Ambitious executives all over the world are supposed to study just one core product if they want to know how to survive (even prosper) during a depression or severe recession, and that humble product is Rice Krispies.
Introduced in the early 1930s by the Kellogg company in the teeth of the Great Depression, the introduction of this "snap, crackle and pop" breakfast cereal changed the thinking about how companies should behave in a severe downturn when consumer spending is effectively collapsing.
Classic management theory before the '30s advised that companies should seek to contract in line with national income, cutting all expenses and curbing advertising budgets, until the consumer was able to resume spending. Only then should company investments be considered.
The view was taken in the 1920s that any attempt to grow in a recession was not only doomed to fail, but was also likely to be the result of desperate managers trying to gamble for resurrection. The Kellogg company changed all that by expanding its advertising budget, buying up large chunks of radio advertising airtime, introducing new products and retaining workers. It achieved the latter by creating a fourth daily shift, effectively spreading the payroll among more workers.
The company came into the Great Depression neck and neck with its chief competitor Post Cereals. Post decided in the Great Depression to curb advertising, lower costs and cut back on product development. By 1933 it had fallen behind Kellogg, which had recorded a 30% increase in profits compared to 1929, with much of the success based around new products like Rice Krispies.
The idea of growing sales during a downswing in economic activity is no longer as novel as it was for the US cereal kings of the 1930s, but achieving top line growth amid collapsing consumer spending, reducing corporate investment and shrinking government spending remains probably the toughest challenge that can ever be set for a company.
Slightly easier, though no less painful, is boosting margins via swingeing cost cuts. This is prudent of course, but the law of diminishing returns can occur in a recession as steep as the current one being endured in western economies.
The problem with the current "recovery", particularly in equity markets, is that much of it is based on cost reductions, job shedding and dividend cuts. At some point businesses will need to resume top line growth.
Even during the horrifying events of 2008, many companies still managed to expand top line growth, among them McDonalds, Ryanair, Tesco, Aer Lingus, Fyffes and Vodafone.
Of course, for companies like Aer Lingus a revenue increase was not enough to prevent a loss further down the profit-and-loss account. The former state-owned airline took exceptionals (mainly related to staff redundancies) of €141m in 2008, leaving it with a loss of €108m for the year.
Despite its losses, Aer Lingus is a good example of companies managing to find alternative revenue streams in a downturn. The airline's revenue increase was mainly down to increases in ancillary charges. Airline passengers are a strange species; they will demand lower ticket prices from airlines, but then give that money back in additional ancillary charges.
Based on quarterly returns from the US it is clear that very few sectors are managing to grow sales even a year after the worst of the credit crisis. Of course, financials are finding ways to grow their top line after getting federal assistance and pulling in billions of dollars in fees for underwriting bond issues. Based on third-quarter returns for 2009, sales at financial companies are up 34.6% year on year.
Pharma as a sector was even resilient last year and its defensive characteristics remain intact, with sales on a year-on-year basis up 4.5%. The defensive characteristics of industrials have not been as clear, with revenues in this sector down by 14.4%.
All around the world, major global brands have unveiled specific margin-boosting plans to shore up earnings, among them Peugeot and telecoms company Telenor.
However, a look at CRH's most recent figures show that cost cutting at best will only moderate the collapse in profitability.
Sharp falls in revenues will still translate into a poor performance further down the profit-and-loss account. CRH in its most recent results to end of June experienced a 15.4% revenue drop to €8.2bn. Helping to absorb this plunge the company managed to slash total costs from €8.9bn to €8bn in just a year. But this huge bout of cost reductions could not fully shore up margins. In the six months to the end of June in 2008 the company still managed an operating profit margin of 7.3%, but a year later this had plunged to 3%.
If anything explains the cataclysm of the last year it is the amount of job shedding and cost curbs companies have had to engage in, just to leave profit margins at half their previous values. Conversely, clearly a global recovery will leave many of these companies in a very strong position after working so hard on the cost side. But cost cutting is only going to take any company so far. At some point the profit uplift has to come from a stronger top line and that is still a very rare sight in large listed companies, apart from financials.
The lesson of the Kellogg company is clear – expansion and a sense of risk is the only true way in the long term to boost profits.
All these stories are all very well. And we read them because they seem to be relevant in these trying times.
I would only like to question the basic assumption behind such stories: Businesses are honest.
All white businesses (esp the good ones) must hide all black businesses (esp the big ones). A lot of accounting wizardry is required to achieve that.
With so much manipulation going on, such stories make no sense whatsoever.
Comments are moderated by our editors, so there may be a delay between submission and publication of your comment. Offensive or abusive comments will not be published. Please note that your IP address (75.101.246.104) will be logged to prevent abuse of this feature. In submitting a comment to the site, you agree to be bound by our Terms and Conditions
Subscribe to The Sunday Tribune’s RSS feeds. Learn more.
Dear Sunday Tribune, I wrote much about the oncoming credit crunch as far back as 2006 just as the sub-prime was taking hold in the US. I sent these comment's to Independent.ie when they had a comment's page. That page didn't last long, maybe because they thought I knew more than their own expert's. All of these comment's are in the BBC's archive, along with thousand's of others I sent them. Here are just two.
And just another little comment I wrote in early 2007.Even before this property (I’ll have one party), I wouldn't trust a bank that gave you anything free, even if it was only a "Piggy Bank". But this pretense of giving out free money is another of their "BLANKS"", and if you're foolish enough to take it, its MONETARY sting will hit you back later deadlier than a "BULLET"!
This sub-prime debacle is going to take a lot of time to sort out, even more than this incumbent President (Bush) has got. It could take months to realize the extent of the financial institutions caught up in this credit nightmare, and in the end when we find out the extent of the damage could bring the markets down like a pack of cards. For the moment all President Bush has in his hands are the 4 jokers, and if you count him in also, five. See, this could be a long term divestment, for a long time!
I wrote this when the two Polish lads were killed by feral thugs a few years ago.
Racism in Ireland does exist in Ireland. Why? Because we're no better here than any other country or Island, especially when those coming in are seemingly threatening a lot of us by being able to seek out the opportunities (that) a lot of our own are not able to do, because of sociological, educational, or (won’t) for having a dose of laziness in a lot of cases. What worry’s me like your writer, is when the rich “Celtic Tiger” ekes out the last of its rich takings & has to hand out benefit’s to both our own Nationals, & the illegal (spurious basis) migrants & even the decent migrants who might now want to settle down here for life and to stay & rear their families, (and that should be their right) but who might with this economical downturn be out of work, then we will see the clouds of this dormant “Racism” rise to a more visible level. That would be our “Dante’s Inferno”. Let's hope our leader's are always prepared for such a scenario or that God doesn't allow it to happen!
And this next one I wrote when I saw how many people were buying into the property bubble.
Even before this property (I’ll have one party), I wouldn't trust a bank that gave you anything free, even if it was only a "Piggy Bank". But this pretense of giving out free money is another of their "BLANKS"", and if you're foolish enough to take it, its MONETARY sting will hit you back later deadlier than a "BULLET"!