Well-positioned brands will see more consumer opportunity in 2011 than they have in a long time – and the less strong will be still battling higher costs and tighter budgets. Here are two things to think about:
1. Refine your strategy for managing margins at retail, to grow your bottom line.
2. Position your business as if you are going to sell: whether or not you want to sell, this ensures you are running your business as efficiently as possible.
As I write this, producers, retailers and economists are breathing a sigh of relief. Without counting the important week-after-Christmas sales, the National Retail Federation predicts spending this holiday season reached $451.5 billion, up 3.3 percent over last year. That would be the most since a record $452.8 billion in 2007 and the largest increase since 2006.
The Commerce Department says the economy grew slightly faster than predicted in the third quarter of 2010 (2.6 percent), making that period the fifth consecutive quarter of gross domestic product growth. This was enough to raise expectations for the fourth quarter and for all of 2011. In early January, Dow Jones Industrial Average broke 12,000, a two-year high.
Managing margins at retail. That’s all good news for the economy at large, but not new news for food and beverage companies who weathered the storm better maybe than any other industrial category. The recession slowed revenue growth for most food and beverage sectors, but there still was growth. However, margins were more impacted.
Rising raw material prices had a big effect. “Margin compression due to climbing raw material costs (and rising freight costs for that matter) has some businesses scrambling. Some have been able to pass on cost increases to retailers, and in most cases only once a year. Wal-Mart and others have given producers a one year reset.” says Robert Parzick, Senior Managing Director, Eureka Capital Partners, LLC (www.eureka.com), a boutique investment banking company that specializes in the food and beverage sector.
Except for the largest consumer packaged goods producers, many manufacturers are at the mercy of most, more powerful retailers who aren't putting up with higher prices. Another approach that is working for some producers is to sell products of lower weight or smaller size and to charge the same or slightly increased price charged previously for the larger sized products. Says Parzick, “for those getting squeezed, free cash flow is dwindling and they are spending less on promotion and on prospective M&A projects.”
Sustaining growth long term. The worst appears to be over but unemployment is 9.8 percent, credit remains tight and the housing market is comatose. There are definite market changes, some of them structural. Consumer shopping behavior has shifted to tighter budgets and healthier eating; private label is even more dominant; and retailers are localizing. (See Deborah Steinthal's February Food and Beverage Sector Insights: Back to Business-as-Usual May Not an Option.)
Promotion [and discounting] is fierce. Most consumer brands out there are still severely feeling the pain of this economy. Says Scion Advisors Managing Director, Deborah Steinthal (www.scionadvisors.com): “Overall, it seems that consumers are just now showing a little more confidence in the future. For example, the above $20 wine category saw 11% growth in retail 52 weeks year over year December 11, 2010. (The Nielsen Company).”
The real issue is the long-term impact of discounted pricing pressures on margin structures. Many brand owners are rethinking their growth scenarios based on changed pricing and cost of goods. They are asking: how much can cash flow realistically contribute to the long term capital investment requirements of the business?
Looking at 2011 from a financial standpoint, Parzick adds, “Companies are getting stronger and there will be more consolidation of the ones that are not. With corporate and private equity fund cash balances growing and credit market thawing, there will be plenty of cash to chase acquisition opportunities assuming valuation expectations are somewhat realistic.”
As you move into 2011, you need to ask yourself what additional steps you can take through your product portfolio and channel strategy, to build a more profitable and sustainable business model.
About Scion Advisors, LLC. Specializing in the food and beverage sectors, Scion Advisors® is a business and strategy consulting firm with a proven approach that helps business leaders get to the next stage: reposition to grow or prepare for exit. The Scion team is comprised of seasoned executives with general management expertise who have achieved results across more than 100 companies and several industries. They have a track record of results, working alongside executive leadership to develop plans and teams capable of navigating complex business transitions with more confidence.