The "Balance of Power" Myth

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" colspan=2 height=110 BGCOLOR="#666699" TEXT="#080000" bgproperties="fixed" background="04900840erlcjm.png"> <div> <B> <TABLE BORDER="0" CELLPADDING="1" CELLSPACING="1" WIDTH="600" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="LEFT" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=TOP HEIGHT= 103 ><NOBR><div> <A HREF="index.htm" TARGET="_top" TITLE="Hoytnet Home"><U><B><IMG SRC="063775a0.jpg" border=0 width="119" height="90" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></B></U></A></div> </NOBR></tD> <tD VALIGN=TOP><NOBR><div> <B>Hoyt & Company</B></div> <div> <A HREF="services.htm" TARGET="_top" TITLE="What We Do"><U>What We Do</U></A> | <A HREF="who.htm" TARGET="_top" TITLE="Who We Are"><U>Who We Are</U></A> | <A HREF="articles.htm" TARGET="_top" TITLE="How We Think"><U>How We Think</U></A> |<A HREF="contact.htm" TARGET="_top" TITLE="Contact Us"><U> Contact Us</U></A></div> </NOBR></tD> </tR> </TABLE></B></div> <bR> <div> </div> </td> </tr><tr> <td valign="top" width=165 BGCOLOR="#CCCCFF" TEXT="#080000" background="04311c00egdysm.png"> <div> <A HREF="articles69.htm" TARGET="_top" TITLE="Chris Hoyt Articles"><U><B>Back to:  Articles</B></U></A></div> <bR> <bR> <bR> </td> <td valign="top" height=370 BGCOLOR="#FFFFFF" TEXT="#080000"> <div> <B>www.reveries.com - 12/01</B></div> <div> <I><B>The "Balance of Power" Myth</B></I></div> <bR> <div> BY<B>: Chris Hoyt</B></div> <bR> <bR> <div> The relationship between CPG manufacturers and retailers is often described as a tug-of war, but you may be surprised to find out who is in the mud puddle.</div> <bR> <div> One of the recurring themes in the CPG trade press these days is that after an heroic 30-year struggle, the CPG manufacturing community has “lost the battle” for control of the retail environment. The “balance of power” has swung over to rapacious retailers.  Manufacturers, hats in hand, are now on the downside.  Disparate bits and pieces of information, when pulled together, repeatedly reinforce this impression.  For example:</div> <bR> <div> The FMI reported last month that in Y2000, the supermarket industry delivered an after-tax net profit of 1.25% -- the highest in 30 years and 30% higher than in 1990.</div> <bR> <div> A.C. Nielsen reported that manufacturers' trade promotion spending as a % of A&P budgets jumped to 60% in Y2000 - a breathtaking increase of 76% since 1981.</div> <bR> <div> The kindly folks from Cannondale Associates of Wilton, CT reported in their annual <I>Trade Promotion Spending & Merchandising Industry Study</I> that “trade promotion inefficiency” was again ranked by manufacturers as the #1 issue with retailers in Y2000 - the sixth year in a row that manufacturers listed this as their top-ranking concern, suggesting that manufacturers are powerless to do anything meaningful about this.</div> <bR> <div> The recent collapse of one of this country's largest food brokers - Marketing Specialists - has been interpreted by some as yet another sign of the degree to which the CPG manufacturing community is in disarray.</div> <bR> <div> Retail consolidation hasn't helped either.  Now we have most of the U.S. food business in the hands of five mega-monsters who are doing things like global sourcing and pricing and dictating terms to beleaguered suppliers.  To add insult to injury, these guys keep their own information close to their vests while actually “grading” suppliers on the quality and quantity of the information and analytics they provide.</div> <bR> <div> Sounds like a one-way street, right?  </div> <bR> <div> Wrong!  If we examine the <U>financial</U> performance of the CPG manufacturing community vs. CPG retailers over the past ten years, a completely different picture emerges from all of the claptrap we are hearing today about who is on track and who isn't.  Consider the following, all taken from <I>Value Line</I> between FY 1990 and 2000:</div> <bR> <div> The entire U.S. Food Processing industry - which refers to manufacturers, not retailers - increased operating margins from 10.9% to 13.0% (19.2%) and net profits from 4.4% to 5.9% (34.1%).