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Monday, May 17, 2010

The Future of International SKU's

A few weeks ago, I posted a story on vanishing SKU’s (Stock Keeping Units). To my surprise, it generated more mail than any other Media Realism piece to date. Some enjoyed, some agreed, many were amused by it and one reader said that I had definitely become a socialist! The mail also included requests from readers on three continents who asked me to expand on it and discuss what is happening internationally and what may the future may look like in their neck of the woods.

So here is my take. It may be different from what you see or hear elsewhere.

About 20 years ago, American multi-nationals began to realize that countries with emerging middle classes were becoming a happy hunting ground for well established brands. Colgate-Palmolive was way ahead of the pack. As early as 1972, some 52% of their sales were outside of the U.S. Other U.S. brands got religion and began to make their move abroad for several reasons:

1) Many brands were in mature mode in the U.S. and margins were paper thin. Beverages would be a good example. So, to keep growing they had to follow growth trends regardless of the passport of the new markets.
2) Foreign countries had some native brands but many were not national in scope. They did not have expertise in mass production, distribution, or branding.
3) Importantly, few had much advertising expertise as there were few media outlets available and not nearly as much TV as the U.S.
4) There was a halo effect. American pop culture traveled well whether it was blue jeans, Budweiser, Marlboro, Coke and Pepsi, McDonald’s, music and Hollywood films. So, when American products showed up, the new generation of consumers in emerging markets gobbled them up.

Since then, a few things have happened. Locals who did not have the expertise slowly began to get it. Some did knock offs of American products and succeeded as well. Countries such as India, Brazil, Korea, even Turkey now have indigenous brands that are thriving and fiercely competitive to US brands or Switzerland’s Nestle or the Anglo-Dutch conglomerate, Unilever.

So, for the next several years we may see brand and resulting SKU expansion around the world. But, then the big boys will pounce as they have done in the states for the last few decades. How will they do it? Do this exercise and you will come away convinced. I took a careful, actually boring look at the balance sheets of beverage and snack food king PepsiCo, the world’s largest food processor Nestle, and insurance giant and conglomerate Berkshire Hathaway. These companies are growing with almost armored car safety. If the present trend continues in about three years, they will be able to secure long term debt at a price far more reasonable than the US government will. This gives them access to capital that is easy and cheap relative to 99% of emerging market competitors.

These giants and others like them will buy up strong local brands across the globe at a pace far faster than the past and the cycle that we have seen in the US will only repeat itself.

Is this a good thing? Probably not as fewer SKU’s means less competition and less consumer choice. But the economies of scale that the multi-nationals provide may keep prices down for a while. Capitalism is relentless and unforgiving. The strong will get stronger and office workers in Manila will soon shave with Gillette, have Nescafe at breakfast along with a Kellogg’s cereal, brush with Colgate, and knock back a Pepsi at lunch and a Bud or two after work.

Also, if the dollar dives in a few years as our massive deficits finally catch up with us, earnings of the big multi-nationals may zing as big sales in stronger Asian currencies are repatriated back home.

Another big beneficiary will be the large advertising holding companies that have global responsibility for key brands. Right now, these accounts have the growth potential similar to many US brands in the early 1950’s.

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

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