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McKinsey onFinance
Restructuring alliances in China 1Twenty-five years after alliances first paved the way into the worldsmost dynamic emerging market, knowing how to structure them is mimportant than ever.
The view from the corporate suite 6
A survey of multinational corporations finds expectations for moreand more profitablealliances in China.
Smarter investing for insurers 8
Insurance companies need to get better at managing their investmen
Heres how.
A closer look at the bear in Europe 13
The market slump in Europe was deeper and more widespread than cousin in the United States.
Alliances in consumer and packaged goods 16
The sector lags in collaboration, but some companies are beginning change that. Its a good thing.
Perspectives on
Corporate Finance
and Strategy
Number 9, Autumn
2003
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In China, alliances have been the dominantform of foreign direct investment sinceBeijing officially opened the country to the
outside world in 1978. Twenty-five years later,
however, maturing local companies, more
accessible markets, and progress toward a
more stable regulatory environment have
removed much of the initial rationale for
alliances. Indeed, more than 50 percent of
new foreign direct investment in China is
now in wholly owned and cont ractual joint
ventures.
At the same time, many existing alliances have
become unstable, as fundamental imbalances
in part ner contributions have grown. Around
the world, the hallmarks of sustainable
alliances are partners complementary skills,50-50 contributions, and the ability to evolve
beyond original expectations. In China, most
joint ventures are between po tential
competitors, 50-50 deals are in th e substantial
minority, and b oth Chinese and multinational
companies face cash constraints in the
enormous Chinese market. Its no surprise,
then, that ma ny of the joint ventures signed in
the early 1980s are now being restru ctured.
In view of these circumstances, executives of
even successful ventures should take a hard
look at t heir current and prospective China
alliances to assess their rationale and potential
for restructuring. Even successful ventures can
go wrong as markets, part ners, and
competito rs evolve.
Partner . . . or friend?
On e of the most common pitfalls in striking
an alliance in China is blurring the distinction
between government friendships and business
partnerships. Each can be helpful, but it is
usually a mistake to expect their roles to
overlap, such as in anticipating that a
government approval authorit y will do a
ventures marketing or that a business partner
will secure government licenses. Companies
must fully understand the need for and
interests of bo th government friends and day-
to-day partners.
Government entities can be enormously
helpful when they intervene directly in
resolving policy disputes, though some
functional bureaus such as Customs and
Finance will generally not make p olicy
except ions for individual compan ies. Even
where government will get d irectly involved,
companies must first understand the direction
of reform. The government is unlikely to
aggressively promo te a foreign businessagenda among the many industries nominally
controlled by central planning entities that
have been corporatized1 in the past few years.
These include steel, oil and gas, and
automotive, among others. Finally, in those
Restructuring alliances in China
Twenty-five years after alliances first paved the way into the worlds most dynamic
emerging market, knowing how to structure them is more important than ever.
Jonathan R. Woetzel
Restructuring alliances in China |
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sectors where government influence can
still be directly applied, such as health care,
companies must understand w hat ma kes an
offer interesting to the government and
what the government is prepared and able to
give in return. For example, when Volkswagen
proposed to move production of its Santana
sedan t o China in t he 1980s, it did so in
exchange for guaran teed marketing and
support in component localization. The
automaker was the only global original-
equipment manufacturer willing to invest
in China, and it kn ew the government
desperately wanted a global O EM to kick-
start the domestic industry. In return, thegovernment virtually guaranteed profitability
by buying all the sedans produced at
preagreed prices and selling them to taxi
fleets and government bureaus. In todays
much more competitive market, this deal
could no t b e repeated.
With day-to-day partners, it is essential to
understand not merely a companys technical
capabilities but also its business aspirations,partnership track record, and organizational
depth. T his is typically not done, and this
oversight can be a costly mistake. Consider the
experience of one CEO from the United States
who on a onetime trip to China was
introduced to and quickly partnered with a
major Chinese supplier and distributor. But
the CEO neither thoroughly checked out the
business aspirations of his new partner nor
monitored him, and the Chinese partner soon
became a major competitor. In a noth er case,
the head of a global business unit negotiated a
joint venture with the local market leader to
quickly secure market share. But conflicts with
the par tner on product-line priorities and sales
force control soon emerged. This ultimately
led to an acrimonious divorce and a write-off
for both par tners.
