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It’s a non-traditional recession for CPG

February 10, 2010

Traditionally, CPG companies can expect to ride through a recession pretty well.  Chocolate is a mature market (which is why Kraft and Cadbury’s are going at it – not for products but for market share), but it’s a small indulgence for us.  Same with soap powder, prepared foods, etc.  But given our very rough ‘recovery’, people are starting to vote with their feet.

A bit ago we posted about a qualitative based research panel of NDR’s Highly Involved Moms, showing people were tightening their belts, big time.  Now, NDR has sent out an email showing how the Great Recession has affected their Highly Involved Grocery Shopping and Cooking Moms panel:

1 – How did the “great recession” of 2009 affect your household grocery spending?
o  Some affect (decrease of 1-5%) – 35%
o  Moderate affect (decrease 6-10%) – 29%
o  No affect – 15%
o  Considerable affect (decrease 11-15%) – 12%
o  Significant affect (16+%) – 9%

Not surprising given the need for people to cocoon and maintain their families.

2 – Did you find yourself trading down (switching to a less expensive alternative product) as a result of the 2009 recession?

o  Yes – 82%
o  No – 18%

This is a salient point – the rise of value brands and the need for CPG firms to not cannibalize their own premium brands, with thedetrimental effect on EPS and share price.  As we’ve written before, there’s the added complexity of requiring the CPG firm to produce a good product consistent with their company’s image, either tasting differently or just below the quality of their premium brand in that category. Case in point – during the last Great Recession of the mid to late 1970’s, soap powder sold via premium, value, store and even generic brands, many times produced by the same CPG firm.

3 – If you did find yourself trading down in 2009, what product categories did that include (multiple answers possible)?

o  Snack – 58%
o  Household Cleaners – 53%
o  Personal Care – 50%
o  Paper Goods – 50%
o  Prepared Meals – 47%
o  Laundry Care – 38%
o  Beverages – 32%
o  Did not trade down – 11%

It looks like the Beverage and Laundry Care manufactures have the edge on brand loyalty but, even here, if the recession is seems as continuing at the consumer level through 2014, all bets are off even in these categories. The 58% number for Snacks may explain why Doritos’s bought so much time on the Super Bowl.  If it’s between an extra package of frozen vegetables or a bag of Doritos’s, that store brand could be pretty tasty in 2010. Given how many CPG markets are mature, innovate packaging and portioning can steal even a small part of a competitor’s customer base which is no small matter when each 1% market share could easily be $100M in revenues.

4- Thinking only of 2010 grocery shopping for your household, do you anticipate spending more, less or the same amount in 2010 compared to 2009?

o  Same Amount – 62%
o  Less – 35%
o  More – 3%

Fortunately, most people have adjusted their spend to income ratios, so assuming the income side is unchanged or slightly improved, 2010 should reflect 2009’s decisions.  As firms cut back on overtime, under-employ, increase employee contributions to health insurance costs and other income ‘robbers’, this decision could be revisited in 2010 and again in 2011, and again…

Any good study has to be corroborated by other data points, so to speak, and the recently published Ceridian-UCLA Pulse of Commerce index confirms NDR’s learning.  Ceridian issues gas cards for truckers useable at over 7,000 locations nationwide and so they have a strong view of the movement of goods across the country (which in itself is a marker for economic growth).  Bottom line – in January, the index fell at an annualized 36.8% rate from December 2009, translating to an anemic 3.3% annualized growth rate where their index has to grow at an annualized 15% to indicate a strong recovery.  Never mind how the Gov’t cooks their figures to look like something is being accomplished in DC, the truckers are telling you what their gas tanks have to say and that number cannot be fudged.

We’re going to avoid going deeply into the obvious – the need to actively perform error proofing to minimize rework and waste, or repackaging to make your product seem more affordable.  We’ll assume you’ve already have those nailed down tight or at least know you have to get them nailed down tight.

For all companies, not just CPG firms, there is a major source of unnecessary bleed most companies overlook – the cumulative effect of the cost overruns on all your strategic initiatives.  Unless Uncle Sam is bankrolling you, that SAP upgrade which should have cost $50M but is now at $75M and marching on has to be x-rayed and corrected or even stopped. Same for construction, or the costs associated with acquisition or divestiture execution, and so on.  In our experience, many large firms can ‘find’ $100M in lost money simply by managing effectively based on an accurate understanding of their key initiatives.

Even smaller and mid-sized firms, the SMB market, can ‘find’ multi-millions and this can help make payroll or avoid having a vendor convert you into a cash customer. With CIT and other traditional SMB credit sources dried up, money found is not just nice in the SMB world, it can be crucial.

Let’s all forget the easily manipulated Gov’t figures, some showing jobs lost while joblessness goes down, etc. and focus our 2010 plans on those indices which tie back to real, verifiable findings such as how people spend household funds and truckers fill their tanks.

Rich Eichen is a Managing Principal of Return on Efficiency, LLC, who’s website is http://www.growroe.com and is one of their senior turnaround leaders/CROs, Program and Interim Executives with over 25 years experience reshaping companies, Operations and key initiatives. He can be reached at richard.eichen@growroe.com

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