When times are good, CPG earnings reports are full of interesting advertising questions, like how to reach customers, stand out online or collect first-party data.
But when the market cycles down, investors cut to the chase: What’s your price, when will it go up, and how reliable are your retail deals?
In the past few weeks, a litany of the biggest US food, beverage and consumer goods brands, among them many of the world’s biggest advertisers, disclosed tepid quarterly revenue and lower year-over-year sales, which were more than offset by price increases, so the overall revenue was up. And their investors are anxious to see durable profits and stronger relationships with retailers at a time when brand-to-retail relationships have become more complicated.
The head honcho retailers Walmart and Target reported their earnings this week, but those earnings calls didn’t ease investor concerns.
“You’ve got a big, very atypical reprioritization of spend occurring by consumers,” Coca-Cola CEO James Quincey told investors last month, echoing caution and conservatism voiced by other CPG companies. “And that’s an important factor of how to see what the consumer is doing, because there are a number of channels and categories where things look a little tougher in the short term.”
Advertising ups and downs
CPG ad budgets are in a state of flux right now, in part due to their complicated relationships with retailers.
Retailers have “come under pressure from the consumers’ wallet pullbacks” in the past few months, Quincey said.
Stores don’t appreciate when brands raise their prices, which makes a retailer’s offering less compelling. On Amazon, for instance, reducing prices is generally a more effective way to improve search rankings than to increase search ad bids. Ad revenue is nice, but retailers prefer the increased chance of a sale on the lower price.
CPGs, on the other hand, contend that their advertising drives shoppers to stores and pressure to increase their marketing is reflected in the price.
“Our idea is like, look, we’re investing in our brands to create value for the consumers that the retailers can realize in their stores,” Quincey said of Coca-Cola’s pitch to stores that carry its products.
As overall advertising and retail trade budgets move from TV and offline channels like in-store placements and paper coupons to the internet, CPG marketers claim a more efficient process will offset price increases and consumers will pocket the savings.
Procter & Gamble has been seeing improved reach and efficiency as it shifts to delivering its ads online, but for the past few years the company has consistently reinvested the money it has saved on efficiency back into its ad budgets, CFO Andre Schulten told investors recently. But now digital media represents the majority of P&G’s marketing dollars.
“That allows us to increase productivity on media spend in the current fiscal year to the point where we believe we will use some of that productivity not to reinvest fully but to actually flow through and help offset inflation,” he said.
When it comes to the shifting landscape of ad spend, there’s no consensus on the playbook.
General Mills has increased advertising every year since 2019, and total ad budgets are up by 20% since the pre-COVID era, prompting one investor to ask: “Why do you feel confident that this is getting an ROI in a way that would make you different than you were in the three years before COVID?”
Jon Nudi, president of the company’s North America Retail group, said the majority of spend is now digital, and most of this online spend is performance marketing tied directly to a sale. “And the first part of that, which we’ve invested to acquire, is probably with the retailers and their data, which is really powerful and becoming really targeted.”
Unilever has also benefited by the shift in spend to online retail platforms, said CEO Alan Jope.
“It’s a myth that the infinite shelf of ecommerce favors middle- and small-sized brands,” Jope said. “Ecommerce is very favorable to relevant big brands they get first onto the search and shopping list.”
Keurig Dr Pepper is banking on relevancy to reduce advertising; in its case, advertising as a percent of sales dropped from 6% to 4% since the company’s COVID reset.
“We were all forced to work with lower marketing spend” during the COVID pandemic, said Bob Gamgort, Keurig Dr Pepper’s chairman, who transitioned from CEO in Q2 this year. “It caused us to be much more sensitive about return on investment and dial up our understanding in terms of a precision marketing perspective.”
The Post Holdings company, another cereal giant, reduced its ad spend last year because it couldn’t restock inventory due to supply-chain issues, according to President and CEO Rob Vitale. Improvement in the supply chain “enables us to reengage more aggressively in marketing the brand,” he told investors this month.
Promise and peril of private label
Not every brand has the same pressure on advertising.
Post is the largest private-label supplier of cereal, Vitale said. (Ever had a store-brand cereal and thought, “Huh, that looks a lot like Raisin Bran or Grape-Nuts”? Well, Post makes those brand-name cereals and many lookalike products white-labeled by retailers.)
Post can reduce its ad spend without sacrificing revenue entirely. General Mills is still driving people to stores with its ad spend increases, and those shoppers may end up buying cheaper white-label cereal. A part of those earnings comes back to the Post company in the end.
For CPGs, there’s a delicate dance between supplying retailers with private-label goods and marketing and selling your own brands.
Private-label grocery isn’t new. But it’s become a bigger force in retail and conflicts more with CPGs as big-name brands raise prices. Retailers have a huge advantage on price, largely because they don’t advertise.
You may not know Good & Gather is Target’s food and snack line, because the company doesn’t need you to. But it’s still a multibillion-dollar business on par with many name brands owned by CPG holding companies.
One way to find out what brands are behind the Good & Gather label is during a product recall. Target’s line of dried sweetened strawberries is made by the nut and fruit snack brand SunTree, which is known because SunTree dried strawberries were recalled by the FDA in March due to undisclosed sulfite, which can cause severe allergic reactions.
Retail roundabouts
Aside from private-label brands, which are both a threat to CPG market share and a hedge on their own sales and ad costs, brands are building out revenue streams in which they aren’t beholden to retailers.
The most straightforward way to accomplish that feat is a direct-to-consumer business. But it’s a tough growth prospect and an unfamiliar muscle for legacy CPGs.
Pepsi acquired SodaStream, the home soda water setup, because it’s a DTC replenishment business.
SodaStream’s DTC business “gives us a lot of first-party data and allows us to have a lot of individual connection with consumers,” said CEO Ramon Laguarta on Pepsi’s latest earnings.
“With that, we can ideate new products and we can also increase the lifetime value of those consumers,” he said. The main lifetime value boost is that Pepsi can package its longtime brands into SodaStream, like Pepsi, Mountain Dew and 7UP-branded flavors, which all launched in the past year.
Keurig Dr Pepper is on the DTC trajectory, too, because of Keurig’s own home coffee makers and pods. KDP has 36 million households and hopes to add at least two million households per year, with a total addressable market (TAM) of 50 million, Gamgort said.
One investor asked Keurig Dr Pepper to what degree increasing the company’s TAM was still a priority, compared to immediate profitability, a question of tangible sales versus growth potential based on revenue multiples and the abstract value of data.
Gamgort said the company prefers to expand its TAM through marketing partnerships. He pointed to Keurig’s home beverage pods deals with McCafé, the McDonald’s coffee brand, as well as with the coconut water brand Vita Coco and Polar, a seltzer brand. Notably, both Polar and Vita Coco are independent beverage makers that compete with Coca-Cola and Pepsi-owned brands.
“But we’re not going to overpay and we’ve never been caught up in valuing anything on a multiple of sales,” he added.