Best pract ice due diligence might have
prevented problems. This should include
site visits to check physical location;
interviews with key execut ives to assess their
management philosophy, business aspirations,
and execution skills; close analysis of financial
and accounting information to codify a
potential partners operational and financial
strength; and visits to retailers and distributors
to assess and evaluate the partners true
marketing skill.
Plan for the power balanceto shift
An alliance between partners whose skills are
truly complementary can last a long time.
H owever, shifts in power can o ccur over t ime
and destabilize a partnership. Global players
tend to have an advantage when global
bra nds, world-class technology, global scale,
or financial depth are key industry success
factors. Local players have more of an upp er
hand when relationships with local suppliers,customers, or regulators are essential and
when global competition is relatively weak. In
an emerging economy these factors can change
rapidly as markets evolve and skills are
transferred. In China the resulting power
shifts have been particularly dramatic.
2 | McKinsey on Finance Autumn 2003
With day-to-day partners, it is
essential to understand not merely a
companys technical capabilities but
also its business aspirations,
partnership track record, and
organizational depth.
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Restructuring alliances in China |
Many early alliances in China were predicated
on a t echnology-for-market swap. Local
companies would bring marketing skills, and
foreigners would contribute world-class
equipment and cash. Unfortunately, some
foreign companies have found that their
Chinese partners lack any real marketing
capability, often because the state distributors
they used to sell to have gone under. As a
result, among the executives we interviewed at
14 leading multinationals, half indicated that
they had recently increased or were about to
increase their equity share in their joint
ventures. In the words of one: If your
ultimate goal is 100 percent ownership, the
closer you start to that goal the less pain you
have to go thr ough later. For their par t, local
companies have sometimes found their foreign
par tners unw illing or unable to continually
inject cash and technology. Said the chairman
of a leading Chinese company: Their initial
technology was not suited to the Ch inese
market, and they have proved unwilling to
reinvest to rebuild share.
For companies considering new ventures,
the implications of power shifts should beconsidered in the negotiation. Because
bargaining power will increase over time,
likely buyers should choose smaller companies
as partners and avoid setting acquisition
prices. For example, one venture succeeded in
reducing the initial buyout price by 20 percent
by timing the offer to coincide with increases
in the partners cash needs in other businesses.
Buyers should also hold bo th management and
financial control. Experience suggests somebest-practice requirements: hold t wo-thirds
of the equity, keep proprietary generators of
value such as brands and core technologies out
of the alliances control, and ensure that key
elements of the alliances business system itself
can be absorbed, if necessary, at a later date.
For example, one logistics firm separates its
customer-relationship staff from the day-to-
day transportat ion service joint venture to
preserve its marketing capability outside the
venture but ensures common electronic data
interchange systems and standards.
Potential sellers, on th e other hand,
should seek to capture the full value of
their participation in the alliance by striking
presale agreements that include an exit option
based on market value at the time of exit.
Many Chinese firms now routinely seek such
agreements by agreeing to base a buyout price
on a specific market multiple, such as P/E,market-to-book, or other ratios, assuming tha
the market will fully reflect the value of the
company at the t ime of buyout. Sellers should
also acquire skills from the joint venture.
Some do this, for example, by actively rotatin
managers over t wo- t o t hree-year periods.
These managers then return to the parent
company to start up new businesses, even
competing with th e venture.
Fit the organization to thepower balance
Equity arrangements alone cannot ensure that
an alliance will go the way you wish. Equally
importa nt is fitt ing the softer organizational
Potential sellers . . . should seek to
capture the full value of their
participation in the alliance by
striking presale agreements that
include an exit option based on
market value at the time of exit.
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elements of structure, such as skill transfer
and human resources, to the alliances
evolution.
Stable alliances are characterized by
independent organizations with their own
board and direct control over their own
business activities. Often, they develop their
own unique business identity, complete with
separate names, logos, uniforms, and
personnel systems. Strong joint venture
boards can effectively block multinationals
that try to coordinate multiple joint ventures
to improve the effectiveness of multiple sales
forces. One consumer electronics company,
for example, has 15 joint venture sales forces
for the same customer base. Strong joint
venture boards can also block efforts to
reduce the overhead associated with having
literally dozens of joint venture general
managers. Some multinationals, after
exhausting negotiations with each venture
partner and its board, have achieved
centralized sales and marketing cost centers,
with joint ventures still acting as profit
centers. However, only those who started
with the end game in mind have achievedcentralized sales profit centers that allow
them to treat production joint ventures as
contract manufacturing cost centers.
