More Headwinds Ahead for CPGsNov14

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More Headwinds Ahead for CPGs

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The dollar’s ups and downs have had significant repercussions. The earnings of global companies, the trend of interest rates, commodity prices, and many nations’ economies – emerging markets in particular – have all been impacted. This issue of MRP’s Viewpoint first examines the forces driving the dollar’s fluctuations, then looks at where the buck might go next and offers some thoughts on what it could mean for the capital markets.

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More Headwinds Ahead for CPGs→

Summary: Consumers’ growing preferences for upstart and private brand products as sapping demand for established products that consumer staples companies are known for. To compete, the staples companies are being forced to innovate and invest more in research and development, which can be costly in the short term.

 Last month, the S&P 500 experienced its worst monthly performance in 7 years, with the SPY returning -7.2%. During that turmoil, the defensive consumer staples sector, as represented by the XLP, bucked the trend with a gain of 2.8%. It was one of the only sectors to survive October’s vicious sell-off with a net positive gain. Indeed, 44% of the market capitalization of the leaders in October were consumer staples companies, with a healthy tilt towards household and food products which we would consider consumer packaged goods (CPG).

The paradox is that CPGs are going through troubled times, leaving investors wondering whether such outperformance can continue in the face of several headwinds.

DISRUPTION FROM TECH COMPANIES

For a while now, technology companies have moved toward controlling online and offline points of sale and managing customer relationships in place of CPG brands. By dominating content, marketing and discovery platforms, tech companies have been able to harvest shopper data to determine what sorts of businesses they should invest in. Now, these companies are converting their data sets into cash by producing their own CPG private labels.

Compounding matters further, 55% of people now begin their search for a product on Amazon before checking other websites. With some 90% of all product searches that begin on Amazon ending in a purchase, advertising budgets are migrating to the e-commerce leader, which has been stuffing its pages with ads to leverage that digital real estate. Still, brands that advertise on Amazon must beat out Amazon’s similar private label products when it comes product visibility and pricing.

RETAILERS ARE MOVING DOWNSTREAM

Traditionally, companies like Kellogg’s and Covergirl don’t operate their own stores — they sell through Walmart, CVS, and other retailers. Now, those retailers are investing more heavily in their own private labels, squeezing out the established brands. CPGs are also in competition with a crop of online retail marketplace startups that have emerged over the past couple of year such as Brandless.com and Jet.com. Brandless joined the $760-billion US consumer packaged goods industry in July 2017, and markets more than 350 “good-for-you” products on its website. Every item sold on Brandless is private label and costs the consumer $3.

NEW DIRECT TO CONSUMER BRANDS

Coming out of the credit crisis, most CPG companies aggressively cut their advertising and R&D budgets to counter lack of top-line growth. Those measures were great for profits in the short term as costs fell and margins improved. But now years later, the innovation pipelines have run dry and the companies are lacking good, differentiated products to compete with new market entrants.

Meanwhile, over the past 5-7 years, a new breed of small and mid-sized brands has flourished thanks to three distinct revolutions that unfolded simultaneously. The B2B revolution which enabled a shift to capital flexible, low-barrier supply chains opened the door for new companies to enter the market. Meanwhile, a B2C revolution put consumers and companies in direct communication, allowing them to bypass third parties such as publishers, retailers, and agencies that had controlled the route to market. Finally, the internet revolution and digital advertising made it possible to garner valuable data on consumers so that brands could cater to them more efficiently.

Together, these three revolutions have paved the way for new brands to produce goods without having to own factories, to advertise without an ad agency or a massive media campaign buy, and to sell without getting shelf space at Walmart. They’ve also become adept at collecting data on their customers, tracking what they buy, love and hate so as to sell to them more effectively.

