Cash Deployment Strategies for Retail & CPG companies
In an era when we are seeing oil remaining well below $60 per barrel , coupled with lower commodities prices (gold, silver, nickel, soybeans) and strengthening US dollar, most CPG and Retail companies are set to have stronger revenue and P/L outlook going into 2017 in upcoming earning season. Also demand – supply imbalance caused by US oil production at all time highs on account of fracking shale oil, and China and European economies showing signs of slowness in growth, it could be a long time for oil to re-capture $100 mark again.
Not going into the details around the cause of falling commodity prices (weakening demand / consumption from China, strength of US economy – and hence the mighty dollar, and rising supply of oil), let us look at implications for the CPG companies arising from these macro changes:
- Potential of higher revenues – on account of increase in disposable income of consumers due to low gas prices (low inflation)
- Higher profitability- due to lowered COGS, manufacturing & distribution costs
Considering already burgeoning liquid assets with major retailers and CPG giants, this surplus on their cash position could spur next round of acquisitions, buybacks, dividend raises and most importantly organizational / business transformation initiatives. Based on the current estimates, American Companies currently hold over $2 trillion in cash / ultra-liquid assets led by Apple with $150 billion, Microsoft with ~$90 billion and Google with ~60 billion (Tech Trio). Below is the list of top cash-rich companies:
With already hoards of cash stashed away on balance sheets and a pile of it more to come through savings from operations due to low commodity prices coupled with consumer spending frenzy, it seems that 2017 may be the year when this cash may be put to use. But the question which puzzles executives and leaders of the industry currently is “where to deploy cash to get best ROI?”. Here are a few channels which most Retail and CPG corporations would be considering for cash investment / deployment in 2017:
- Returning cash to the investors– This is one of the most common means employed by corporate conglomerates to increase shareholder value while reducing cash position. However, in 2015 and 2016 we have seen burgeoning stock buyback programs being implemented by major retailers and CPG giants. Also to add on to stock buybacks, dividends yields in absolute terms are at all-time highs. Given the pricing of stocks at their peaks and stock indexes soaring, most companies may not be inclined to increase spend on stock repurchase programs unless P/E ratio catches up with historical mean values.
- Acquisitions for inorganic growth / entry into new markets– Based on the recent financial reporting from CPG & Retail industries it is clear that the organic growth is close to the inflationary fractions (real growth is almost flat). Given this trend, Retail and CPG giants with hoards of cash would go hunting for acquisitions in order to meet their financial objectives. Apart from inorganic growth, another reason M&A activities would spiral up in near future is due to the spur of innovative products being launched in the industry.
- Strategic transformation initiatives– Given the exponential expansion in business landscape, channels for customer interactions, competitive state of the industry, and geographical spread of most Retail & CPG companies coupled with M&A activities has made today’s organizations highly dynamic and consistently evolving entity. These macro changes have resulted in creeping inefficiencies and lack of synergies within the business processes and organizational practices. With such state of the industry, it is imperative that most companies would see a significant proportion of their cash flows invested into their own businesses through several business transformation initiatives. These could involve R&D on innovative products, servicing consumer through new channels, integration of recently acquired businesses, supply chain automation, expansion into new geographies / business segments and thus require significant spend in areas such as program management, infrastructure, IT portfolio and business consulting.
Now with investors hawking and questioning executives on their plans to make best use of cash, the challenge of cash deployment is still the one which any corporate leader would prefer to have among other possibilities..