Unstable alliances t ypically feature d irect
intervention by par tners into day-to-day
business activities, and boards that are unable
to set a clear direction for the company
because the partners disagree. Trying to build
a stable, independent joint venture on anunstable foundation of radically imbalanced
par tner contr ibutions tempts trouble. As an
illustrat ion, one of the earliest automo tive
ventures was established as a 50-50 deal. The
Chinese partner provided a basic facility and a
ready market for the foreign OEMs global
components exports. In return it expected the
foreign OEM to provide not only parts and
design but to build up the alliances own
manufacturing and design capability over
time. The foreign OEM chose not to do so,
instead sticking by the letter of the agreement,
which allowed it to no t source locally if it
deemed qua lity insufficient. After eight years
of wrangling, the Chinese partner thought it
had been taken advantage of and forced the
foreign OEM to exit.
On the human resources front, one
important consideration is putting sufficient
people into the alliance to ensure the critical
mass necessary for alliance employees to learn
effectively, and to systematically transfer local
employees, par ticularly local executives, t o
develop their knowledge and skills. Many
companies have learned the hard way that
underinvesting in expatriates and relying on
the local partn er is counterpro ductive. In the
short term, skills do not improve, leading to
a weak organization and poor performance.
This in turn makes it difficult to hire top-
notch talent, p erpetuating the skills gap.
The parent becomes reluctant to throwgood money after bad, mak ing it ever mor e
difficult to summon up the courage to send
out yet another expensive expatriate. In our
experience, this situat ion more than any other
drives multinationals to leave China.
Negotiate from the top
Even with foresight and good p lanning there
may be no alternative to a t ough restructu ringnegotiation. In these situations, consider direct
action from the top.
The best restructu ring negotiations are
prepared well in advanceeven in the initial
deal stru cturing. Negotiations in China are
4 | McKinsey on Finance Autumn 2003
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Restructuring alliances in China |
protracted events, often lasting several
years, not just to define the guidelines for
cooperation but also to allow the par ties
to get to k now one another. Given th is
oppor tunity, farsighted multinational
companies clearly signal their intentions and
prepare for likely restructuring by including
equity put and call options in the joint venture
contract to ensure management control and
carefully define the joint ventures scope.
To illustrate, provisions can also be inserted
into contracts that put pressure on a partner
to agree to restructur ingfor example,
identifying early on events that require a
unanimous resolution approving joint venture
termination, if they occur.2 Experienced
negotiators insist that timeliness of
negotiations is not critical but that avoiding
major concessions is.
Planning ahead is part icularly impor tant
in China as joint venture restructuring or
divestiture is legally valid only with the
consent of both partners and the original
approval authority. T he 199 6 Foreign
Invested Enterprise Liquidation Measuresand other relevant regulations appear to
indicate five circumstances where ear ly
joint venture termination is possible. They
are failure to subscribe capital, divestiture by
one par ty, ban krup tcy, termination for cause,3
and liquidation by unan imous board consent.
In all cases, a unanimous board resolution is
required.
If your part ner does not agree with yourrestructur ing proposal, reopening negotiations
usually is best done at the par tner-to-par tner
level. The same issues of part ner selection and
long-term strategy tackled in the initial
negotiation need to be addressed. Venture
managers may have an understanding of the
issues, but they typically lack both internal
and external credibility t o make the tou gh
decisions. Where the joint venture is clearly
being looted by one partner, the other partner
should no t t ry to fight from inside but should
appeal directly to government officials
typically the local mayor. If its a large deal,
appealing to the state council may be
necessary. A final caut ionary tale: one
multinational relied on government goodwill
and installed the former general manager of
its Chinese partner as the joint venture CEO .
As it happened, the general manager
embezzled and transferred funds to the
Chinese part ner. After two years of fruitless
discussions by local expatriate managers, the
CEO of the multinational corporation
appealed directly to the city government,
which ousted the general manager within a
month and agreed to the joint ventures
restructuring.
Restructuring alliances in China is likely to be
a significant trend. With adequate pr eparation
restructuring can be an effective tool fordeveloping a sound business platform. Withou
it, the pro cess is likely to be challenging and
expensive.
Jonathan Woetzel([email protected]
is a director in McKinseys Shanghai office. Copyright
2003 McKinsey & Company. All rights reserved. Adapted
fromCapitalist China: Strategies for a Revolutionized
Economy, New York: John Wiley & Sons, 2003.
