Sustainability Initiatives Contributing To CPG’s Bottom Lines

Marketing_daily_jpegAn interesting post on MarketingDaily highlights how consumer product goods manufactures are using sustainability initiatives as a leverage point to maintain long-term growth prospects.

Posted June 10, 2008
By Karlene Lukovitz, MarketingDaily

Net_sales_growth_jpegCost reductions and brand image benefits
accruing from investing in sustainability initiatives and reporting
these to consumers are beginning to pay off for consumer product goods
manufacturers (CPGs), according to a new study conducted for the
Grocery Manufacturers Association (GMA) by PricewaterhouseCoopers.

The biggest challenge facing CPGs is how to offset rising commodities
prices while preserving long-term growth prospects, and their three
main points of leverage are sustainability strategies, global growth
and partnering with retailers, concludes the report, "The Food,
Beverage and Consumer Products Industry: Achieving Superior Performance
in a Challenging Economy 2008." Maximizing these three factors was
critical in enabling CPGs as a whole to perform in line with the Dow
Jones and S&P 500 indices last year, despite soaring raw
materials/input costs and consumer spending cutbacks in response to
rising costs and other economic challenges, the study points out.

CPG’s input costs rose at a much higher rate than anticipated last
year. In addition to spiraling gasoline and oil prices, egg prices have
jumped 30% since last year–in part because of major cost increases for
feed corn. Large food companies such as Kraft Foods and Sara Lee Corp.
now attribute 45% to 55% of their products’ prices to raw materials
costs.

   
Some 2007 financial highlights:

  • CPG sales grew at 10.6%, and median EBIT grew at 15%+.
  • CPGs delivered shareholder return of 7.3%, on average, continuing positive three- and five-year trends.
  •   Large and medium-sized CPGs saw higher returns on sales, average assets and market capital.
  •   Small companies showed the highest median net sales growth.

  Sustainability Pays
On the sustainability front, "the strong effect that sustainability
reporting can have on corporate value" was a "particularly exciting"
finding of this year’s report, says Lisa Feigen Dugal, PwC’s North
American consumer packaged goods and retail advisory leader. "It’s well
known that sustainability initiatives can be a great brand and
reputation enhancer, but now we’ve discovered that they’re much more.
Positive reporting on these initiatives can enhance a company’s bottom
line and shareholder value."

  Examples cited include:

  • General Mills, which has been recycling since the 1930s, is more
    focused than ever on employing sustainability practices to improve its
    bottom line. For instance, changing the case configurations for
    Progresso soup removed 2,000 tons of steel from Progresso’s annual
    steel input total, reducing costs and making consumers happier with
    lighter cans at the same time.
  • "If you can make the
    jump from sustainability being a cost to a contributor to margin
    growth, that’s the key," commented General Mills VP/corporate
    communications Tom Forsythe, one of many CPG executives interviewed by
    PwC as part of its research.
  • Clorox Company is now
    measuring its carbon footprint, and moving toward naturally based
    products is proving even more important, according to CFO Dan Heinrich.
    "The consumer trend toward sustainable cleaning products is one that we
    are very committed to," he stated. "At the end of the day, our
    reputation with the consumer is huge."
  • Early
    adapter DuPont saved over $3 billion in energy costs between 1994 and
    2006, while reducing greenhouse gas emissions by 72%. The sale of
    eco-friendly products is also spurring the company’s goal-surpassing
    financial performance, accounting for $5 billion in 2006 revenue.

  Smarter Global Expansion, Retailer Collaboration
CPGs are not only increasingly focused on tapping the
greater-than-domestic growth potential in global markets; they are
increasingly sophisticated about merchandising and marketing in
non-U.S. markets, mitigating and managing risks such as international
materials sourcing and "indirect taxes," and integrating international
with domestic operations.

   Examples:

  • Hormel Foods Corp. saw double-digit increases in international sales of
    its SPAM products in first-quarter 2008. The company is balancing the
    costs of its overseas push and its increasing grain and fuel costs with
    product mix improvements and manufacturing efficiency measures in the
    U.S.
  • The Hershey Company is becoming more
    aggressive about overseas expansion, but is being cautious about
    finding the right product mixes before it starts leveraging its joint
    venture relationships in India and China. "You can’t replicate [product
    mix] overseas," said Hershey CFO Bert Alfonso, stressing the need to
    tailor selections to each market. Hershey is also looking into
    lower-cost production options in international markets (it recently
    built a manufacturing facility in Monterrey, Mexico).
  • Campbell Soup spends years doing "ethnographic research" before
    launching any product overseas. "We live with the people and understand
    how they make soup," explained CFO Bob Schiffner. "We get a feel for
    some of the cultural and emotional factors involved in serving soup in
    their families." Campbell is now targeting Russia and China.

At the same time, CPGs are learning to mitigate high indirect
taxes–taxes incurred during cross-border transactions such as custom
duties, value-added and excise taxes, and customs processing and port
fees–by improving the efficiency of how their raw materials and
finished goods move through the global trading system, according to the
study.

  In addition, CPGs are getting more creative about collaborating with retailers to reduce costs and increase performance.

  Examples:

  • Clorox is working with retailers to "engineer out" unneeded input costs
    that can occur when companies jump into new packaging/design
    initiatives that must later be undone because of retailer or consumer
    pushback. "When we do a project launch, we try hard not to embed costs
    that just have to be taken out later," noted Heinrich.
  • Campbell spent $75 million over the past six years and used consumer
    feedback and retailer data to integrate its trade promotions with other
    marketing initiatives and eliminate its most unprofitable events. "You
    want to have events with meaning that drive enough volume to offset
    their costs," observed Schiffner.
  • Kimberly-Clark’s
    Business Planner software tool builds predictive models for promotions,
    which the company shares with its retail customers.

Karlene Lukovitz can be reached at [email protected]

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