As consumers turn to healthier foods in droves, food and beverage companies are looking for their own way to drive healthy profit margins. While margin growth strategies can take many forms, cost-cutting initiatives are the method of choice for many major companies.
"Given the slow volume growth environment, there are two ways to drive earnings: revenue and cost-cutting," said Adam Fleck, director of the consumer equity analyst team for Morningstar, Inc. "[Companies are] working on both, but I think there was a realization that they need to get leaner to show that growth for shareholders."
As revenue has fallen across the processed foods industry, many of these companies have turned to cost-cutting to not only make up for lagging sales but to find the money they need for other efforts that could drive revenue.
"The competitive environment is super intense," said Erin Lash, equity analyst for Morningstar, Inc. "Foreign currency rates are volatile, operating costs are volatile. [Companies have] all taken a hard look at their own cost structure and looked to extract excess funds, a portion of which we anticipate will be reinvested behind the brands. And that’s across the board, both in the form of product innovation as well as marketing."
"The initiatives are not just around cutting costs," said Fleck. "… You’ve also got that being reinvested in marketing in different activations, promotional efforts—those are aimed to drive awareness and growth in a category. And [companies] invest back in innovation as well."
Company cost-cutting breakdown
Company structure, operations, products, and issues are different, so no two companies’ cost-cutting methods look exactly alike.
"There are probably differences in how each of them is targeting," said Lash. "But essentially it’s to make their manufacturing and distribution more efficient, leveraging their purchasing scale, ensuring that the money that they’re spending on media and advertising is effectively spent, [and] reducing unnecessary spend, which affects a number of companies in regards to consultants and travel, etc."
Here’s a breakdown of how several of the major food and beverage companies are approaching cost-cutting.
Mondelez’s cost-cutting efforts have made headlines lately after activist investor William Ackman announced his 7.5% stake in the company and said that Mondelez should either cut costs considerably or sell itself to a competitor. Mondelez announced its restructuring plan in May 2014 with a goal of reducing the company’s annual operating costs by at least $1.5 billion by the end of 2018.
But the company’s margins still fall behind the competition, which were at 12% in 2014 compared to the 15.8% average for U.S. food companies.
This one came as no surprise: Since Kraft Foods Group was merged with H.J. Heinz Co. by owner 3G Capital in July, experts expected the same cost-cutting that drove successful margin growth at Heinz in 2014 to take place at Kraft as well. The combined company eliminated about 2,500 jobs in August. That includes about 700 at Kraft’s headquarters in Northfield, IL, as the company will be moving to a much smaller headquarters in Chicago’s city center.
Kraft also announced several other cost-cutting measures, such as no more refrigerators packed with free Kraft products or limits on employee spending during business travel or electricity use.
In February, Campbell announced its cost-cutting program with an initial target of $200 million in savings over three years, which included cutting excess management and implementing zero-based budgeting. In July, Campbell had revised that target to $250 million after expecting to save $75 million from the cost-cutting measures already by end of fiscal 2015.
Last October, Coca-Cola introduced its new cost-cutting initiative to mitigate the loss of sales volume in the soda industry. The plan was to cut $3 billion per year through 2019, and in January, the company announced that it would cut 1,600 to 1,800 white-collar non-bottling and non-distribution jobs globally. Fleck said that other changes, such as in-line blow molding, are reducing costs as well. Coca-Cola was also among the 25 companies named in a World Economic Forum report for boosting revenue by to 20% and cutting up to 16% of its supply chain costs through sustainable supply chain practices.
In September 2014, General Mills announced it would cut about $100 million in operational costs after a disappointing earnings report where profit dropped 25%. Cost-cutting initiative Project Century has led to a number of factory closings, from two revealed immediately following earnings to two announced as recently as July.
Last month, and one year after introducing its cost-cutting plans, General Mills reported a 24% profit increase, despite decreases in domestic and international revenue.
Project K, a four-year efficiency program meant to improve earnings growth, is Kellogg’s cost-cutting answer to 2014 having brought the lowest net profits in over a decade. When the plan came about, Kellogg anticipated reducing its global workforce by 7% and making other changes that would generate cash savings of between $425 million and $475 million in 2018. The plan is still in effect.
Along with its latest earnings announcement in August, Keurig also introduced a cost-cutting program to save the company $300 million over three years. Cuts have already begun, as Keurig is shedding 330 jobs, or about 5% of its workforce.
While each company’s efforts may look different, the fundamental idea is often the same across the industry, particularly for processed foods.
"You’ve got these very strong currency headwinds that are driving revenue flat to down in many cases," said Fleck. "You focus on the things you can control, which is why [cost-cutting is] being talked about a lot more now."