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Key Strategies for Stock Growth
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Because of their maturity, most consumer goods industries have already gone through periods of consolidation. As a result, most industries are dominated by a handful of huge companies that account for the majority of category volume and sales. For instance, in 2OO2 Anheuser-Busch, Coors, and SAB Miller, the three largest brewers, controlled more than an 80 percent share of the do­mestic beer market. Wrigley owns close to a 60 percent share of the domestic gum market.

The sector's maturity also means that firms have only a few basic strate­gies for growth available, and most companies rely on some combination of these approaches.

Steal Market Share from Competitors, Usually by Introducing New Products This approach can be a fairly costly proposition. PepsiCo (which makes both beverages and salty snacks through its Frito-Lay division) spends an estimated Si. 6 million, on average, to develop a new product. That doesn't include the cost of consumer marketing support and sales allowances to retailers critical to the success of any product in the crowded consumer markets. Since PepsiCo launched 456 new products between 1998 and 2OOO (many of which were In the Frito-Lay division), the bill for all that innovation was a whopping $729.6 million.

Unfortunately, the road to a successful new product is littered with many failures. Of the thousands of new food and beverage products launched in 2OO2, only 130 generated more than $7.5 million in revenue during the first year. 1 If sales of a new product do not show signs of positive momentum in the initial 6- to 12-month trial-building window, store managers are often re­luctant to leave it sitting on valuable shelf or freezer space.

For companies as large as many of the consumer goods firms, even a strong lineup of new products can lift revenue by only so much—usually just slightly above GDP growth. Thus, on the whole, leading firms post no better than mid-single-digit revenue growth.

Grow by Acquiring Other Consumer Goods Companies

Some companies opt to enter new product lines by purchasing other firms. For example, Gillette acquired the Duracell Battery business from Ralston- Purina in 1996 to establish a presence in that market. In 2001, PepsiCo pur­chased Quaker Oats primarily for the Gatorade franchise. Unfortunately, this strategy can be hit-or-miss, depending on the companies and price paid. Following some initial bumps in the first year after acquiring Quaker, PepsiCo managed to iron out problems and was ahead of schedule to achieve operating efficiencies in mid-2003. There was a high level of synergy in this particular case because both companies were mainly in the food and beverage businesses. The distribution systems and retail customers of the firms overlapped, and both companies were strong marketing organizations.

On the other hand, Gillette's acquisitions have not turned out as well. Gillette is famous for dominating the razor and blades market with nearly an 80 percent share. It's also a category where product innovation leads to increased pricing power, as customers paid 15 percent to 20 percent more for each successive product from Sensor to Mach3 and Mach3 Turbo. Gillette thought k could apply this model to batteries when it bought Duracell in the mid- 1990s. However, several important characteristics of the battery business were not the same, and Gillette's Duracell battery unit failed to produce the intended results. The Duracell division performed poorly from 1999 through 2OO2 and took up a great deal of top management's time.

Reduce Operating Costs

Because top-line growth for consumer goods companies, whether it comes from innovation or acquisition, is not much greater than that of the overall economy, earnings growth must rely more on a streamlined operating structure than on revenue growth. With large retail customers such as Wal-Mart dedicated to keeping inventories tight and prices low, a consumer product maker must have a lean and flexible manufacturing structure. One tried and true method of becoming leaner has been large-scale restructuring, which is often very expensive in the short term, but can pay off in longer term effi­ciency gains. Procter & Gamble, Gillette, and Coca-Cola have consolidated manufacturing and laid off thousands of workers to reduce administrative overlap. It is not uncommon to see these companies undergo a substantial restructuring over a five-year period. For instance, Colgate-Palmolive racked up more than $500 million in restructuring charges in 1995, nearly wiping out net income for that year.

Starting in the mid-1990s, for example, Colgate-Palmolive took several steps to increase earnings by cutting costs as opposed to boosting top-line sales. This increased its operating profit margin from about 14 percent in 1997 to 20 percent in 2OO2. And the company thinks it can squeeze out more costs by using SAP's integrated enterprise software to search out inefficiencies In international supply lines and operations.

The danger of this strategy is that the firm focuses too much on trying to achieve earnings growth through cost-cutting and too little on looking for ways to grow or at least maintain revenue growth. Colgate, which has an innovative history, has lagged Procter & Gambles new product launches in recent years, and Colgate has also launched less effective products that suggest a "me too" approach to product innovation. Moreover, Colgate's focus on cost- cutting led to reduced media exposure at a time when Procter & Gamble increased spending because P&G saw low advertising prices as a good opportunity to invest in its brands. Cost-cutting is important, but it can damage long-term business performance when taken to extremes. Sell Products Overseas

Facing slow top-line growth in a mature domestic market, many consumer product makers have chosen to expand internationally to supplement domestic growth. This allows a firm such as Procter & Gamble to launch Pepto- Bismol in Argentina and Brazil , where stomach remedy medication is still a new category experiencing accelerated growth, even though the same prod­uct has been in the United States for more than a century and hasn't seen double-digit growth in years. Consequently, many multinational consumer products companies derive a substantial portion of their business from over­seas. For example, Coca-Cola gets 77 percent of its operating profits from abroad, and Avon earns 65 percent of the same from overseas markets.

Selling overseas can lead to currency risk (for example, if the euro declines relative to the dollar, reported sales for U.S.-based companies selling products in Europe will suffer). But most consumer goods companies use hedging instruments to mitigate this risk.

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