Media Resources Commentary Archive Commentaries 2007 Third Quarter 2007 Third Quarter 2007
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Manufacturing/NondurablesNovember 13, 2008
Commentary by Professor Claes Fornell
ACSI Retreats for First Time in Two Years; Higher Food
Prices to Blame
Big Gains for Nike,
Dial, Heinz, and Campbell
Soup; Customer Satisfaction with Sara Lee and Colgate Palmolive Takes a
Hit. After a period of continual growth, the American Customer Satisfaction Index (ACSI) contracts for the first time since early 2005. At a score of 75.2, ACSI is down 0.1% compared with the previous quarter. This is a very small drop with the overall score still 1% above where it was a year ago.
Customer satisfaction is up for most industries, including
athletic shoes (+3.9%), apparel (+2.5%), pet food (+1.2%), beer (+1.2%), and
personal care products (+1.2%). Apparel, pet food, beer, and personal care
products either attain or equal all-time highs. Gainers lead decliners 52% to
30%, with 17% unchanged. But because of the size of the food industry, the
higher proportion of gainers is not enough to offset the ACSI decline in food. The consumer spending outlook for the holiday season remains reasonably good, but not without potentially serious threats. On the positive side, customer satisfaction continues to be high; the decline this quarter is small and limited to food and cigarettes. The higher the satisfaction, the more likely it is that consumer spending growth increases. Additionally, inflation appears to have leveled off, or at least slowed, alleviating some of the pressure on household budgets. Falling customer satisfaction, on the other hand, makes consumers less likely to repeat a less gratifying experience. What may further dampen the positive effect of customer satisfaction are consumer borrowing and consumer financial obligations. If these are too high, customer satisfaction will matter less for future spending. The growth in household borrowing has slowed a bit, but savings remain low, and there is no reason to believe that borrowing and lack of savings will have a different effect on spending compared with last year. What's different from 2006 is the mortgage market, but there is no indication that credit availability has been reduced. Finally, the dollar continues to weaken, which may lead to higher prices on import goods and on energy. Because customer satisfaction has weakened and some consumer debt burdens remain high, there will be a dampening effect on holiday spending, but it might well be offset by the recent growth in real wages. Weak early fall retail sales could be another factor suggesting increased consumer spending. In order to move inventory, some retailers have already started to discount both earlier and deeper than last year. The ACSI equations forecasted a spending increase of 3.1% for the third quarter. According to the Commerce Department, actual spending growth was 3.0%. Relying on these same equations, ACSI forecasts fourth quarter spending growth of 2.5%. This is less than 2006 (3.6%), but because of greater than expected spending on gasoline (because of higher prices) and apparel (because of higher customer satisfaction), and higher than 2005 (1.2%).
Food: Heinz Strengthens Its Lead
Customer satisfaction with food companies moves lower for
the first time since 2005 falling 2.4% to 81. But ACSI leader Heinz moves in
the opposite direction with a 3% gain to 90, the highest score for any company
in any industry in ACSI. Heinz has also accelerated its earnings growth in the
past year by selling off non-core businesses to concentrate on what it has
historically done best: ketchup, sauces
and snacks. The company also appears to
have been successful at making its core products better, improving packaging, convenience,
and variety such as its "picnic pack," offering ketchup, mustard, and relish
packaged together, targeting the football tailgating market.
Campbell Soup has followed a similar strategy with similar
results. It's ACSI score is up 4% to
83. Campbell's has been making its
product line fit "wellness" in food consumption, shedding its "indulgence"
brand, chocolate maker Godiva, and offering more health-conscious soup and
broth alternatives that are flavored with sea salt to reduce sodium
content. This is not to say that
indulgence foods are less satisfying. On
the contrary, chocolate manufacturers Hershey and Mars also show strong
performance with scores of 87 and 86 respectively.
