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In 2006, the median total
shareholder return (TSR) achieved historically strong levels. The public equity markets saw the long-term
value in CPG manufacturers, as industry shareholder return (as measured by a market-weighted index)
was greater than both the S&P 500 and the Dow Jones for the year. After uncharacteristically low one-year
returns versus five-year returns in 2005, the adage “invest for the long haul” (in consumer products)
looked especially true in 2006.
But operating in this industry continues to have its challenges. As overall spending on in-home consumption of food and beverage products has remained about the same (9.8% of discretionary spending in 2002 versus 9.9% in 2006), manufacturers are looking for top- and bottom-line growth by expanding into foreign markets and focusing their portfolios on more profitable and growing segments. Further, there are more, and different, global sources of competition—especially for supply of raw materials such as corn and oil related products. What can appear to be a relatively simple industry is increasingly complex and dynamic. Even the one constant in this industry—the consumer—has more diverse tastes, is more informed, and requires new kinds of experiences both in-store and online, through converged digital media technologies like cellphones, the Internet, and digital television.
As always, CPG manufacturers (and retailers) are responding to industry challenges with new and innovative ways of working and communicating. Through collaborating across the value chain, creating agile organizations, and developing an even better understanding of how to interact with the consumer, the industry continues to generate strong returns. Median net sales growth was more than 6.1% over 2006, earnings before interest and taxes (EBIT) growth was strong, and the industry continues to generate free cash flow at a rate of 6.3% of net sales.
In the three sections of this report, we explore these results, issues, and responses in more detail.
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