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.
 One of the recurring themes in the CPG trade press these days is that after a 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:
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- The FMI reported last month that in Y2000, the supermarket industry delivered an after-tax net profit of 1.25 percent -- the highest in 30 years and 30 percent higher than in 1990.
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- A.C. Nielsen reported that manufacturers' trade promotion spending as a percentage of A&P budgets jumped to 60 percent in Y2000 – a breathtaking increase of 76 percent since 1981.
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- The kindly folks from Cannondale Associates of Wilton, CT, reported in their annual Trade Promotion Spending & Merchandising Industry Study that "trade promotion inefficiency" was again ranked by manufacturers as the number-one 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.
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- 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.
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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.
Sounds like a one-way street, right?
Wrong! If we examine the financial 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 Value Line. Between FY 1990 and 2000:
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- The entire U.S. Food Processing industry – which refers to manufacturers, not retailers – increased operating margins from 10.9 percent to 13.0 percent (19.2 percent) and net profits from 4.4 percent to 5.9 percent (34.1 percent).
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- Household Products manufacturers grew operating margins from 13.6 percent to a whopping 20.0 percent (47 percent!) and net profits from 6.5 percent to 9.1 percent (40 percent).
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- Toiletries and Cosmetics manufacturers have taken up margins from 16.7 percent to 20.5 percent (23 percent) and net profits from 6.9 percent to 11.0 percent (59 percent!).
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- 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 percent in 1990 to 21.0 percent in 2000 (22 percent) and net profits from 7.2 percent to 9.3 percent (29 percent).
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With only a very few exceptions, all major CPG brand manufacturers have contributed to and shared in these successes. For example, between FY90 and FY00:
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- P&G grew operating margins from 12.6 percent to 22.3 percent (77 percent) and net profits from 6.1 percent to 10.6 percent (74 percent).
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- Coke grew operating margins from 21.4 percent to 28.9 percent (35 percent) and net profits from 13.5 percent to 17.9 percent (33 percent).
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- Gillette grew operating margins from 21.9 percent to 28.2 percent (28 percent) and net profits from 8.5 percent to 13.5 percent (59 percent).
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- ConAgra has managed to almost double operating margins during this period -- from 4.1 percent to 7.2 percent (77 percent) and more than double net profits -- from 1.5 percent to 3.2 percent (113 percent).
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- General Mills took up operating margins over the last decade from 12.8 percent to 19.5 percent (52 percent) and net profits from 5.8 percent to 9.2 percent (58 percent!).
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It is instructive -- and perhaps even surprising -- that, overall, the CPG retailer community has not fared nearly as well financially as CPG manufacturers during the past decade.
While Value Line reports that the grocery industry in total did manage to increase gross margins from 25.4 percent to 28.4 percent (12 percent) and net profits from 1.28 percent to 1.90 percent (49 percent) between 1990 and 2000, other industry segments and certain retailers actually lost ground:
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- The entire U.S. Drug retailing industry suffered a decline in gross margins from 28.8 percent to 24.3 percent (-16 percent) and avalanched in net profits from 2.6 percent to 0.6 percent (-77 percent).
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- Both SuperValu and Fleming -- this country's leading wholesalers -- suffered declines in net profits from 1990 to 2000: SuperValu from 1.3 percent to 1.0 percent (-23 percent) and Fleming from 0.8 percent to 0.4 percent (-50 percent).
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Chris Hoyt is President of Hoyt & Company, LLC, a packaged goods training and consulting organization based in Scottsdale, AZ. He may be reached via his web site at www.hoytnet.com
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