Some have already become significant threats to major CPG leaders. Chobani became the top-selling yogurt in the US in 2011, only four years after its launch, threatening established brands like Danone and General Mills’ Yoplait. Ice cream startup Halo Top, founded in 2011, became the best-selling pint of ice cream in the US in 2017, stealing market share from General Mills’ Haagen-Dasz and Unilever’s Ben & Jerry’s. Subscription razor startup Dollar Shave Club, founded in 2011, grabbed 7% of the US shaving market and 30% of US shaving e-commerce sales by 2016, significantly impacting P&G’s Gillette. Looking to emulate such successes, more CPG brands are entering the market than ever before and targeting everything from dairy, beverages, and meat to cosmetics, skincare, and homecare.

OTHER CHALLENGES

Changing consumer lifestyles are also making a mark. The number of stores in the country selling grocery & CPG products has declined from 50,000 in 2006 to 41,000 today, while the number of restaurants in the country has increased 18% since 2000. E-commerce has brought a lot of transparency to consumers, reducing staples companies’ pricing power at a time when costs for labor and transportation are rising. And, as if all that weren’t enough, activist investors are putting pressure on CPG players to perform better.

To combat these threats, CPG leaders are having to acquire retail chains to establish and maintain points of sale for their products. CPG represents only about 15% of the total online retail business today. Amazon’s 2017 purchase of Whole Foods served as a wakeup call, not just for grocers, but also for CPGs, since they rely on grocers and other retail outlets to sell their products. Once Big Tech entered their turf, online went from being an afterthought to a necessity, pushing CPGs to invest in expensive multichannel platforms for conducting business. Such investments will increase costs and lower margins for consumer staple companies in the near-to-medium term.

Mid-sized players will struggle the most from the growing cost of doing business and staying competitive with the largest companies. The price tag of technology would survival even more difficult for those that don’t have the working capital to invest in their businesses.

We’ve also summarized the following articles related to this topic in the Services section of today’s report.

CPG & Grocers

• Big Tech Is Invading Grocery: Are CPG Leaders Prepared?
• P&G streamlines operations with 6 industry-focused business units
• Chew on this: ‘Brandless’ website offers food items on the cheap
• Amazon, Other Top Grocers Add or Expand Click-and-Collect
• From traceability to Trump – predicting the US food trends of 2019

Staple Consumer Goods (XLP) vs Discretionary Consumer Goods (XLY) vs S&P 500 (SPY)

Economics & Trade

Inflation

US wholesale inflation hits quickest monthly pace since 2012

A jump in prices for trade services and gasoline helped US wholesale inflation rebound in October to the quickest monthly pace in eight years, after four consecutive months of decline.

The data follow the Federal Reserve’s decision on Thursday to keep its interest rate target range unchanged at 2-2.25 per cent. The central bank’s bullish assessment of the economy, including a further drop in unemployment and overall inflation close to its target, left policymakers on track to raise interest rates a fourth time this year in December.

The headline producer price index — a key measure of industrial inflation — rose 0.6 per cent month-on-month in October, according to data from the Bureau of Labor Statistics. That was its quickest pace since September 2012, up from 0.2 per cent in September and compared with forecasts of 0.2 per cent in a Reuters poll.

It took the annual rate to 2.9 per cent, from 2.6 per cent in September, versus forecasts of 2.5 per cent. This was the quickest pace of headline inflation since June’s 3.4 per cent reading, which was the highest level since November 2011.

The core PPI reading, which strips out volatile food and energy prices, rose 2.6 per cent year-on-year in October, up from 2.5 per cent the previous month and ahead of expectations for a 2.3 per cent rise. FT

Argentina Banks

In Land of Risk-Free 70% Returns, Banks No Longer Lend Out Money

Argentina’s central bank has become a kind of borrower of last resort. It’s the only place where banks can safely and profitably park their money, as credit drains out of a slumping economy.

President Mauricio Macri’s latest rescue plan, supported by a record $56 billion International Monetary Fund bailout, has involved jacking the world’s highest interest rates even higher — they’re now close to 70 percent. The goal is to pull cash out of circulation, curbing inflation and propping up a currency that lost half its value this year.

Policy makers want Argentines to hold pesos not dollars, and they want those pesos locked up in bank deposits. That’s starting to happen. The currency stabilized in the first month of the IMF plan, and time deposits spiked higher.

