There’s more evidence that size no longer is the be all and end all for international companies, whether its in mining, retailing, manufacturing or even financial services.
It is a trend not unknown in Australia-BHP Billiton is looking to sell second tier assets in nickel, coal, aluminium (it has sold its manganese operations); Rio is selling costly mistakes like coal in Mozambique, but can’t find any buyers for billions of dollars of weak aluminium assets.
In 2013, Amcor spun off its Australasian packaging assets into a separate company and Brambles did the same to its Recall document storage operation.
In many cases the boards are looking to focus on assets with better futures and higher growth potential, while others are selling assets that are now secondary to the main game.
All that talk about economies of scale, marketing clout, buying power and the power of brand and their product extensions, are being abandoned because they don’t bring the desired benefits.
Size can in inhibit a company’s nimbleness, make it less responsive to the market and consumers, and raise costs.
Nowhere has the mirage of size and marketing clout been as seductive as in retailing, and among their supplier companies – the fast moving consumer goods (FMCG) giants at the heart of consumerism as we know it – Proctor and Gamble, Unilever, Danone, Nestle, Conagra, Colgate Palmoliver, HJ Heinz and Campbell Soups. Until recently, that is.
And, all the stories being written locally about the power of Woolies and Coles, are starting to look hackneyed against the emerging financial (weak sales growth and falling profits) strains we are witnessing among these big companies and their big retailers customers, from the mighty Wal-Mart in the US, to Tesco in the UK, Carrefour in France.
They are the world’s three largest retailers and have run into a low growth, weak profit environment in their home markets, as well as in many other markets where they expanded to find higher growth.
The retailing sector has been the worst performed market sector globally in 2014.
Size is no longer the best defence against underperformance as consumers reject the claimed benefits of too much choice, too many similar products (and brand extensions), which is at the heart of all business strategies among these FMCG European multinationals, such as Nestle and Unilever.
Major food suppliers have tended to move in fits and starts in rationalising their portfolios – Unilever has spent the best part of a decade trying to sort out its flagging food business, especially in the US.
It has sold its John West fish products brand, pasta sauces in the US and Europe, dietary products. Nestle has sold various food and perfume interest, and bought some food lines (from Kraft).
Up till now, the American FMCG giants have been slow or even reluctant to start rationalising their product lines.
But on Friday we saw the most radical move yet from a US global food giant.
Procter and Gamble revealed it plans to get rid of up to 100 weak performing brands in the next few years and focus more on its 70-80 top selling brand lines (including 23 those with global sales of $US1 billion to $US10 billion).
The move is likely to be followed by competitors, some of whom have been heading that way in recent years (Unilever and Nestle), but nowhere with nowhere near the ruthlessness shown on Friday by P&G’s CEO, AJ Lafley, who is in his second time at the helm of one of the world’s biggest FMCG companies.
It’s his reasoning that will echo round the world – he said in an earnings conference call that the consumer goods industry is offering people more products than they want. His comments echo the 2005 book with crystalised much of the thinking on this issue – The Paradox of Choice.
In his briefing, Mr Lafley told analysts "There is a lot of evidence in a number of our business categories that the shopper and the consumer really don’t want more assortment and more choice… consumers want to keep their life simple and convenient.”
He said that over the next one to two years P&G would divest or discontinue 90 to 100 of its smallest household and personal care brands, which make up about one-tenth of its revenue, to focus on 70 to 80 big “leadership” brands.
"(W)e are going to create a faster growing more profitable company that is far simpler to manage and operate. This will enable P&G people to be more agile and responsive, more flexible and faster, less will be much more. As we rationalized business and brand portfolios, product lines and SKUs, P&G brands and products will be easier to shop and more productive and profitable for our customers, our partners and for the company. This focus on fewer strategic brands will enable R&D to focus product and technology development on more consumer relevant and impactful brand and product ideas."
Mr Lafley would not reveal the brands to be sold, but he did say few would be in paper products, feminine care products and nappies.
That puts the emphasis instead on hair care, make up, shaving and healthcare. Some US analysts said this would see products with annual sales of around $US8 billion being sold. That’s around 10% of P&G’s annual sales.
Earlier this year P&G solid its Iams and Eukanuba pet food business to Purina, which is owned by Nestle, for $US2.9 billion.
Among P&G’s brands are Tide detergent, Pampers nappies, Bounty paper towels, Crest toothpaste, Gillette shaving products. the 70 to 80 big selling lines account for around 90% of P&G’s $US83 billion of sales in 2013-14 and 95% of its profit of $US11 billion.
P&G’s smaller brands include Braun Oral-B toothbrushes, Wash & Go shampoo and Antikal bathroom cleaner, Naomi Campbell perfume and Silvikrin hairspray. These are dozens of others sell around $US100 million or less of products a year.
"I’m not interested in size at all," Mr. Lafley said in an interview with The Wall Street Journal on Friday. "I’m interested in whether we are the preferred choice of shoppers."
Some of this is business strategy heresy, some of it has been driven by slowing consumer spending in the developed world and the rise on the internet and its myriad forms of competition for the consumer dollar and to retailers generally.
Suppliers like P&G, which is the second biggest global consumer products company after Nestle, have to change.
European companies such as Nestle and Unilever have been trying to drive higher growth by reshaping their product portfolios – selling a lot of food assets and buying services (such as the Nespresso idea of Nestle), or growing existing brand areas, as Nestle’s Purina did by buying P&G’s pet foods business earlier this year.
But even they haven’t looked across the entire their entire product portfolio and decided to rationalise to produce a smaller business to try and get bigger growth and profits as P&G is doing.
"With this refocus on consumer and shopper preferred leading brands, we will be able to focus selling operations by retail, account, wholesaler and distributor, strategies, tactics and in-store executions that really make a difference. The same simplification and prioritization enables all our functions to provide the business units and sales operations better value-added help and support," Mr Lafley said.
And he made clear in the briefing that the company’s marketing spend will change, which will be more bad news for print publications – while retailers will find P&G more willing to spend up on its core brands, while cutting support for the also rans.