1 That is, which have been set up as companies as opposed to
state-owned enterprises. This may or may not be coincident wit
an IPO or share sale.
2 It must be noted, though, that the binding nature of these clause
is yet to be tested.
3 That is, force majeure or breach of contract of a magnitude to
prevent continuation of the business.
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The view from the corporate suite
A survey of multinational corporations finds expectations for more
and more profitablealliances in China.
Peter A. Kenevan and Xi Pei
Foreign investment in China used to be
restricted largely to alliances with struggling state-
owned companies. The results were mixed, and
some high-profile failures gave alliances a bad
name. Recently, however, foreign companies have
been allowed to run their own enterprises in
certain sectors,1 and they will soon be able to do
so in several others as well.2
For both foreign and Chinese investors, wholly
owned ventures are, on average, more profitable
than alliances (Exhibit 1). Yet last year, alliances
attracted roughly half of Chinas record $55 billion
in new foreign direct investment, and many
companies expect to pursue more of them, not
only because they remain the sole way to invest in
the life insurance, securities, and telecommuni-
cations sectors, but also because, in many cases,
they perform quite well. Indeed, if alliances are
carefully chosen and skillfully run, they can be just
as financially rewarding as wholly owned
businesses.
We surveyed 31 companies3 to learn about the
goals, partnership structures, and past
performance of their 400 alliances in China. A
majority of the companies in our sample were
foreign-owned, the remainder Chinese. All expect
to enter into more alliances in China during thenext five years.
Upward of 90 percent of the multinationals
surveyed believe that their alliances in China
perform at least as well as those in other emerging
markets. Most foreign investors now judge the
success of an alliance by its current profitability
instead of by the longer-term strategic gains they
used to pursue, such as learning how to operate in
China, gaining access to its regulators, building
market share or brand awareness, and developing
an export-manufacturing base. By contrast, the
Chinese partners often place greater emphasis on
acquiring Western management skills and
production technologies and on the secure
employment that comes with foreign joint ventures
(Exhibit 2). However, among the companies we
surveyed, large differences separated the strong
and weak performers, both of which were identified
by the propor tion of their alliances that met or
exceeded expectations, financial and strategic,
and the proportion that operated in the black
(Exhibit 3).
Peter Kenevan([email protected]) is a
principal in McKinseys Tokyo office, andXi Pei
([email protected]) is a consultant in the Shanghai
office. Copyright 2003 McKinsey & Company. All rights
reserved.
1 Prior to Chinas entry into the World Trade Organization in 2001,
only the electronic-equipment, processed-food, consumer goods,
and pharmaceutical sectors were open to multinational
corporations.
2
The WTO agreement removed impediments to foreign investmentin accounting and legal services, banking and insurance,
chemicals, construction, distribut ion and retailing, and Internet
services.
3 The survey took place between October 2002 and March this year
and included companies in five industry sectors: automotive,
basic materials, consumer goods and pharmaceuticals, energy,
and high-tech and telecommunications.
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6 | McKinsey on Finance Autumn 2003
Sidebar
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The view from the corporate suite |
Exhibit 1. Wholly owned is more profitable
Economics of alliances vs. wholly owned businesses in China, percent
Source: 2003 McKinsey Chinese alliances survey of 31 companies in automotive, basic materials, consumer goods/pharmaceuticals, energy, and high-tech/telecom sectors
Wholly ownedAlliances
Share ofinvestment
Share ofassets
Share ofrevenues
Foreign-owned mult inational companies(average of 25 companies)
Share ofprofit
5545
31
6960
40
60
40
57
40
60
43
57 60
40 43
Chinese-owned companies(average of 6 companies)
Share ofinvestment
Share ofassets
Share ofrevenues
Share ofprofit
Exhibit 2 . M ixed expectations
Percentage of alliances
Source: 2003 McKinsey Chinese alliances survey of 31 companies in automotive, basic materials, consumer goods/pharmaceuticals, energy, and high-tech/telecom sectors
. . . while their Chinese partners measure success in other ways
(100% = 459 alliances)
Profitable
40
60
Unprofitable
Is alliance profitable?
Exceeding
44
21
35
Notmeeting
Meeting
Foreign-owned mult inational companies measure alliancesuccess in terms of profits . . .
Does alliance meet financial andstrategic expectations?