But after two decades of volatility, luring Argentines back into the local currency isn’t cheap. Banks are having to pay above 50 percent on those time deposits. To make a profit, they have to lend at even higher rates — and it’s hard to find creditworthy borrowers in a recession. B

India Banks

India’s banking system is flirting with a Lehman moment

For several years state-run banks have failed to get to grips with a $100bn mountain of dud loans. Now panic has seized parts of the privately run system. One bank boss says the situation is as bad as the Asian crisis of 1998 or the global crash of 2008.

India’s financial system has both Chinese and American characteristics; it faces a blend of a slow-motion banking crisis at government-run lenders, plus a high-speed liquidity run of the kind that hit Wall Street in 2008.

A sell-off in global markets could easily trigger a new wave of panic. The government, facing a general election next year, wants the central bank to lend more freely to the shadow banks. But the rbi does not want to reward failure and has so far injected liquidity only indirectly, by buying government bonds and allowing banks to guarantee some new bonds issued by shadow banks. It blames the government for its endless meddling in state-run lenders and for its failure to recapitalise them, despite years of warning signs.

In the short term the government is right—unless the liquidity squeeze abates soon, the central bank will need to set aside its natural reluctance and act boldly. In the long term the rbi is right. A “big bang” reform is needed to privatise the state banks and extract them from the government’s tight grip. India also must end the regulatory arbitrage that allows shadow banks to raise most of their funds from retail investors and deposit-taking banks. Either shadow lenders should come out of the dark and be turned into banks, or a firewall will have to be erected around them to protect the rest of banking. And if India does not get its financial system back on its feet, the economy will not grow fast. It is that simple. Economist

Finance

Payments

These Stocks Are Sitting On A $1 Trillion Opportunity In Payments

The revolution in payment methods is lagging in one key area: business-to-business payments. In fact, so-called B2B payments are largely a lose-lose scenario for businesses and their suppliers stuck with 20th-century inefficiencies. But that offers a $1 trillion opportunity for hot payment stocks like Visa (V), Mastercard (MA), Square (SQ) and PayPal (PYPL).

Many businesses are so focused on their growth that they miss out on the huge savings possible from more-efficient payment methods, says Rania Succar, who leads QuickBooks Payments and Capital at Intuit (INTU). To appreciate the potential in this space, consider the disparity in payment methods between consumer-to-business transactions and B2B payments. Even at your local flea market, you can use a credit card to electronically pay for goods in just seconds.

“It’s largely inertia. If you are in a small business, you want to be in the business of building your business,” she said in an interview. “You got into it because you had an idea for a unique product you could build or a service you could offer. And doing research to find out all the best point-to-point solutions is time-consuming.”

In contrast, B2B payments average 45 days to process. Small businesses making purchases often have to draft checks, obtain signatures and mail them to suppliers. Comparably sized suppliers have to wait for checks, manually process them, wait for them to clear and finally receive their money. IBD

Construction & Real Estate

Housing

A Fifth of China’s Housing Is Empty. That’s 50 Million Homes

Chinese President Xi Jinping’s mantra that homes should be for living in is falling on deaf ears, with tens of millions of apartments and houses standing empty across the country. Soon-to-be-published research will show roughly 22 percent of China’s urban housing stock is unoccupied, according to Professor Gan Li, who runs the main nationwide study. That adds up to more than 50 million empty homes, he said.

The nightmare scenario for policy makers is that owners of unoccupied dwellings rush to sell if cracks start appearing in the property market, causing prices to spiral. The latest data, from a survey in 2017, also suggests Beijing’s efforts to curb property speculation — considered by leaders a key threat to financial and social stability — are coming up short.

Housing speculation has bedeviled China’s leaders for years, as some cities and provinces tightened buying restrictions only to see money flooding into other areas. Rampant price gains also mean millions of people are shut out from the market, exacerbating inequality. Xi famously said in October last year that “houses are built to be inhabited, not for speculation.” B

Services

CPG & Grocers

Big Tech Is Invading Grocery: Are CPG Leaders Prepared?

