The pillars of the old 20th century economy are falling one-by-one and the effects on the logistics sector will inevitably be structural.
For example, the consumer-packaged goods’ (CPG) sector has always been one of the largest customers for contract logistics providers, yet the recent tribulations of Kraft-Heinz illustrate how much this business is changing.
Kraft-Heinz is the product of a takeover and merger of two of the largest CPG and processed food companies. The Brazilian investment house 3G Capital had embarked on an aggressive consolidation of the global CPG sector in 2015, merging first Kraft Foods – which itself was a product of previous mergers, followed by the demerger of Mondelez- with H.J. Heinz, which 3G had bought in 2013. 3G Capital then attempted to buy the Anglo-Dutch company Unilever but was rejected.
3G’s plan was to introduce radical cost-cutting and ‘zero-based budgeting’. This would restore these slow-growing companies with falling profit margins, back to health.
It appears not to have worked. Last week Kraft announced a US$15bn write-down of assets, particularly focussed on brand-value. This triggered an immediate 25% slump in the capital value of company. Since 2017 the company’s share price has fallen by two thirds.
Warren Buffet, the CEO of Berkshire Hathaway, the investment company that supplied much of the capital to 3G Capital, commented that one of the core problems was brand strength. Strong brands can “go toe to toe with Walmart or Costco” but weaker brands had lost “the ability to price….and that is huge”. Although he was clear that such businesses were still financially attractive, he admitted that the “packaged goods business is not as good as it used to be”.
This shift away from ‘CPG’ companies has been happening for a couple of decades in several parts of the world. The UK is probably as advanced as anywhere and retailers have been out-competing CPG companies since the 1980’s. However, that this has now spread to the US, where Kraft-Heinz does much of its business, is significant. It threatens to undermine the long-term prospects of other CPG companies that rely on US sales.
Combined with the changes in retailing these businesses face significant headwinds. They are being out-competed not just by retailers but by smaller, specialist producers that lay less emphasis on economies of scale and more on product design. Therefore, the logistics service providers who have had the major, global CPG companies as key customers face the threat of being sucked down with their clients if they are not careful.
Source: Transport Intelligence, February 26, 2019
Author: Thomas Cullen