On the other hand, The Sara Lee Corporation's leaner look
has not translated yet into higher customer satisfaction. Sara Lee drops 4% to 82 after getting rid of
about 40% of its business over the past year, including its apparel line, spun
off as Hanesbrands and some parts of its food business in packaged meats and
coffee brands. Sara Lee has apparently been
slow at rolling out new products to appeal to consumers and stimulate
investors. With myriad brands to choose
from and switching costs low, manufacturers that lead the way in innovation
tend to carry the upper hand with the customer. Breweries: Mergers and Customer Satisfaction The ACSI score for the industry increases 1.2% to 83. The difference between the highest scoring company (Miller) and the lowest (Anheuser-Bush) is tiny. Perhaps things will change with the merger of Molson Coors with Miller. While mergers tend to spell trouble for service companies, often leading to customer service problems, product companies usually don't experience the same problem. On the contrary, they tend to maintain pre-merger levels of customer satisfaction while also enjoying the benefits of economies of scale. Molson Coors and Miller expect to save about $500 million annually through lower production costs and combined advertising. Despite high levels of buyer satisfaction, beer sales have been sluggish as of late, and it remains uncertain as to whether or not any one company will be able to break away in terms of better serving its customers. In general, it has been the smaller breweries that have held higher ACSI scores, but that lead has now evaporated. If this trend continues, we may see additional consolidation of breweries and a return to a smaller number of beer makers in the future. Athletic Shoes: Nike "Just Did It"Customer satisfaction with the athletic shoes industry rose 4% to 79, reversing the downward trend since 2005. Shoe makers such as New Balance, Skechers, and Puma (included in the "all others" category) continue to lead the industry with a 3% increase to 83. In the decade-long see-saw marathon for market share and customer satisfaction between Nike and Reebok, Adidas acquisition of Reebok almost two years ago helped the new combined portfolio of shoe brands to an unprecedented ACSI 6-point lead last year, while Nike hit its all time low at 72, despite being the #1 maker of athletic shoes in the U.S. This year Adidas slows with a 1% drop to 77, while Nike closes the gap considerably with a 4% rise to 75. Nike has streamlined operations to curb costs, cutting its inventory growth to 2 percent after having double-digit inventory growth for several quarters. Besides expanding both retail and wholesale businesses worldwide, Nike is also tapping into sports like skateboarding, in an effort to stay a step ahead of its rivals, while at the same time moving away some from superstar endorsements. Like successful food manufacturers, Nike too give a good deal of attention to innovation, most recently through its partnership with Apple to develop shoes with an embedded sensor that communicates with iPod Nano to tell runners how many miles they've run or how many calories they've burned. Personal Care & Cleaning Products: Dial climbs; Colgate loses ground Customer Satisfaction with personal care and cleaning products is up 1% to 85, a record high for this product category. Clorox, Unilever, Procter & Gamble each gain 1%, with Clorox retaining the top position at 87. Dial moves up by 4% to 86, its highest score in 12 years. Bouncing back from the bottom of the pack a year ago, Dial surpasses Colgate-Palmolive and Procter & Gamble, sharing with Unilever the second highest ACSI score in the industry. Dial's climb may be attributed to getting rid of its interest in the foods business, mostly canned meat and ready-to-eat meals under the Armour brand, in order to strengthen personal care, laundry and professional products. Dial also benefited from parent company Henkel's acquisition of several deodorant brands, including Right Guard and Soft & Dri, from Gillette, a subsidiary of P&G, expanding its portfolio of body care products in North America.
Colgate-Palmolive is heading in the other direction. After
tying with P&G a year ago, Colgate drops 4% to 81. In an effort to offset
rising costs, Colgate increased prices globally in the third quarter of 2005
and then again in the second half of 2006, contributing to profit growth, but
not to the satisfaction of its customers. So far though Colgate seems to have
managed to pass on the higher costs to buyers without hurting sales, but there appears
to be a weakness in its toothpaste business, where the company has lost market
share to P&G's Crest brand in the first quarter of 2007. Apparel: Jones Apparel bounces back; Liz Claiborne falls - Both Face Major Challenges Customer satisfaction with apparel, after very little movement over the past decade, hits an all-time high of 82, a 3% increase over last year. VF Corporation leads with an 84, a 2% increase. Smaller companies, as measured in the "all others" category, manage a 3% improvement to 82, tied with Hanesbrands, unchanged from last year. Jones Apparel, which fell to a low of 79 a year ago, bounces back 3% to 81. Jones was on the bidding block for quite some time, which may well have marred operations in general, but then decided to dispose only of its Barneys luxury fashion. Using cash from the sale, the company is trying to come back from disappointing results. Last year, Jones dropped from a leadership position in ACSI to the bottom of the industry. Its stock price followed suit, falling by 45%. At the other end of the spectrum, Liz Claiborne, which after reaching a ten-year high of 81 also faced a stock price decline, albeit less severe than that of Jones, falls back 3% to 79. Department store sales have been sluggish. Under the leadership of new CEO William McComb, a former Johnson & Johnson executive, Liz Claiborne is trying to reduce its reliance on department stores, launching its own retail line, and putting almost half of its three-dozen brands up for sale. But, unlike Jones, it also faces the additional challenge of falling customer satisfaction.
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