By Julie Forster
It's no secret that top consumer brands get a huge edge from a special ingredient: cash manufacturers pay stores to stock their wares. But just how much the likes of Kraft Foods (KFT ) and PepsiCo (PEP ) spend on these givebacks has always been a mystery because most have kept it as a closely-guarded trade secret.
Now, thanks to a Financial Accounting Standards Board rule that took effect in 2002, the public will see how big the payments are--for one year, anyway. That's because the companies must restate their 2001 accounts by subtracting the incentives from reported sales. Before, they included them in sales numbers. The results are startling: Kraft lopped $4.6 billion, or nearly 14%, off its top line; Kellogg Co.'s (K ) 2001 sales shrank 15%, to $7.6 billion. On average, food companies spend $60 billion a year on givebacks. That's the lion's share of the $100 billion consumer-goods companies spend in the U.S. for such payments, says marketing consultant Cannondale Associates. Net profits weren't affected, because the companies deducted the rebates as costs elsewhere, usually lumping them with general expenses.
FASB gets one cheer for striking a blow for transparency. But that's about all. After the 2001 adjustment, no more before-and-after comparisons can be made because FASB didn't take the next logical step and make companies permanently break out incentives. Timothy Lucas, FASB's research director, says it was too complicated to require disclosure because many industries also use incentives and are affected by the change. Still, FASB shouldn't have backed off, especially for consumer-goods companies. Heavy spending on promotions can be a red flag, says Kevin McCloskey, portfolio manager for Federated Investors Inc., which owns General Mills (GIS ) and Sara Lee (SLE ) stock. "They may be losing position. There may be a new entrant into their market. Or they just have a dud as far as a product is concerned," he says.
FASB also missed the boat in other ways. It won't make retailers reveal how much they get from rebates. If they did, investors might learn how much the low-margin business depends on them. Company executives say that the details would baffle the public. Says Francis A. Contino, chief financial officer of food company McCormick & Co. (MKC ), which spent 12% of sales on incentives in 2001: "We have somewhat of an excess of material included in the footnotes. I don't think that this disclosure is going to make it any clearer."
The U.S. government seems to think otherwise. The Federal Trade Commission is investigating whether paying for shelf space is anticompetitive, after smaller companies complained they were shut out of stores. During 1999 congressional hearings, small manufacturers wore hoods and testified behind screens for fear of retaliation. A subsequent General Accounting Office investigation got nowhere. The incentives are "highly suspicious," says Senator Christopher S. Bond (R-Mo.), ranking member of the Senate Committee on Small Business & Entrepreneurship. If they're reasonable, "why in the dickens is it kept so secret?"
Good question. Companies clearly won't answer voluntarily. FASB owes it to investors and consumers to make them do so.
Forster covers the food industry from Chicago.