The Brand Eating Trolls

According to Wikipedia, as described in Old Norse sources, trolls are said to dwell in isolated mountains, rocks, and caves, sometimes live together, and are rarely described as helpful or friendly.”

In reading about Kraft’s most recent decision to split into two publically traded companies—Global Snacks and Domestic Grocery—I was intrigued by the comments made by some of the Consumer Package Goods [CPG] analysts. What’s really going on here? Has Irene Rosenfeld, with her powerful cache of Kraft’s well known and iconic brands—as some analysts suggest—given up on the North American grocery market? Have US consumers become so price sensitive that they are willing to abandon brand loyalty for a private label look-a-like and/or the seductive everyday low price of the Big Box stores like Wal-Mart and Costco? Has the price-value ratio, intuitively, used by consumers, finally, tilted in favor of “store brands”? What, I repeat, is going on!?

Well, let me venture a guess. First, I do not believe it is a case of “everybody’s doing it”—e.g., Sara Lee, Motorola and Fortune Brands, just to name a few. Secondly, I don’t believe that Irene was bullied into this decision by so-called “activist investors” like Peltz. Nope, as they say, “I ain’t buying it” (excuse the unintended pun). What I am buying is that Irene made a calculated decision based on industry developments (trolls) that have been at work the past quarter century—nibbling at the product portfolio and profitability of these mammoth CPG companies. Their annual revenues suggested to an interloper, ‘we are too big to take on…what about scale don’t you understand?’ was the subtext.  Yesiree, scale use to be a competitive advantage you could count on to scare off and/or vanquish your smaller competitors. Now, scale can, actually, be a competitive disadvantage in the development and introduction of new and innovative products. For sure, scale is still advantageous and can scare off a number of potential competitors while providing the enterprise with certain supply chain efficiencies.  So even with the breakup, Kraft will still have scale on its side.  Still, years ago, as a novice in the corporate world, I was told that it always came down to volume, share and revenue.

Yet, there are some other industry trolls that have been lurking under the bridge to profitability for a number of years. Volume, share and revenue are the tasty morsels for these trolls and they have gained considerable weight at the expense of the Branded CPG companies. Specifically, there are three industry ‘trolls’ that have created a ‘force field’ over the bridge to profitability that the Brand Giants must cross to get to sustained profitability. The most effective troll has been the ‘Big Box’ stores exemplified by Wal-Mart who is currently at one third of a trillion dollars in revenue. That’s right, I said a trillion dollars. Big Box stores, like Wal-Mart and Costco (at about $78 billion in annual revenues) feast off of a company’s revenue in exchange for accelerated volume opportunities. And, volume is very, very important to the company—the greater the volume produced and sold, the lower the overhead expense of the manufacturing facilities. However, to get this volume outlet, the company must accept lower profit margins or even the threat of ‘look-a-like’ products emblazoned with the Big Box store’s private label. Consumer loyalty to brands wane in the face of an affordable price.

The next troll is the private label industry operating in all categories/segments. These folks meet annually in Chicago at the PLMA conference. As an industry, they have come a long way. Back in the day when I was growing up, my mother would send me to the store to get Oscar Mayer bacon—not just any bacon. She believed that Oscar Mayer bacon was higher quality with less shrinkage. The price –value ratio favored the branded product. For the record, we were not wealthy or even solidly middle class yet. Still, her pantry reflected her loyalty to brands—like Kraft Sandwich Spread, Miracle Whip and Jell-O. Why? Because they were higher quality and the manufacturer stood behind their products. Yet, this private label troll kept improving both the quality of their product and packaging. Because, the CPG giants spent the trade and consumer advertisement money to grow the categories, private label manufacturers could price lower. Their morsel of preference was ‘market share’. They nibbled and nibbled until, in many cases, ate up several share of market points off the ‘big boys’ plate. After years of steady growth, this past year 2010, sales of private label foods stagnated. The big boys of branded products had “counterattacked and increased trade and consumer promotion”.  

 Ironically, the weapons used to contain and push back the private labels benefit the last troll—that is, the large retail customer like Kroger with revenues of about $80 billion annual, placing it #2 behind Wal-Mart. Kroger, Safeway and Supervalu, for example, are important customers to large branded CPG companies like Kraft.  They receive millions of dollars in trade promotions yearly. And, in return for these trade dollars, intended to drive their business, CPG, instead, find they are subsidizing another competitor—the third troll,  if you will. The unassuming and cash strapped consumer walks into one of these stores and it immediately bombarded with ‘store brands’ in every category, in every aisle. Incandescent yellow sales tags announcing price cuts on store brands scream at the consumer; and, sitting next it is the branded product, even when on sale, has a price that is a ‘fistful of change’ more expensive than the store brand. 

Why, you ask, would the Krafts of the world accept this? Or an even better question is why the retailer would even want to carry the branded product while ‘hawking’ their own. Simply put, these trolls need the branded product for price comparison. Now that price sensitivity works to jar the consumer away from brands, the issue becomes a purchasing IQ test. For Kraft and other CPGs the retailer is the most convenient and direct route to the consumer. The retail outlet is the last place you can get profitable margin—albeit, with increasing contraction. But, with the store labels proliferating, volume becomes softer and softer. This retail troll eats profitable volume.

Now, what is a bright and skilled marketing mind like Irene to do—when faced with these three trolls?  Simple, get the hell out and look for greener pastures. Fact is the developing world countries are the greener pastures. According to the World Bank “the global middle class are expected to triple by 2030 to 1.2 billion. Today, a bit more than half of that free-spending group resides in the developing countries. By 2030, almost all of it, 92% will call the developing world home.” Irene is getting a visa and passport ready to leave Troll Land and go to the Promise Land.