Tech leaders are gathering data by controlling online and offline points of sale; investing directly in new businesses; controlling content, marketing, and search and discovery platforms; and testing out their own products. Over the past year, tech companies have begun to turn their data sets into CPG cash more directly. Today, we see two main models for doing so.

1. The Amazon model — turning data into consumer product sales.

2. The Alibaba model – turning data into insights, which can be sold to other businesses.

Just like in retail, the grocery “middle” is getting squeezed. As chains like Tops and Southeastern Grocers declare bankruptcy, they’re blaming competition from new premium, organic offerings on the one hand, and new budget players on the other. Those dual pressures will only increase. On the high end, we see premium private label products taking off, while on the low end, budget chains like Dollar General aim to massively expand in the grocery space.

If grocery businesses aren’t doubling down on data collection today, they’re going to wake up in 5 years and find that tech players have eaten their lunch. CBI

CPG & Grocers

P&G streamlines operations with 6 industry-focused business units 

Procter & Gamble (P&G) announced at an investor conference this week and in a news release that it is streamlining its management structure. The packaged goods giant, which owns brands like Tide, Pampers and Gillette, will reorganize to operate through six category-based Sector Business Units, or SBUs, starting in July next year.

Each SBU will have its own CEO leading major decision-making around brand communications, product and packaging innovation, consumer insights, cost management and the supply chain. The units will span P&G’s largest markets, such as the U.S., Canada and China, which account for roughly 80% of its sales, according to the release. The CEOs of each unit will report to P&G President and CEO David Taylor.

The change-up follows on the tails of activist investor Nelson Peltz winning a seat on P&G’s board in March, per CNBC. Peltz has put mounting pressure on the marketer to simplify and modernize its business structure. His appointment to the board was hotly contested: he initially lost a proxy vote for a board seat by a slim margin in October 2017, but then won a recount. P&G and Peltz were estimated to have spent $60 million collectively campaigning around the appointment, an amount Ad Age said was the largest ever put toward a proxy vote for a board position at a company. MDive

CPG & Grocers

Chew on this: ‘Brandless’ website offers food items on the cheap

On the website Brandless, every item you purchase is $3, yes, $3. Brandless says it markets more than 350 “good-for-you” products. Their $5 shipping fee is waived for orders over $39 or 13 items.

The company calls consumers “the community” and says it offers a way to cut the middle man out.

Brandless joined the $760-billion U.S. consumer packaged goods industry in July 2017. “We want to make sure that we provide people with equal access to that at a simple fair price,” said Brandless Chief Marketing Officer, Aaron Magness.

Although there is competition, with Target launching 70 items at $2, and online services like Instacart and Amazon; Brandless says it offers one-of-a-kind goods, so you don’t have to choose between 147 of the same type of item.

“If people truly understood the difference between what a product costs and what they paid,” said Magness. “By the time the consumer buys that product, it’s been marked up and marked up and marked up.” CBS8

CPG & Grocers

Amazon, Other Top Grocers Add or Expand Click-and-Collect

More than 10 retailers nationwide are adding a click-and-collect option to their grocery ecommerce program through a new service from Instacart – the same day Amazon announced expansion of its own pickup service from Whole Foods stores via Prime Now.

Publix, Sprouts, Smart & Final, Wegmans, Aldi, Schnucks, Food Lion, Tops, Price Chopper and Cub Foods, among other top grocers, are introducing the new service through Instacart Pickup, which piloted a multi-month program that received strong positive response from shoppers at the chains. The San Francisco-based grocery technology company will continue working with existing and new retail partners to add the option at stores nationwide through the rest of the year and 2019.

Meanwhile, Amazon has expanded its own grocery click-and-collect service from Whole Foods stores via its Prime Now service to eight cities, including Birmingham, Ala.; Colorado Springs, Colo.; Long Island, N.Y.; Milwaukee; Salt Lake City; San Antonio; Tacoma, Wash.; and Tulsa, Okla. Members of Amazon’s Prime subscription service in these areas now can shop Whole Foods’ selection of fresh and organic produce, bakery, dairy, meat, seafood, floral and everyday staples online or through Amazon’s mobile app, then pick up their order in as little as 30 minutes or less.PG

CPG & Grocers

From traceability to Trump – predicting the US food trends of 2019

Consumers demonstrated their power like never before in 2018, choosing smaller, emerging CPG brands over big legacy brands in higher percentages and by demonstrating they’re channel agnostic, by shopping for groceries in multiple retail formats, buying online, using food delivery services and dividing their purchases roughly equally between at-home and away-from-home eating.

