Global powers of the consumer products industry
Top 250 consumer products companies, fiscal 2006
In 2006, the global economy was very strong, with global GDP rising an astounding 5.4%, one of the fastest rates ever recorded. Relatively rapid economic expansion took place in such disparate locations as Argentina, Canada, China, Germany, India, Russia, the UK, and the US. Even long-stagnant Japan experienced growth far better than in recent years. In many countries, elevated home prices added substantially to consumer wealth, thereby stimulating expanded spending. This was especially true in Australia, Spain, the UK, and the US. Big emerging markets continued to experience rapid growth in consumer incomes, with millions shifting from poverty to the middle class. Economically, this was a good time to be in the business of selling consumer products.
Food, drink & tobacco is dominant product sector
For analytical purposes, the Top 250 companies have been organized into eight major product sectors:
- Electronic products
- Fashion goods
- Food, drink & tobacco
- Home furnishings & equipment
- Home improvement
- Leisure goods
- Personal & household products
Food, drink & tobacco companies are, by far, the largest product group — home to almost half of all Top 250 companies. Food processors comprise the largest subgroup in this sector with 85, followed by 25 beverage makers, and 13 tobacco companies. This huge sector reported sales growth of 5.6%, on average, in 2006, the slowest of all the product sectors.
Companies selling electronic products tend to be far larger, on average, than companies in any of the other product groups, with an average size of $23.5 billion. This is due, in large part, to the fact that these companies’ total sales figures include significant enterprise, as well as consumer, sales. This sector, represented by 37 companies, posted strong growth, but profit margins in this intensely competitive industry sector were slim. Only the tire group, with a negative average net profit margin, had worse profitability.
Among the eight product groups, the leisure goods sector enjoyed the strongest growth in 2006, followed by fashion goods. However, the Leisure group’s result was heavily skewed by Nintendo’s rapid sales growth. Both also posted above-average profitability. The personal & household products sector, with 27 companies, grew on a par with the Top 250 overall. Companies in this group tend to be above-average in size.
The two homegoods sectors also posted solid gains, but average profit margins were significantly higher for the home improvement group compared with the Home furnishings & equipment companies.
The value of intangibles: understanding Q ratio
In today’s business environment, producers of consumer goods fight a constant battle against commoditization. Due to advances in manufacturing technology and the ubiquity of discount retailers with low-priced private label goods, consumers have come to expect high quality and low prices. As a result, they are not necessarily convinced that a brand is differentiated from its competitors simply on the basis of good quality. The problem with commoditization is that it leads to margin-killing price competition. The only way to avoid this is to create a compelling brand, clearly differentiated products, and a better consumer experience. This entails innovation in design and technology, clever marketing, closeness to the consumer, and excellence in brand management. This is a tall order, but companies that can do this achieve pricing power, higher margins, better returns to shareholders, and higher market capitalization.
Deloitte has chosen to measure the Q ratio for the world’s leading consumer product companies. We have done this for the 190 publicly traded companies on our list of the top 250 consumer product companies. To calculate the Q ratio, we took market capitalization (share price times number of shares) as of October 8, 2007 divided by reported assets for fiscal year 2006.
Our analysis of the world’s leading consumer product companies yields some interesting insights. The composite Q ratio for all 190 companies is 1.51. In other words, on average, the world’s leading consumer product companies generate about a third of their financial market value from non-tangible assets such as brand.
Of the 190 companies, 99 had Q ratios greater than one while 91 companies had Q ratios less than one. If the Q ratio is less than one, this implies that there is an arbitrage opportunity. In theory, the company could be acquired and the assets could be sold off for a profit.
Page Last Updated