(100% = 359 alliances)
Is alliance profitable?
32
68
Profitable
Unprofitable
Meeting
Exceeding
Notmeeting
48
18
34
Does alliance meet financial andstrategic expectations?
Exhibit 3 . Segmenting the sample
Average distribution of alliances in each companys portfolio by performance category,1 percent
Notmeeting Meeting Exceeding
Does alliance meet financial and strategic expectations?
Strong performers(n = 9)
Average performers
(n = 13)
Weak performers(n = 9)
12
35
86
61 27
38 27
113
100%
Is alliance profitable?
ProfitableUnprofitable
7723
33 67
64 36
100%
1Strong performers = 80% of alliance portfolios meet/exceed targets and 60% profitable; weak performers =
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Smarter investing for insurers
Insurance companies need to get better at managing their investments. Heres how.
Lo M. Grpin, Marcel Kessler, and Zane D. Williams
By the staid standards of the insuranceindustry, investment strategies in recentyears have been a walk on the wild side.
Drawn over the years to an increasingly
complex menu of investment options,
including mortgages, private equity, junk
bonds, and collateralized debt obligations,
insurers a lso inevitably increased their levels of
investment risk. North American life insurers,
for example, reduced the quality of their bond
por tfolios. In 2001 holdings in bonds rated
BBB+ and lower made up 39 percent of their
$2 t rillion under management, up from
23 percent in 1996. European insurers also
took more risks but b ecause of regulatory
rules concentrated their exposure in equities
rather than corporate bonds.
As the stock market rose, the pursuit of ever-
higher yields seemed a surefire way to boostcompany returns. With more than h alf their
risk capital supporting investment activities by
the time the bull market peaked in t he late
1990s, many insurers resembled little more
than hedge funds with an insurance business
on t he sideonly without that industrys
sophisticated systems and management
processes to oversee the potential downside of
added risk. The rising market also obscured
another fact: many insurers investments wereactually yielding only limited shareholder
valueand often destroying it.
When t he market dove, many insurers were
left holding th e bag. US insurers faced b illions
of dollars in losses from defaults on
collateralized debt obligations and troubled
bond issuers. Rating agencies issued
downgrades on 151 and 148 US property
and casualty insurers in 2002 and 2001,
respectively compared with 77 and 59 in
2000 and 1999, respectively. A similar trend
affected life insurers.1
Addressing such losses is just the first step in
mount ing a broad industry revival that will
require improving operations, distribution of
insurance products, and underwr iting of
insurance risks. Yet investment strategy is also
a crucial component. Our research2 indicates
that it is critical for t he industry to rethink its
exposure to investment risk if it is to avoid
further calamities. It isnt simply that insurers
need to dial back their pur suit of higher yields
and the greater risks they entail. By crafting
an investment strategy that eschews chasinghigher yields, insurers can reduce exposure to
unnecessary risks and in the process free up
billions of dollars in capital. At many insurers,
such an approach may require reorganizing the
way underwriting and investment functions
interact and raising the level of investment
expertise.
A flawed investment strategy
The industrys shift to riskier investments has
been gradual and p erhaps unintentional in
some companies. Chasing ever-higher yields
seemed to provide easy money, and while the
economy boomed the markets rewarded
insurers who increased their risk levels. But in
8 | McKinsey on Finance Autumn 2003
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Smarter investing for insurers |
the process these insurers tied up substantial
amounts of capital that could have been put to
use more productively for shareholders in the
underwr iting of value-creating insurance risk.
Three approaches at the heart of many
insurers investment strategies illustrate the
problem.
Increasing the risk profile of the investment
portfolio. Increasing the riskiness of assets
may return higher investment income over
the life of the security, but it rar ely does
more t han compensate shareholders for
bearing a higher level of risk and increased
price volatility. When credit defaults were
low and equity mar kets buoyant, insurers
generated at tractive short -term returns from
riskier securities. Yet r egulations require
insurers to hold more risk capital for riskier
investments, a cost that amounts to more
than $2 billion a year for the US life
insurance industry.
Mism atching assets and liabilities. Insurers
also commonly purchase assetstypically
bondsthat mature over a longer period of
time, betting that they will capture some of
the higher yield of those securities. But t he
chances of beating the market are slim anddepend on whether or not interest rates
behave as the market expects. Those who
bet on t he direction of interest rates are
unlikely to be right consistently, especially
in the US Treasury market, the worlds most
liquid and efficient financial market.
