One of the rites of almost-spring in the packaged goods industry is the migration, en masse, to Florida where the likes of Colgate-Palmolive, Procter & Gamble and Unilever are grilled by Wall Street analysts. Cagny, as the Consumer Analyst Group of New York is known, is usually a forum for concerns about the creeping influence of private label, commodity pricing and ad spending. Expect those topics to pop up with a vengeance at this year’s conference, starting Feb. 17, along with a few new ones as speakers from P&G, Unilever and smaller advertisers like Church & Dwight make their case to investors during the worst economic downturn in about 20 years. But along with those evergreen concerns there should be a few new ones this time around in Boca Raton, including:
• A softening ad market. Procter & Gamble, the world’s biggest advertiser, has slashed TV spend, and some wonder if Unilever, its biggest rival, will follow suit. On top of that, media rates have come down substantially, letting marketers get more for their advertising dollars. Will the two factors even out?
• Sanford Bernstein senior analyst Ali Dibadj wasn’t sure. “All of these companies are talking about reducing marketing spend, getting discounts from marketing agencies and the actual channels,” Dibadj said, adding that it was unclear if the overall share of voice for the companies would stay the same. Cutting back on ad spending is not necessarily a bad thing for everyone, but analysts will be watching to see which particular brands are yanking ad dollars, said Nik Modi of UBS Investment Research. “I’m much more worried about Energizer cutting back on ad spend because it is the No. 2 player to Procter in almost every category than I am about Clorox,” he said. The latter’s commanding share in the cleaning aisle makes it less vulnerable, he said.
• Solid numbers. It’s true that P&G, Kimberly-Clark and the major food and nonfood marketers all reported earnings within the last two months, but much could have changed since then. Regardless of their financial standings, “All of these companies are going to make the case for why they’re well positioned in this environment,” Modi said.
• Portfolio strength. Store brands have traditionally been an Achilles’ heel for most marketers. In a recession, even more so. “Kimberly-Clark and Clorox are very vulnerable to private label because of the categories they play in. P&G is the next most exposed,” said Jack Russo, who covers household goods at Edward Jones. Colgate, on the other hand, saw net income rise 20 percent to $497 million in its latest quarter, proving that some commodities, like toothpaste, defy store brands’ encroachment.
• Long-term gains. No company is doing particularly well in this economy, which is why investors want to put their money where it’s worth it. “The stock prices of all of these companies have been beat up . . . as investors, we’ll be looking for companies who can deliver earnings and sales growth, particularly in the back half of the year. The first half is going to be soft for everyone,” said Edward Jones analyst Matt Arnold.
• Consumer trade down. Brands that once enjoyed enormous popularity in the supermarket have since been relegated to discretionary purchases. (Danone’s dairy-food products took a hit, with net profits down 69 percent to $1.67 billion.) Such trading down is forcing marketers to explore options outside of their portfolios. (Starbucks, for instance, is testing a soluble, instant coffee.) “Demand is normally pretty stable for this kind of stuff, and so, any color management teams can provide about how they’re addressing that, I’d definitely be interested in,” Arnold said.
• Price war tussles. As commodities start to deflate, retailers will begin putting pressure on packaged goods companies to cut prices. “These companies will have to do a pretty good job of putting out why they can’t roll back prices significantly,” Arnold said. Some instances of this are already starting to happen. Belgian giant Delhaize, for instance, is yanking 300 of Unilever’s products off the shelves as these items got a bit too pricey.
• Kraft’s three-year plan. At Cagny two years ago, the food giant’s CEO, Irene Rosenfeld, unveiled a four-pronged strategy for growth, including the decentralization of business units and a plan to maximize presence in supermarkets. Wall Street has been closely watching, as the food maker delivered 6.6 percent annual net revenue, yet fourth quarter profits plunged by 72 percent. “Analysts are skeptical about whether Kraft has the scale they think they have and whether it’s truly an advantage to them to have the most presence across most aisles of the grocery store,” Arnold said. In these economic times, “many people believe a concentrated product portfolio is the ideal situation to be in.” Kraft, for its part, maintains the strategy is working. By giving local brand managers and their teams full accountability, the company was able to boost sales of its Oreo in China and Oscar Mayer in the U.S. In the case of the former, new, less-sweet, wafer-like varieties of the cookie were introduced, and Oreo is now the top-selling biscuit in China, per Kraft. A value campaign for Kool-Aid, rolled out in seven weeks’ time, likewise resulted in second quarter growth. (IRI data ending the week of Dec. 28, 2008, however, shows sales to date have increased by only 0.56 percent, to $293 million.) Marc Babej, a partner at Reason Inc., a New York-based marketing consultancy, said there’s no doubt the recession has stalled Kraft’s plans. “In an environment like this, packaged goods as a category is poised to do relatively well, but at the same time, we’re dealing with an economic recession of such severity that it’s really altering people’s spending behavior,” he said.