G.M.A. Leadership Forum exclusive: Finding the formula for growth

by Josh Sosland
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Accelerating growth is within reach for large consumer packaged goods companies.
 

WHITE SULPHUR SPRINGS, W.V. — Accelerating growth is within reach for large consumer packaged goods companies but will require agility at a time the industry grapples with major changes on numerous fronts. That was the message of a panel of leading C.P.G. executives culminating the 2017 G.M.A. Leadership Forum.

The Grocery Manufacturers Association event was conducted Sept. 10 on the final day of the group’s meeting held at The Greenbrier in White Sulphur Springs.

Shiv Iyer, managing director and partner at Accenture, moderated the discussion, which featured Michele G. Buck, president and chief executive officer, The Hershey Co., Hershey, Pa.; M. David Darragh, president and c.e.o. of Reily Foods Company, Inc., New Orleans; Benno O. Dorer, chairman and chief executive officer, The Clorox Co., Oakland, Calif.; George Zoghbi, chief operating officer, U.S. Commercial Business, The Kraft Heinz Co., Chicago; and Paul Grimwood, chairman and c.e.o., Nestle USA, Inc., Rosslyn, Va.

Paul Grimwood, Nestle
Paul Grimwood, chairman and c.e.o. of Nestle USA

Calling the current situation “very dynamic,” Mr. Grimwood said the industry’s fate rests on how “we actually deal with that.” Preparing for this change will be made easier by what he called “a little pause right now while we try to work that out.”

“But I think that companies are reacting to those changing dynamics in the market and are reacting very quickly,” he said. “And I think, actually I’m very excited because the pace of change, the way we have to invest, the capital we have to invest is probably going to be more dynamic than any time in the last 30 years.”

Benno O. Dorer, Clorox
Benno Dorer, chairman and c.e.o. of The Clorox Co. 

Growth is in the marketplace today for those who know where to look, Mr. Dorer said.

“If you think there is growth, there will be,” he said. “The opportunity for all of us is to find growth currents. If you look at this as the sea, the sea is pretty flat. Underneath, there are growth currents. And there are many. It’s the multicultural transformation of the demographics. It’s millennials. It’s baby boomers. There is growth everywhere. For us, the opportunity is to get hold of those growth currents and drive them.”

Ms. Buck said Hershey is working hard to maintain a focus on its heritage business while simultaneously working intently to change its corporate culture to adjust to industry changes.

Michele Buck, Hershey
Michele Buck, president and c.e.o. of The Hershey Co.

“In the first six months of the year our core brands grew mid-single digits in an indulgent category at a time there was pressure in the marketplace,” she said. “I think it’s because in the category we are in, a lot of the key players really played well on some of the fundamentals. They had great innovation. Good merchandising at retail. So some of the fundamentals we can drive against and still get growth.”

At the same time it is necessary to build new business models within existing food industry organizations to handle increasing complexity, she said.

“We may still need some of our existing models against our core, but we may need some very different models against some of the growth vectors,” she said. “So I’m very interested and spend a lot of time thinking about the organizational construct that will let us win.”

George Zoghbi, Kraft Heinz
George Zoghbi, c.o.o. of the U.S. Commercial Business for The Kraft Heinz Co.

While the lack of growth across the consumer product goods sector is real, the situation is not intractable, Mr. Zoghbi said. Noting that certain categories are performing well while others are not, he said the environment is not to blame. Instead, it is that C.P.G. companies are not “doing enough as organizations go generate the growth.”

This inactivity reflects how the industry is grappling with change in a way that is fundamentally different than the past, Mr. Zoghbi said.

“Change happening today is unique, because it is happening at three levels,” he said. “We are seeing the consumer landscape changing. We are seeing the retail landscape changing. And we are seeing business models changing, all at the same time and at a very high speed. And I truly believe once we adjust to dealing with it as organizations, the growth will come as a consequence. Because it is a big wakeup call for all of us.“

David Darragh, Reily Foods
David Darragh, president and c.e.o. of Reily Foods Company

Mr. Darragh challenged his colleagues by speculating that “traditional brands as we know them may not be around in the future” and that the advantage of scale has diminished over time.

Mr. Grimwood was unwilling to accept that large C.P.G. companies were unable to produce blockbuster innovation.

"I seem to remember, I think it was about 12 years ago, there was a really good idea came from a very embryonic part of our business and it was called Nespresso,” he said. “And that business basically didn’t go through mainstream supermarkets, it was a direct-to-consumer delivery model and super premium, and we all know the story, it’s a multi-billion dollar operation at the present moment.”

Mr. Grimwood and others advocated for a hybrid model as necessary for larger businesses. The first element of the hybrid is carefully looking after the core, recognizing that pressures on this business are unavoidable in the current environment, he said.

He warned against reckless spending in pursuit of trends.

“There are an awful lot of people who put a lot of money down betting on external growth drivers that have proven to be fashion,” he said. The second part of the hybrid model at Nestle has a number of components, including a Silicon Valley innovation office and the close work Nestle is doing with start-ups.