Trying to beat the market. Warren Buffett,
CEO of Berkshire Hathaway, is the rare
investor who can claim to have consistently
created value for shareholders by beatingthe market through stock picking. Insurers
have assumed that by actively managing
their own investment por tfolios they, too ,
could identify assets that are mispriced and
offer higher returns without taking
addit ional risk. Yet the evidence belies that
assumption (Exhibit 1). Insurers would need
to have research, analytical, and trading
capabilities equivalent t o t hose of the best
hedge funds and asset managers to deliver
returns consistently in excess of the market
benchmarkand would still be constrainedby demand ing regulatory requirements.
Active management also carries the costs of
frequent trading, fees paid to external
managers, and an additional tax burden
from the realization of capital gains. These
costs would chip away at whatever
outperformance the insurers achieved.
A different approach
To satisfy short-term expectations and
maximize long-term economic value to
shareholders, insurers should stop trying to
generate short-term yields and instead return
to a more disciplined approachassessing
investments on a risk-adjusted basis and
1As measured by total returns to shareholders; distribution includes 679 open-end USequity funds.
2Figures do not sum to 100% because of rounding.Source: Financial Research Corporation; McKinsey analysis
Exhibit 1. Active managers are no better at beatingthe market than random chance
Percentage of actively managed funds in top quartile,1 19952001
0 0.30
1.0 6.0
17.0
31.0
30.0
31.0
13.0
06
Number of times in top quartile in 7 years
5 4 3 27 1
14.0
33.0
20.0
0 0
3.0
Actual distribution2
Random distributio
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paying more attention to account-investment
expenses and total capital costs. This would
allow insurers to fit the risk capital they
commit to their investment activities more
closely to t he risk obligations of their
underwr iting. Such an approach wou ld require
bo th structural and policy changes to let
executives more clearly identify what really
drives performance: efficient use of capital
and effective product design and pricing.
Separate structurally to integratefunctionally
Stru cturally, product and investment groups
must have separate responsibility and
accountability for t heir costs, retur ns, and
risks. On the investment side, that includes
managing the optimal portfolio required to
support insurance products and bearing the
risks of any deviations from that optimal
portfolio. Yet today the investment and
underwr iting sides of most insurers, especially
life insurance companies, bear collective
responsibility for the overall profitability and
risks of underwr iting products. As a result,
the investment group is typically creditedwith the overall performance of the por tfolio
rather than the risk-adjusted performance in
excess of the optimal liability port folio.
Precedent for a more tra nsparent approach can
be found outside the insurance industry. In the
early 1990s banks divided accountability for
balance sheet performance between their asset-
and deposit-gathering functions. The industry
also broadly adopted more sophisticatedcapital-management t ools, such as risk-adjusted
return on capital (RAROC) and shareholder
value added (SVA), in large part because
massive bankr uptcies of US banks in t he late
1980 s led to a radical rethinking of financial
risk management. Increasing transparency and
accountability not ably improved the indust rys
performance. M any banks b egan p ricing their
products more accurately and making bett er
decisions abou t their product lineups, and
many smaller and midsize banks left the
corporate-lending, mor tgage, a nd consumer
credit card businesses as a result of chronic
underperformance. In the decade since, the
US bank ing industry has more than tripled its
return on assets, improving its return on equity
(ROE) by 50 percent and at t he same time
strengt hening its capitalization to reflect risks
more accurately.
But insurers have been slow to adopt such a
structur e, in par t because the complexity of
their products ma kes the development of
sophisticated performance-management tools,
such as SVA, more difficult. M oreover, unt il
recently the industry hadnt faced a challenge
as dramatic as the one the bank ing industry
did in the late 1980s. Tardiness has hurt
insurers: the performance of banks exceeded
that of the S& P 500 over the past decade,
while the performan ce of insurers has lagged
behind the S& P 500.
Some insurers have succeeded by breaking
from the pack, dividing their balance sheets
for pro duct groups and investments. Adopting
this approach made one large Nor th American
insurer aware that even though its fixed-
annuity business accounted for a large share
of its risk capital, it was destroying value for
shareholders. Among companies that have
already divided their balance sheets, the
increased transparency and responsibility hasserved to b reak dow n the functional silos of
product and investment groups common to
many insurance carriers and served to
promote a n ew constructive collaboration.
