from retirement to lead P&G. The announcement comes after P&G reported both fourth quarter and fiscal year earnings. Earnings per share growth were reported as 5 percent in fiscal 2014 while organic sales growth was 3 percent. Net sales for the fiscal year grew by a mere one percent. In the earnings press release, Lafley states: “We met our objectives in a very difficult operating environment, delivered strong constant currency earnings growth, and built on our strong track record of cash returns to shareholders. Still, we have more work to do to deliver the profitable sales growth and strong cash productivity we are capable of delivering.”
From our lens, this is yet another acknowledgement of the short-term focused, external Wall Street and hedge fund pressures being exerted on industry players. It’s a two-fold vice. Consumers have permanently altered their shopping practices and buying choices and larger industry players are struggling to provide business responses. The Wall Street and activist community continues to have a very short-term financial results focus for industry players, viewing CPG companies as cash, dividend or acquisition plays.
According to published reports from both the Wall Street Journal and AdvertisingAge, the latest divestiture announcement implies major consolidation of 90 to 100 current P&G brands in the coming months or years. The company previously divested of its pet care business. P&G will retain 70 to 80 of its most profitable core brands, those reported to be fueling 90 percent of total revenues and the majority of current profits.
According to the WSJ, the brands being shed account for $8 billion in revenues and could prove attractive to private equity firms that specialize in orphaned brands or CPG focused companies in China or Brazil looking for more global presence. The scope of this P&G strategic initiative implies both opportunity and/or added challenges for existing industry chains, especially the commodity supplier community.
The WSJ once again acknowledges that the P&G announcement reflects the reality of a new environment of weak sales growth for consumer products, increased currency fluctuations and inbound commodity costs that are eroding profitability. Meanwhile, activist investor pressures to cut costs, consolidate and merge brands continue to influence industry behavior.
The adage that as P&G goes, such does the industry, is yet another poignant indicator of the current business challenges that are surrounding CPG focused supply chains.