Quality in the age of cost cutting

Fears of global recession have corporate planners scurrying to improve their financial prospects, mainly by cutting costs. The snappily titled programmes that are the outcome of these are obviously intended for the consumption of Wall Street, but are they fair on consumers and the worker?

Transnational giant Unilever announced in 2007 a ‘restructuring plan’ which would cost 20,000 jobs in four years and was apparently ‘bearing fruit’. I do not mean to single out our friends at Unilever because it is no different at Nestle, P&G or Sara Lee. And that was before the present financial crisis. More ‘restructuring plans’ will be announced in the coming weeks as the giants seek to cut costs to prop up their share prices and please shareholders.

All this seems natural enough, even though you need to try and ignore the same organisations’ delightfully composed statements of principled behaviour and commitment to ‘people’ (in the words of Unilever’s copywriter – “Conducting our operations with integrity and with respect for the many people, organisations and environments our business touches has always been at the heart of our corporate responsibility.”).

Food prices have risen to unprecedented levels, yet there is huge pressure on producers and manufacturers to maintain or reduce prices. There is at the same time equal force in the opposite direction from shareholders and stock markets. Very unfortunately, what gets caught in between and invariably squeezed is quality.

One of the largest food safety scares in recent times is the China Milk contamination scandal, which was the World Health Organisation claimed “…a large-scale intentional activity to deceive consumers for simple, basic, short-term profits.

It is unlikely that the international brand owners whose products were detected to contain the milk did so knowingly although a disturbing reality emerges from this incident. The accelerating consolidation amongst food companies, their growing profits through cost cutting and the use of those profits in buying up more and more companies, is not doing much for quality, for the consumer or for the multinationals themselves. The ‘BnL-esque’ scenario this creates is unnatural and completely against the interests of any concept of integrity, fairness or quality.

The major transnational food companies spent the 1980s in a frenzy of mergers and acquisitions, buying up local brands and grabbing bigger market shares. The takeover boom continued into the first half of the 1990s and was complemented by a massive shift in company financial resources into marketing these brands, building an image and creating consumer loyalty. By the mid-90’s companies like Nestle, Unilever and Kraft had built up extensive brand portfolios and held the largest market shares in a range of food products – everything from cooking oil to ice cream, instant coffee and biscuits. They were also under investigation for monopoly practices and price fixing in several countries as a result.

By the end of the 1990s the new logic of financialization set in. The brands themselves became valuable financial assets and their value could be boosted through a blend of Wall Street wizardry and aggressive marketing rather than better manufacturing. So there was an irrational shift to rationalization: cutbacks, restructuring and consolidation. Less is more. Now fewer brands were better. By focusing on a few global brands in overseas markets the financial value of these brands would skyrocket. Nestle and Unilever called these their “billion dollar brands”, while Kraft would “shrink to grow” – with just 10 global “power brands” by 2008.

extracted from IUF.org [Melamine milk contamination exposes the reality of ‘global brands‘]

In the tea category, cost cutting has been affecting quality since the 1950s. Initially it was the move by the owners of newly acquired brands that were defined by their quality, Ceylon Tea content to other, less expensive and inferior origins for their tea. Then those ‘efficiency’ drives even led to the abandonment of facilities in Sri Lanka, where some of those brands – which lead the category in volume but not in quality – were first established. Then a rash of Russian brands repeated that scenario, showing that for some, a commitment to quality lasts only until  consumers build a brand and take it from fledgling to major brand status. Ironically consumer loyalty in this instances rewarded by disloyalty from the object of that loyalty.

Quality costs. In tea that cost is not large if the brand owner’s ambitions might be moderated by the interests of the consumer as much as those of the stock exchange. Easier said than done of course but in order to avoid a round of cost cutting that could lead to the destruction of the tea category itself, a simple truth that needs to be said, and oft repeated. The cost of good tea may be double that of mediocre tea but, when expressed as the consumer knows it – as the cost of a cup of tea – the difference is a few cents.

Tea and other less developed country product like tea, has the potential to lift these countries out of their poverty. The global corporations that dominate these categories and indirectly influence the ‘commodity markets’ through their buying power need to consider whether their marketing investment may be better spent in educating consumers on quality, why good tea with natural goodness need not cost much more than the average tea that today might come with a free gift or special discount offer. It would be moral to do so, and it would also legitimise the lofty claims on the websites of these companies.

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2 Comments Quality in the age of cost cutting

  1. Bruce November 4, 2008 at 12:40 pm

    I gather that a Kenyan shares analyst of excellent reputation last week advised in a written statement to the global market and the local press that he strongly opposed UNLV KE investors unload their shares at the Company’s offering price of approx 65 KSHS.

    It was his Firm’s view that 65 kshs didn’t even cover the market price of the raw real estate, let alone the extensive planting etc done which made it one of the world’s premier tea real estate holdings.

    His Firm’s minimum valuation was more like 145 KSHS according to their extensive financial analysis. He urged all shareholders to reject UNLV KE’s offer until such time as they improved their offer.

    Dilhan, you are quite right in referring to the tea team at UNLV as our friends, because they truly are now, just as they have been for over one half century since we’re been in the tea business. But when the firm was purchased along with our other old friends at Brookes and became just a cog in the wheel of that huge multinational ice cream and soap maker, it became clear to Merrill, Malik and I after making a personal courtesy call to their tea team a decade ago, that our suspicions had become confirmed over the coming months – the quality of their tea product line had suffered – no doubt, because of unreasonably low limits forced upon their tea team by senior management who were none of them Teamen.

    Really, in Kenya, India or Ceylon, the bit higher standards of tea cost such a trifling sum more than the poorer standards – particularly when expressed as a proportion of finished goods cost, that it makes little sense to not spend a few extra shillings for such a lovlier tea.

    It was, in any case, encouraging to see them buy those two sacks of Imboolpitiya at extremely high prices for charity in the recent Premium Tea Auction of a select twenty sacks of Ceylon’s finest district varietal gardens.

  2. Dilhan November 8, 2008 at 2:57 pm

    Thank you Bruce, for your comment. You are quite right in your conclusion that it is less the ill intention of the Teamen than the pure profit orientation of the senior managers of the business that has led to the gradual decline in quality. One can see the present economic crisis in two ways from a Teaman’s perspective – an opportunity to offer consumers a really good cuppa, and upgrade their tea experience at home, or on the other hand, a reason to cut quality, and intensify discounting.

    As you know we see the former as the priority because tea is an inexpoensive beverage at a few cents per cup, and selling tea through discounting and free gifts as has become the norm for some brands, must be the result of ignorance and the application of conventional and inappropriate strategies to a noble and affordable herb.

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