Typically interact ion b etween these silos is
rare, information flows po orly, and teamwork
10 | McKinsey on Finance Autumn 2003
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Smarter investing for insurers | 1
is often devoted to figuring out how to
extract concessions from oth er departments
on topics such as pricing and crediting rates.
Transparency also lets companies take
advantage of changing conditions when r ising
prices make some insurance products more
competitive.
Match the risk levels of investmentsand liabilities
In our experience an essential element in
improving an insurers investment approach is
setting down a clear policy that compels the
investment function to weigh risk against
value creation. Th is includes rigorously
identifying what t ypes of risks an insurer is
willing to accept, how much exposure to each
risk type is acceptable, and what return is
expected. In practice, this policy can be
implemented t hrough three different k inds of
pro grams. Strategic asset allocation (SAA)
defines what asset classes the insurer wants to
invest in and how to allocate the assets to
each class. General account portfolio
management (GAPM) specifies the investment
strategy (the asset classes, the mix, theduration of securities, and their credit quality)
for a product. Finally, asset liability
management (ALM) defines the amoun t o f
interest rate risk an insurer is willing to take
and continually ensures that this limit is
adhered to . Although many insurers have
similar programs in place, their form and
execution vary enormously. Asset allocation
may be based on experience and rud imentary
calculations at some insurers, for example,whereas others use leading-edge software
designed to organize their portfolios.
Viewed from a long-term perspective, the
interdependence among risk, returns, and
capital requirements in this industry leads to a
counterintuitive conclusion: insurers looking
to maximize shareholder value should match
their risk exposure from investments to the
financial risk inherent in their liabilities rather
than aim to maximize yields. Insurers should,
for example, perfectly match the cash flows of
their assets and liabilities to reduce interest
rate risks.3 Ideally, insurers wou ld deviate from
this strategy only in specific asset classes
where their expertise or experience made them
confident they could find underpriced
investment oppor tunities over the long term.
The optimal investment strategy would depen
on p roduct design, but in most cases it would
require risk-free or high-grade corporate
bonds for products where insurers bear the
investment risk themselves. It can also require
investing in riskier asset classes, in part icular
for certain European products where the
liabilities depend on market r eturns and some
of the investment risk is borne by the
policyholders.
One might argue that as investments are
moved to lower-risk assets, net income will
fall, reducing earnings per share (EPS) and
ROE. However, the reduced portfolio riskfrees up capital to be used by activities that
generate greater value, such as underwriting
insurance risk, and results in a fall in the cost
of equity (Exhibit 2). This in turn raises the
P/E ratio of the company and offsets the fall i
EPS. Moreover, since less risky securities
require less capital to support them, the
overall reduction in capital cost can boost the
companys market capitalization.
Give the professionalsmore expertise
In practice, executing the new investment
strategy requires insurers to strengthen th e
actuarial, risk-management, and por tfolio-
8/14/2019 MoF Issue 9
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management expert ise of their investment
organization, w hen t raditionally their focus
has been security selection. They need a better
understanding of the structure and risks of
assets and liabilities in portfolio management
if they are to choose appropriate GAPM and
ALM objectives and processes and to
implement strategies to hedge the many risks
inherent in th e liabilities.
Some leading North American insurers have
responded by adding new teams to support
their portfolio managers. A few have formed
por tfolio-management teams and ALM teams
within t he investments function o r in
derivatives groups to find better ways to hedge
12 | McKinsey on Finance Autumn 2003
liability risks. Others have rotated rising
stars from the actuarial function into the
investments group to ensure cross-fertilization
of knowledge.
A few have built state-of-the-art systems that
enable them to monitor how well their assets
and liabilities are matched and to test the
value of their holdings against fluctuations in
the financial markets. This is also the case in
Europe, where a less-rigid regulatory
framework and greater degree of ownership of
insurers by banks has made it easier for some
insurers to join the avant-garde.
Insurance companies are at a critical juncturein shaping their investment strategies. They
must scale back some of the excessive risk
they took on dur ing a bull market, and also
review basic investment strategies. In the end,
too, they must acknowledge that t hey can
deliver lasting shareholder value on ly by a
better alignment of their product and
investment goals.
Lo Grpin([email protected]) is an
associate principal in McKinseys Boston office;Marcel
Kessler([email protected]) is a principal
in the Montreal office. Zane Williamsis an alumnus of
the Washington, D.C. office. Copyright 2003 McKinsey
& Company. All rights reserved.
