Should We Thank Mr. Peltz?

The stakes are high. And, becoming higher.

While Amazon dominates the news, the shifts in the consumer value chain are far more fundamental. The redefinition of shopping is exploding with changing formats and new directions. The pace is fierce. In the face of change, consumer product companies, once the brand captains and marketing darlings, are slow to rethink fundamentals.

Tensions climaxed this week with Trian's argument that Mr. Peltz should have a board seat at the iconic Procter & Gamble. As a past P&G employee, daily, I have gotten Linkedin ads to vote against Peltz's seat on the board. The pressure is fierce. More than 400 people showed up for the shareholder meeting at P&G’s Cincinnati headquarters, filling an auditorium and spilling into two overflow rooms. Retail investors own roughly 40% of the company, compared with an average of 12% at the S&P 500. P&G shares over the past decade have lagged behind competitors’ and the S&P 500.

However, the fight at P&G is not unique to Procter. It just has more fanfare. The issues are systemic and across the value chain. Let's examine the facts and ask some tough questions:

•  German Retailers Redefine Formats for a Simpler Grocery Experience. Aldi and Lidl are evolving in the US as masters of store efficiency. While the traditional grocery store has over 20,000 items in more than 250 categories, these German retailers have 80-90% fewer items with ? the categories. The impact is far fewer line extensions on the shelves. Simpler shopping. If this is the case, why have consumer products companies added 38% more items to their item master over the course of the last five years? This drives cost and complexity.
• New Services/Solutions. Albertson's recently purchased Plated to try to bring cooking to the home. Families want healthy, value-based meals. Many don't know how to cook. The company is attempting to redefine omni-channel meal service. One might ask, "Why is this not happening under the direction of McCormick or Conagra? Or General Mills?" Why are consumer products companies so slow to bring new models to market?
•  Decay/Distrust of Big Brands. The introduction of Honest and Brandless as successful start-ups is a megaphone for customer sentiment. The names, by definition, defy big brand power. In parallel, private label, or retail house brands are growing. Private label is 18% in the United States. It is 45% in Switzerland. Big consumer brands are shrinking. The center store of a grocery store is moving online. Why are Unilever or P&G not leading this effort? Why did Unilever have to buy Dollar Shave Club versus invent it?
• The Amazon Effect. As Amazon extends its tentacles, stretching into supply chain crevices, and redefining capabilities, many boards are waking-up to question tomorrow if they don’t act now. I would argue that P&G should have acted faster. With brand power and brand insights, why were they so slow to move into eCommerce? Why were they not Amazon?

Big brands are out of step. Shoppers want local along with fresh and personalized products. They want locally sourced goods, convenience and product quality. In the last decade, as consumer packaged goods companies drove global growth strategies, the focus was on supply chain efficiency and the delivery of a standardized product. Mistakenly, consumer products companies have attempted to grow through acquisition. M&A deals in the first quarter of 2015 rose by 14% and 25% year-over-year respectively making it the largest deal quarter since 2007. In Figures 1 and 2, the decay in business results speak for themselves.

Figure 1. Year-over-Year Shifts at the Intersection of Operating Margin and Inventory Turns in Consumer Goods Nondurable Companies

Figure 2. Year-over-Year Shifts at the Intersection of Operating Margin and Inventory Turns in Consumer Goods Food Companies

In this environment, food companies struggle more than household products manufacturers. For food brands, there is a steady decline in operating margin. Balancing ingredient costs, commodity strategies and increasing legislation issues, they have failed to orchestrate cost trade-offs across the silos. In Consumer Products, the swings in inventory are largely reactive based on the market pressures.

There is no substitute for knowing the customer. These companies know this. It is in their veins, but they are slow to build new models and late to ship directly to the shopper. The focus has been on new product launch not solution innovation. In the area of new product launch, there are few successes.The models have changed, and innovation within the companies has not.

Within consumer manufacturing, digital marketing teams operate largely in isolation of the larger organization. Traditional marketing programs reign. Companies "yell" their messages into the market through advertising, but they do not know how to "listen or test & learn." The gaps between marketing and operations are large and growing. Companies do not use Point of Sale (POS) data for replenishment and cross-channel strategies are slow to develop.

Within the consumer products company, sales and marketing turn to traditional definitions of trade promotion and advertising which are largely out-of-touch with today’s market. Traditional promotions shift demand and add cost. No consumer products company has successfully adopted the model to be market-driven. When companies are market-driven they sense, adapt and evolve based on insights from the shopper outside-in. Many companies are talking about driving a digital transformation, but the inertia is against change.

Consumers want convenience, local and customized choices. Supply chains should be fit for purpose. The branded consumer supply chain is delivering anything but convenient, local and personalized products. The consumer manufacturer has been on a three-decade old journey to be efficient, but they are not effective. With the intense pressure, the functional silos of sale, market, make, source and deliver are focused on becoming even more efficient, but out-of-touch with the market.

To stir the debate, in Figure 3, we share P&G's orbit chart for the same period. Note the decline in operating margin for the period of 2008-2015. Did shareholder activism drive the improvements in operating margin in the period from 2015 to 2016 by forcing the divestitures? Or was it the hand of responsible leadership? And, why was the change not driven faster? We will probably never know. I believe that P&G mistakenly believed they could grow through M&A to exert more brand power on the retailer and the markets. However, as the sand shifted under their feet, they were slow to react.

Figure 3. Orbit Chart for P&G for the Period of 2006-2016

Maybe Mr. Peltz will be a wake-up call to save traditional branded consumer product companies.... The story may give some boards new courage to act. Let's just hope that in the process we avoid another Barbarian at the Gates RJR story.

I welcome your thoughts.

Sources for the article

Financial Times, The Hedge Fund, the Investor, and the Fight for P&G's Future, Anna Nicolaou in New York and Scheherazade Daneshkhu in London, https://www.ft.com/content/a4c4d59e-aff7-11e7-beba-5521c713abf4?mhq5j=e7, October 13, 2017

Orbit Charts are Based on Syndicated Public Data Sourced from Y Charts using techniques developed to study supply chain excellence by Supply Chain Insights

Retail Trend Data on Retail from a presentation at a Symphony conference by Pallab Chatterjee, on 10/9/2017, https://www.xcelerateretail.com/eu/

Wall Street Journal, P&G Board Vote Comes Down to the Wire, Sharon Terlep and David Benoit, https://www.wsj.com/articles/p-g-board-vote-comes-down-to-the-wire-1507629601, Updated Oct. 10, 2017 8:57 p.m. ET