Is M&A eating away at the Food Industry CFOs?
Why the current “CFO Shuffle” in the food industry? I read a MarketWatch summary by Tonya Garcia that had me exploring answers in some depth. The article referenced J.P. Morgan’s recent analysis of major food companies, which revealed that by the end of 2016, more than half of the CFOs will have been on the job fewer than three years. Something is out of whack when the most stable — and stabilizing — role in the C-suite is in such flux.
First of all, there is the obvious fact that the larger CPG market, like almost every industry sector, is consolidating. Berkshire Hathaway and Brazilian 3G Capital acquired Heinz and then Kraft, a consolidation of two multi-billion dollar companies. Hillshire/Sara Lee has a pending merger with Tyson Foods. Nestle now owns Gerber and Ralston Purina. Suntory acquired GSK drink brands and Beam. At the time of this writing, even snack giant Mondelez, although rejected in its initial takeover bid, is still pursuing its interest in Hershey.
“The shuffle seen in Food industry CFOs comes into sharp focused when viewed through the lens of the current market, with a strong correlation between change CFO role demands and the market’s volatility.”
CPG firms are also fragmenting, with major food companies hungrier than ever to acquire smaller brands. B&G Foods recently bought Green Giant from General Mills, Unilever acquired Best Foods, Ben & Jerry’s and SlimFast, while Smuckers bought Folgers, Jif and Crisco… each company almost simultaneously divesting themselves of other brands.
The shuffle seen in Food industry CFOs comes into sharp focused when viewed through the lens of the current market, with a strong correlation between change CFO role demands and the market’s volatility.
The big players in the food industry are facing a slew of intense new challenges :
1. Consumers in command: If you are over 40, chances are that companies have dictated what you bought for most of your life. Now, however, consumers are driving the bus. As a result, marketing has shifted from a sales push approach to a scramble to read consumer signals and then deliver. This puts non-stop pressure on companies to be quick and fluid in their responses and offer greater variety and numbers of SKUs, often at low volumes
More and more of these companies are responding by buying established brands vs. launching new products to meet these needs, i.e. innovation through acquisition
2. Proliferation of small manufacturers: Agile by nature, they are growing at twice the rate of larger companies, filling niche needs expressed by the consumer.
3. The economic uncertainty is squelching sales and profits, lurching some players into unfamiliar categories. To compensate for low margins and market loss, supermarkets like Whole Foods and Kroger are selling higher margin durable goods and hosting wine tastings, cooking classes, yoga and child care.
4. Packaged foods, particularly carbs, are out of vogue: With major packaged-food companies losing roughly $4 billion in market share last year, shoppers are spending less time in the center aisle and seeking healthier alternatives. Companies whose flagship brands are rich in processed grains have teed up more protein-rich offerings. Kellogg, for instance, is ratcheting up and publicizing protein content and capitalizing on yogurt’s current popularity through new cereals. General Mills, whose cereals make up 1/4 of their sales, is fighting the decline of the morning bowl and spoon through products like Cheerios Protein. And at Campbell’s, CEO Denise Morrison realizing that the company had to “shift the center of gravity”, made a bold strategic move to appeal to changing consumers appetites and demographics by acquiring Bolthouse Farms and Plum Organics.
5. Big box, online and global competition are biting into traditional players’ revenue streams: Walmart and other big box retailers are expanding their market share in the CPG space.
Plus, online food purveyors such as Amazon.com Inc.’s AmazonFresh, are growing. A WSJ article references Jefferies Group LLC’s prediction that online grocery sales could grow from 2.5 percent today to 8 percent by 2025. That’s a large bite that traditional players in this margin-pinched sector can ill afford.
Global competition from companies like Aldi and Lidl further infringe on turf once held by American market leaders.
6. The churn: An active M&A environment across the industry at large pressures both giants and dwarfs alike to devote resources to both opportunity shopping and watching their backs.
As a result of these drivers, the market and its CFOs, are in unprecedented flux. But this phenomenon isn’t pervading the C-suite. Why are finance chiefs undergoing such rapid change of late?
A recent conversation that I had with Ray Silcock, a seasoned food industry CFO and Pinnacle Foods Board Director, shed a bit of light on the issue for me. Ray, who was instrumental in helping Diamond Foods successfully lead and complete the company’s sale to Snyder’s-Lance, commenting on the challenges CFOs face in the high-pressure, M&A heavy environment, notes “The CFO has to focus on both new and existing customers to help drive growth and innovation for the company.” CFOs must ‘mind the gap’ between their strategic initiatives and growth plans by owning the integrity of the M&A process.
Correlation between Growth Goals and the CFO
A CFO study developed by McKinsey reveals profiles of four types of CFO, matching their skill sets and experiences with industries, organizational structures, business cycle positions and organic vs. inorganic growth goals.
More traditional background in financial reporting, audit and compliance, planning, treasury and capital structure. This works well with a decentralized company needing standardization of the financial functions and is typically promoted from within the organization.
May have a traditional background or have an MBA (vs. advanced financial degree), and is rotated through several leadership roles to hone operations and strategy expertise within the industry. This CFO is found in mature sectors and typically promoted from within the organization.
Has a strong track record of utilizing rigorous analytics to drive aggressive growth of highly diversified, often global, companies. Most often, an external hire.
Experienced in M&A, divestitures, scenarios involving growth and dramatic changes in resource allocation. This CFO is often recruited from a PE, consulting or investment banking firm for his or her external network and strategic insight.
What we are seeing is a shrinking demand for the pure “finance experts” and conventional “generalists” (typically internally promoted), and demand surge for the “performance leaders” and “growth champions” (often externally sourced).
Today, CFOs with aggressive, inorganic growth experience are in high demand, and with the “war for talent” in full force, companies are madly dancing the CFO shuffle to adjust to this reality. As a result, our CPG clients more and more are seeking a CFO from outside the company who has been opportunistic in creating value for the company and brings track record of growth.
“The CFO has left the building…”
Traditional CFOs are exiting in greater numbers, voluntarily or involuntarily. Those retiring early often find their exit timely, feeling that the company’s heyday has passed. J.P. Morgan’s research implies that CFOs may view the dwindling “low-hanging fruit” produced by efficiency programs (like LEAN Six Sigma, continuous improvement), the high premium at which food stocks are trading, and the rise in food manufacturing costs as signs that the best years may be behind them. When they are shaken loose by restructuring or other changes, CFOs in the CPG industry find it hard to match their old pay in other industries, since compensation in CPG pulls toward the high end of the scale.
It will be interesting to see if this high turnover trend levels out as the new “performance leaders” and “growth champions” settle into place. How then will aggressive, deal-minded CFOs manage, if “organic” growth becomes the modus operandi at their new company? This settling effect may occur or, if the M&A churning accelerates, we may see even greater turnover among Food CFOs. What we can predict with some certainty is that strategic, deal-savvy CFOs will continue to hold sway for the foreseeable future.
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