While in agreement that scale does not confer the advantages it did in the past, Mr. Zoghbi disagreed with the notion that “big brands are dead.”

“Philadelphia Cream Cheese is growing market share from 63%, up five years in a row,” he said. “Heinz Ketchup is growing market share in the 60s and up, and the list goes on. What is interesting is large organizations and some great or respected organizations create new categories every year. We created the meal categories. We created the Lunchables categories. It’s a billion dollars. It’s much larger than many organizations. However, we have been slow in reacting in the areas where we have brands that are losing relevance with consumers. So the playbook for us in the future is to move fast.”

He highlighted three parts of this playbook:

  1. The need to keep renovating to maintain relevance with consumers.
  2. Build the innovation on top of that
  3. Communicating to where the consumers are reading and watching and surfing.

Ms. Buck credited 3G Capital with helping Hershey and several other C.P.G. companies realize success is possible with a much leaner cost structure.

“They showed a lot of us in C.P.G., ‘Wow, we can run in a really lean cost structure,’” she said.  “I do have the opportunity to run even more efficiently without losing the good of what I do by making smarter choices.”

While acknowledging start-ups have in many cases successfully attracted consumer interest and chipped away at the market share enjoyed by larger companies, the smaller competitors have not been successful by every measure over the last 5 to 10 years, Mr. Grimwood said.

“Sometimes they have the growth, but very, very, rarely do they have the profitability at the bottom line,” he said. “And there are a lot of companies that I have seen that have actually gone out there and purchased very big acquisitions, especially in this market. If you look at some of the purchase multiples, I mean, quite frankly, why would you buy these businesses?  It tends to be in the U.S.”

Shiv Iyer, Accenture
Shiv Iyer, managing director and partner at Accenture

Declaring “there is no reason why a start-up should know the consumer better than a big company should,” Mr. Iyer challenged the panelists over why that is happening.

Beginning with Mr. Grimwood, a number of the panelists discussed how size and complexity distracts employees from focusing intently on the consumer. To explain, Mr. Grimwood said companies the size of Nestle “breed complexity.” Noting that information technology costs at Nestle were going up and up and up, he described a “quiet word” he exchanged with the head of I.T. some time back.

He continued, “I just said, ‘You know the end of the month, you know all the reports you run? He says ‘Yeah.’ And I said , ‘Don’t.  And let’s see what happens.’ So we basically switched off the reporting mechanisms apart from some very top-line reports.”

 With few exceptions the reports were not missed — 78% of monthly reports in all, he said. A similar process allowed Nestle to successfully reduce its stock-keeping units nearly in half, again without significant disruption.

“It’s about simplifying or taking the complexity out of an organization and a company the size of ours,” he said.

Mr. Zoghbi said still more is required to better refocus employees on the consumer.

“We don’t believe it’s enough to ask people to stop doing something,” he said. “Because if I’m doing something that is taking 20% of my time and I stop it, what would I do with that 20%? I’ll just create another thing.  Which then I do a project three months from now to stop that new thing. So two things actually, people and s.k.u.s create complexity in an organization.”

He also said innovations often fail to gain traction in large organizations because one individual’s top idea may turn out to be number 15 when considered by a large group.

“So, it is never going to thrive,” he said.  “So what we are learning is, for strategic reasons, if we believe that trend is strategic, and it’s going to be there for the long term, 10, 15, 20 years from now, is how can we take it outside the mainstream organization and let it grow there? So these are the two things that goes back to the hybrid model that Paul talks about: How can you make the core efficient and how do you create an environment for small ideas to be able to grow?”

Asked about the rise of e-commerce in food in the wake of the Amazon acquisition of Whole Foods, Mr. Grimwood warned that change probably will occur more quickly than many expect.

“It’s all very exciting to see Amazon take Whole Foods and the pace with which they’ve adjusted pricing, and the pace with which they have changed the model in terms of direct to home deliveries, being phenomenal,” he said. “I don’t think we’ve seen anything yet. In the U.S., in the grocery market, in actual fact we have had a whole industry that has been trying to slow down the progress of e-commerce, home delivery, groceries delivered to home. And we’ve also had some pretty inefficient disrupters around the place that have been working on margins that frankly haven’t covered their overall cost base. I think we are going to see huge acceleration in e-commerce in grocery. What’s going to happen is that the major retailers are going to have to step in very quickly. Otherwise, their brick-and-mortar costs are going to be so significantly de-leveraged. And I think there are going to be more people coming to the party, much quicker than we’ve anticipated. I mean remember, you know, you’re probably talking U.S. versus the U.K., today, there’s five times the level of home delivery and click and collect there is in the U.S. If you take France, it’s six times greater. Over the next two to three years, well, is it two to three years or is it two to three months, you are going to see a lot people who are going to have to engage really quick, so this digital communication with consumers accelerating will continue to accelerate but actually the e-commerce element of that in terms of how we deal with consumers to deliver the products that we have to how they want to buy them I think is going to be probably the biggest step change we’ve seen. We thought it was fast and in the last three years I think it’s going to be incredible over the next two to three.” 
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