Packaged Goods

Profits are piling up as producers cut products, promotions--and prices. But what they really need is some revenue growth

For years, discount coupons have fattened Sunday newspapers and clogged mailboxes. But since only a tiny fraction of coupons are redeemed, the companies that make packaged goods such as cigarettes, toiletries, and prepared foods began wondering if they were worth the trouble. So in 1996, Procter & Gamble Co. sought an answer. In a Rochester (N.Y.) test, it simply stopped offering coupons.

The test is still going on, and secretive P&G isn't talking about it. But even a test of dumping coupons is a sign of the changes sweeping the packaged-goods industry. With revenue slowing, the pressure is on to cut marketing costs, reduce product lines, shrink inventories, and pinpoint hot-selling items--often with the help of computers.

SMOKE ALERT. The efficiency drive is paying off. Packaged-goods makers should manage to increase profits 10% in '97 even with flat revenues, says John McMillan, an analyst at Prudential-Bache Securities Inc. Overseas sales will likely be the only source of revenue growth.

Tobacco is likely to outperform the rest of the packaged-goods industry, with operating-profit increases in the high teens. Even so, all is not well with Big Tobacco. Watch for more serious talk about a negotiated settlement, mandated by Congress, to lawsuits brought by more than 17 states seeking to recover health-care costs from tobacco-related illness. The first trial could begin in March. Richard Scruggs, a plaintiffs' lawyer, says the industry will be forced to settle because "if they lose just one of these cases, they'll have to declare bankruptcy."

For the first time in years, packaged-goods makers are routinely cutting prices instead of raising them. One example is Kellogg Co. Following Post's lead, the Battle Creek (Mich.) company has made a frontal assault on promotion and production costs. Last summer, Kellogg cut prices on two-thirds of its cereal brands by an average of 19%. The other cereals were already "value-priced," says spokesman Anthony Hebron.

Simplification isn't being pursued everywhere. Many manufacturers are still hooked on spin-offs and line extensions. "Retailers seem skeptical and somewhat irritated about the heavy flow of new products coming out," says Holly Becker, a Smith Barney Inc. analyst.

Of course, even simplification can be complicated. In salad dressing, "If all you had were Italian and French in two sizes, the category would be 20% smaller and consumers would be dissatisfied," says John D. Bowlin, president of Kraft Foods International Inc.

In general, though, the trend is toward simplifying product lines, cutting prices, and using computers to target discounts for the most impact. The primary beneficiaries of the big squeeze will be ordinary customers.

Before it's here, it's on the Bloomberg Terminal.