Tough times for global consumer firms

The affluent, aging populations of the developed world represent one of the most likely sources of profitable growth for consumer products companies in the coming years, according to a new report released last week by Deloitte Touche Tohmatsu Limited.

Global powers of the consumer products industry argues that whilst developed markets as a whole offer limited opportunities for growth, the “forever young” attitude of the baby boomer generation represents a significant opportunity for innovation to address the specific needs of this consumer segment.

Dr. Ira Kalish, Director of Consumer Business for Deloitte Research in the United States said: “With the oldest baby boomers turning 65 this year, American companies have responded by creatively overhauling product lines, enlarging typeface and lowering store shelves to cater to and capture market share of a relatively affluent generation. Aging populations elsewhere in the world such as the UK, Germany, Japan, and even China and Russia offer similar opportunities and we would expect to see new products being developed for this group. For example, consumer products companies are already leading the way in functional foods to help manage disease, illness, and health and wellness.”

Whilst baby boomers have the potential to become a source of growth for consumer products companies, the report suggests that the biggest single opportunity comes from the emerging middle classes in developing economies, with an estimated 70 million new consumers expected to enter the global middle classes each year. However, to fully exploit this opportunity, companies must prepare for radical innovation to deliver the right products at price points that are typically well below equivalent products in the developed world. Lawrence Hutter, Global Consumer Business Leader at Deloitte Touche Tohmatsu Limited, said: “The emerging markets will be a laboratory for innovation, as companies adapt and develop new products, services, manufacturing, and marketing techniques to fit the lifestyles and values of their consumers. We can also expect to see more mergers and acquisitions in the Asia Pacific region, especially China, as well as in Latin America, specifically Brazil. Those markets continue their fast growth and both foreign and domestic consumer products companies want a part of that opportunity.”

The report, which ranked the world’s largest 250 consumer products companies by global sales, found that 60 percent suffered falling sales in the most recent financial year. As a group, the Top 250 consumer products companies saw a composite sales decline of 1.2 percent in fiscal year 2009, which encompasses year-ends through to 30 June 2010. While the rate of decline slowed or even reversed for some companies in the fourth quarter, 149 companies in the Top 250 experienced negative sales growth for the year as a whole.

However, many companies acted swiftly in this challenging environment to adjust their cost structure in order to maintain or improve profitability. As a result, the composite net profit margin improved for the 215 companies that reported their bottom line results. The fiscal year 2009 net profit margin increased to 6.4 percent from 5.6 percent.  In stark contrast to the dismal sales results, nearly 90 percent (193 of the reporting companies) were profitable in 2009 compared with 80 percent of these companies in 2008.

According to the report, companies headquartered in North America had the highest profit margin at 9.4 percent, followed by those in Africa and the Middle East (7.9 percent) and Europe (7.2 percent). However, North American companies also suffered the sharpest drop in sales, reporting negative growth of -3.2 percent. Latin America was the only region in which companies reported positive sales growth. In this region, sales surged by 16.3 percent and the eight companies headquartered there had a net profit margin of 5 percent.

Kalish added: “The operating environment for consumer products companies remained harsh throughout the last financial year and had a dramatic impact on top line sales. Looking ahead, the industry will worry about inadequate demand in rich countries and overheating in emerging countries.  Exchange rate volatility, rising commodity prices, changing fiscal policies, and the sustainability of recovery in some markets will also be cause for concern.”

Top 250 highlights

In 2009, consumer products industry still in grip of recession

The aftershocks of the financial crisis that began in 2008 were still reverberating around the globe in 2009, although with a different intensity and duration in various parts of the world. Throughout the consumer products industry, the operating environment remained harsh, mainly owing to a slump in demand brought about by rising unemployment that led to a reduction in household income and by falling consumer confidence resulting from continued economic uncertainty. This made 2009 an especially tough year with regard to top-line sales.

As a group, the Top 250 consumer products companies suffered a composite sales decline of 1.2 percent in 2009, a dramatic drop from 4.3 percent sales growth for this same group of companies in 2008. While the rate of decline slowed or even reversed for some companies in the fourth quarter of 2009, 60 percent of the Top 250 (149 companies) experienced negative sales growth for the year as a whole. In half the product sectors (fashion goods, home improvement products, leisure goods, and tires), sales declined for all but one or two companies.

However, many companies acted swiftly in this challenging environment to adjust their cost structure in order to maintain or improve profitability. As a result the composite net profit margin improved for the 215 companies that reported their bottom line results. The 2009 composite net profit margin increased to 64 percent from 5.6 percent for these same companies in 2008. In stark contrast to the dismal sales results, nearly 90 percent (193 of the 215 reporting companies) were profitable in 2009 compared with 80 percent of these companies in 2008.

Combined sales for the 250 largest consumer products companies exceeded $2.57 trillion in 2009, significantly less than the Top 250 total in previous years. (Note In addition to overall negative sales growth, changes in the composition of the Top 250 are primarily responsible for this drop in total sales volume. A number of companies were excluded from the 2009 Top 250 analysis as it was determined that consumer products did not comprise the majority of their sales. These decisions had a disproportionate impact on manufacturers of electronic products, which tend to be much larger, on average, than other consumer products companies. For many of these companies, the majority of sales are derived from products and services targeting commercial and institutional customers. In addition, several other companies were removed that were deemed to be primarily retailers rather than manufacturers of consumer products in 2009. (These companies will be included in the Globe/Powers of Retailing study in the future). The average sales volume for the Top 250 in 2009 was $10.3 billion. The threshold level to rank among the Top 250 consumer products companies was $2.3 billion.