Transparency begets traceability. Consumers increasingly want to know the provenance of the food products they buy. In the food industry, the promise of blockchain includes providing a way to enable consumers to trace the provenance and source of the products they buy or are considering buying. Blockchain also allows food companies to rapidly identify the sources of ingredients in food products recalled, which can better ensure public health and save money.

2019 will be the beginning of the realisation among food companies and marketers that having an omnichannel is not only smart – it’s essential for survival and prosperity. The bricks-and-mortar retail grocery and related format channels will continue to reign for CPG companies. But channels like online retail marketplaces Amazon, Jet, Alibaba, Thrive Market and others are now mainstream for food sellers, as is some form of direct-to-consumer strategy and implementation.

AlphaZero, an AI developed by Google’s DeepMind unit, is now the smartest and best chess-player on the planet. This same “smart” technology will take the food industry by storm in 2019, in areas like food and drink product development, marketing (personalisation), sales and retailing

VCs, many from the world of Silicon Valley tech, not only have infused hundreds of millions of dollars in to the food industry financing start-ups and emerging food companies in 2018, they’ve also become advice-givers and commentators, frequently writing, speaking and being quoted about the need for change in the industry. The mission of many venture-capital firms in fact is to directly disrupt the food industry status quo by investing money in food start-ups that either have a technology-focused angle or are disruptive in their very nature. Direct-to-consumer CPG and food delivery start-ups are two examples of the latter.

And President Trump has broken with long-standing Republican Party orthodoxy – and the orthodoxy of the previous two Democratic Presidents Clinton and Obama who were free traders who eschewed tariffs – and launched trade wars featuring tariffs on a slew of food and agricultural goods with markets including China, Mexico, the EU and Turkey. The trade war with the EU is said to be settled, at least in principle. But the trade war with one of the US’s biggest trading partners, China, continues – and it’s getting bigger and nastier. Just-Food

Advertising

First Consumers, Now Advertisers Leave Google for Amazon

A recent CNBC report indicated that some advertisers are abandoning the search giant in favor of Amazon, moving more than half of their ad budget to the e-commerce leader because that’s where people turn first to search for products. With Alphabet deriving over 80% of its revenue from advertising, Amazon’s growing dominance in search could be an impediment to future Google growth.

Consumers already prefer Amazon to Google when searching for a product. Approximately 55% of people begin their search on Amazon before checking other websites, and lately Amazon has been stuffing its pages with ads to leverage its digital real estate. Amazon is now the third-largest ad platform behind Google and Facebook, though eMarketer data suggests Amazon is still far behind with a 4% share of digital ad dollars.

Because Amazon is largely the default destination for people wanting to buy something online, it makes sense that it is the leader in product search. And with some 90% of all product searches that start on Amazon ending in a purchase, it’s logical that ad dollars are now migrating to the site. CNBC

Video Games

Major Video Games Make More Money Than Blockbuster Movies

Rockstar Games has a hit with Red Dead Redemption 2. And as the latest chart from Statista shows, it’s even a bigger deal than Marvel’s Avengers franchise. Using data from video game companies and Box Office Mojo, which tracks the money-making of any and every movie ever made, Statista’s chart shows that the games from Rockstar have much bigger debuts than the biggest films of the last few years — Avengers: Infinity War, The Fate of the Furious in 2017, and Star Wars: The Force Awakens in 2015.

Even the biggest movie haul on opening weekend was Avengers at $641 million (worldwide); Rockstar’s top two titles both beat that. And one of them was Grand Theft Auto V back in 2013, which took in a cool $1 billion in sales in three days, making it the fastest-selling title of all time. Entrepreneur