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Friday, April 23, 2010

The Case of the Vanishing SKU's

The other day I was in a supermarket line. A lady in front of me had a very large order and sent her 10-11 year old daughter back to the aisles to pick up a can of pumpkin as she took her many other items out of the shopping cart. The child returned moments later and the mother shouted at her saying “We don’t buy Libby’s. They are a Nestle company. Nestle is despicable”.

Relax. This post will not be a diatribe against Nestle, the world’s largest food processor. I felt bad for the little girl who was clearly embarrassed by her mother’s outburst. But then I began to laugh softly to myself as the mother hoisted a case of Poland Spring water onto the conveyor belt. Guess who owns Poland Spring? Why, Nestle, of course, which also owns Arrowhead, Deer Park, and Ice Mountain among others in the U.S. bottled water space. Even passionate activists and insensitive parents have a hard time keeping track of who owns what these days.

Over the last 30 years, there has been quite a consolidation in foodstuffs and household and personal products and I have observed a certain pattern with it. First, the company, a large one, goes on a shopping spree and buys up a few competing companies or brands. Then, heavy with debt, they shut down a plant or two (often in the U.S.), cut overall production, lay off staff, and then begin to eliminate products. It is not uncommon for 15-20% of Stock Keeping Units (SKU), the code for every item in a store, to vanish for a company within a given year. Sometimes, they pay a heavy premium for a company and several of the brands are gone very quickly. Over time, this leads to fewer niches in the marketplace except at the high end where smaller players often still abound.

Competition still exists although there are categories such as toothpaste where the two major players control 80% of the handle. Few know it because the brands are generally identified under their old corporate names on the packaging. Part of this is natural in a rapidly changing world where the concept of Creative Destruction as articulated by Joseph Schumpeter comes into play (for more on Creative Destruction, see Media Realism 1/30/09).

But, over time, our choices are getting a bit more limited and they congregate to the big companies which have a whole family of offerings in a category. Barry Lynn, an astute retail observer and author of the recent book Cornered put it this way—“Do you think it is hard to get your child into Harvard? Try getting a new product onto the shelf of a big chain of stores in the U.S.”

Each year some new ones break through and some old ones survive as independents. But they face slotting allowances for shelf space, lack of marketing dollars, lower name recognition, and tough retail demands on packaging, pricing and content if they want to play at Wal-Mart or Target. It is no wonder that some sell out. Imagine that you built a modest brand up from scratch. You are sixty years old and Coca-Cola, Nestle, Kraft, or Kellogg comes to you with a buyout offer. They offer you a tax deferred swap of your equity for 1 million shares of Coke, Kellogg, 1.3 million of Nestle, or two million of Kraft. Each company tends to raise the dividend each year so you know that your children and grandchildren will have ever increasing payouts as far as the eye can see. They give you a management contract as a consultant for a few years and then sever the ties with you. You lose your baby of a brand but the dividend checks come every 90 days. As Hemingway once said, “Money does not buy happiness but it soothes the nerves.” It has to be pretty tempting.

Invariably, we will see more of this. A small investor who e-mails me frequently buys companies that he feels will be gobbled up. His latest gambit is Heinz (HNZ). He wrote to me that sooner or later Nestle has to buy it and meanwhile you collect a nice little income while you wait. My opinion is that Nestle does not have to do anything and will make their own decision. At the same time, some people will likely make money buying large but second tier players that will at some point be gobbled up by the behemoths.

How does this relate to the communications field? Plenty, I believe. Over the years, I worked on several food brands and many financial institutions. The food brands are either extinct or owned by a conglomerate and the banks are all gone; every single one. For years, they were a mainstay for small and mid-sized ad agencies. They were immensely profitable pieces of business, let you do fairly good work, and gave you a million or two extra media dollars in your local community. Since 1980, the U.S. has lost a bank almost every working day due to buyouts or mergers. And, in the last 18 months, the Federal Deposit Insurance Corporation (FDIC) is closing 5-7 banks per week. If a larger player takes over the assets, local agencies lose nice accounts.

In foods, the same thing works. Many agencies that I know well or have worked at had package goods accounts in the $8-12 million dollar range. You get to do some nice creative, the account and media teams learn some package goods disciplines and you buy some national media. Everyone involved at the shop should become a better marketer as a result of having a food account on the roster. As these companies get gobbled up, the media immediately leaves for the conglomerate’s buying arm, and the creative almost always follows.

Broadcasters and local cable players also get hurt as the new owners either go 100% national with the brand as part of a multi-product buy, morph the entity (bank) into their national/regional name, or maybe shut down some of the product lines.

This is one more challenge that small and mid-sized agencies and local media will have to face in the years ahead. It has been there for a long time but as the economy recovers, M&A activity is likely to accelerate later this year and many will feel the pinch through no fault of their own.

Finally, allow me one more personal story. Not long ago, I was at an all day meeting at a company. We had lunch in the conference room followed by a break so people could get to their blackberries and e-mails for a bit. I used it to grab my toothbrush and Colgate from my bag and head for the men’s room. As I was applying the dental crème to the brush, a pleasant young fellow from the meeting pulled up to the sink beside me and began to do the same thing. “Why do use Colgate?”, he asked. I told him that I liked the taste as a kid, have pretty much stuck with it, and have not had a cavity in 45 years. He smiled and shook his head and said, “I avoid buying from big companies. That is why I brush with Tom’s of Maine”. I did not have the heart to tell him that in 2006 Tom’s sold out to Colgate-Palmolive.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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