</div> <bR> <div> Household Products manufacturers grew operating margins from 13.6% to a whopping 20.0% (47%!) and net profits from 6.5% to 9.1% (40%).</div> <bR> <div> Toiletries and Cosmetics manufacturers have taken up margins from 16.7% to 20.5% (23%) and net profits from 6.9% to 11.0% (59%!).</div> <bR> <div> The soft drink industry - by far the CPG brand marketers' biggest trade promotion spenders - has nevertheless been able to grow operating profits from 19.2% in 1990 to 21.0% in 2000 (22%) and net profits from 7.2% to 9.3% (29%).</div> <bR> <div> With only a very few exceptions, <U>all</U> major CPG brand manufacturers have contributed to and shared in these successes.  For example, between FY90 and FY00:</div> <bR> <div> P&G grew operating margins from 12.6% to 22.3% (77%) and net profits from 6.1% to 10.6% (74%).</div> <bR> <div> Coke grew operating margins from 21.4% to 28.9% (35%) and net profits from 13.5% to 17.9% (33%).</div> <bR> <div> Gillette grew operating margins from 21.9% to 28.2% (28%) and net profits from 8.5% to 13.5% (59%).</div> <bR> <div> ConAgra has managed to almost double operating margins during this period - from 4.1% to 7.2% (77%) and <U>more</U> than double net profits - from 1.5% to 3.2% (113%).</div> <bR> <div> General Mills took up operating margins over the last decade from 12.8% to 19.5% (52%) and net profits from 5.8% to 9.2% (58%!).</div> <bR> <div> It is instructive - and perhaps even surprising - that, overall the CPG <I>retailer</I> community has not fared nearly as well financially as CPG manufacturers during the past decade.  While <I>Value Line</I> reports that the grocery industry in total did manage to increase gross margins from 25.4% to 28.4% (12%) and net profits from 1.28% to 1.90% (49%) between 1990 and 2000, other industry segments and certain retailers actually lost ground:</div> <bR> <div> The entire U.S. Drug retailing industry suffered a decline in gross margins from 28.8% to 24.3% (-16%) and avalanched in net profits from 2.6% to 0.6% (-77%).</div> <bR> <div> Both SuperValu and Fleming - this country's leading wholesalers - suffered declines in net profits from 1990 to 2000:  SuperValu from 1.3% to 1.0% (-23%) and Fleming from 0.8% to 0.4% (-50%).</div> <bR> <div> Albertson's - formerly the financial beacon of the U.S. Supermarket industry - bit  off more than it could chew when it swallowed American Stores and since then has watched its net profits drop from 3.7% (1995) to 2.4% last year (-35%). </div> <bR> <div> K-Mart's difficulties are well known:  between 1990 and 2000, K-Mart's gross margins have dropped from 27.0% to 22.0% (-19%) while its net profits have plunged from 2.4% to 0.7% (-63%).</div> <bR> <div> World-dominant Wal*Mart managed to increase gross margins only marginally - from 22.8% to 23.0% (1.5%) but actually <U>declined</U> in net profit performance from 4.0% to 3.3% (18%).</div> <bR> <div> So what's the take-away from this?</div> <bR> <div> CPG manufacturers are alive and well, thank you. While CPG brand marketers are indeed faced with difficult problems in dealing with the growing power and demands of a consolidated retailer community, it is clear that CPG manufacturers have done an outstanding job in negotiating these difficulties over the past ten years.</div> <bR> <div> The “balance of power” thing is a myth. The financial gains of the U.S. supermarket channel since 1990 - combined with the even more impressive financial gains of suppliers who sell to this channel - suggest that the success of one entity does not require the failure of the other.  There is no reason to believe that this is not true of all trade classes and the suppliers who sell to these trade classes.  To position this as a “tug of war” is syllogistic and misleading.</div> <bR> <div> Cool News is a forum for marketing specialists, published by the David X. Manners Co., Westport, CT.  For more, go to <A HREF="http://www.reveries.com" TARGET="_top" TITLE="http://www.reveries.com"><U>www.reveries.com</U></A>.</div> </td> </tr></table></body>