1 These figures are based on A.M. Best financial-strength rat ings.
2 Interviews with insurance managers, actuaries, investment
professionals, and academics; a review of the actuarial,
investment, and academic research; and a quantitative analysis
of industry performance.
3 Of course, insurers cannot always perfectly execute the optimal
investment strategy. In certain geographies, such as Asia, the
dearth of securities limits the portfolio composition. Even in the
United States, with the recent retirement of the 30-year bond and
the decrease in bond market liquidity, it is often challenging for
insurers to build the portfolios they need. However, any such
deviation should be done out of necessity rather than as an
objective.
MoF
Exhibit 2 . Balancing risk and reward
1Assumes risk-free rate of 5% and market risk premium of 5%.2Reduced investment risk in line with optimal liability portfolio.3Includes value of dividends paid or share buybacks.Source: McKinsey analysis
Company financialparameters
Return on equity
Forecast growth rate
BetaCost of equity1
Potential2
10%
4%
0.26.0%
Current
Investment strategy
15%
4%
1.010%
Currentinvestmentstrategy
150
50 50100Net income
$ million
10.0
Price-to-earnings ratio
21.6 21.6 21.6
1.5
Value of company$ billion 1.6 1.6
2.2
to paydividend . . .
or tounderwriteinsurance
or to buybackshares . . .
Potential investment strategy2
Use 100% of excess capital to . . .
8/14/2019 MoF Issue 9
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Earlier this year we examined thecontours of the recent stock marketdecline in th e United States, by most t ypical
measures the worst bear market since the Great
Depression.1 We found that much of the
markets travails were concentrated among the
information technology and telecommunica-
tions sectors, and among th e largest compan ies
in the Standard & Poors 500 indexthose
megacapitalized compan ies whose market
capitalization surpassed $50 billion. An update
of this analysis in June confirmed our findings:
combined, th e S& P 500 indexs 154 IT,
telecom, and megacap stocks were responsible
for th e entire 33 percent decline from January
2000 t o June 2003. The oth er 346 companies
in the index actually contributed a positive
5 percent, preventing th e overall average fromsinking even fur ther.
Such was the shape of the US bear mar ket. To
explore what took place in equity markets in
the United Kingdom and continental Europe,
we conducted the same analysis there.
Anatomy of a Europeanbear market
Using the FTSE Euro 300 index as a proxy
for t op-line returns, we discovered that t he
European boom r epresented a more wide-
spread inflation of stock price levels than in
the United States. Similarly, the markets
decline was harsher and affected more sectors
than in the United States. In local currency
terms, the European index increased even
more aggressively2 than the S& P 500
until the end of 1999, and th en declined
to a n index somewhat below the US market
by the end of June 2003. In both the United
States and Europ e, the market bubble and
the subsequent decline were dr iven largely
by changes in overall price-to-earnings
ratios (P/E). The market, in short, responded
more to expectations than actual business
performance.
The contrast b etween how the US and EU
markets declined can be seen even more
clearly in the share price performance of the
500 largest European companies. Prior to
January 2000 , the median increase ofEuropean share prices stood at 21 percent p er
year, noticeably higher than for the United
States, at 17 percent. In fact, on a sector-by-
sector basis, the European equity markets
significantly outperformed the US market for
each sector during the bull market, even in th
high-tech sectors (Exhibit 1). Unfortunately,
European share prices since December 1999
have seen a massive 12 percent a nnualized
median decline, compared to a positive1 percent median return for the US market
over the same three-and-one-half year period.
This is largely because all European sectors
did much worse than their US counterpart s,
thereby losing any ground they may have won
during the bull market (Exhibit 2). And while
A closer look at the bear in Europe
The market slump in Europe was deeper and more widespread than its
cousin in the United States.
Andr Annema, Marc H. Goedhart, and Timothy M. Koller
A closer look at the bear in Europe | 1
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14 | McKinsey on Finance Autumn 2003
the Europ ean high-tech sectors also performed
worse than in the United States, their relative
weight in the market was also much smaller
and hence they contributed much less to t he
overall decline.
Is the European marke t fairlyvalued now?
Using the same valuation model that we
used to review the US market, we found
that actual P/E ratios in the United Kingdom
behaved much the same way as those in the
United States, deviating from a range
predicted by market fundam entals only
during the oil shocks of the 1970s and the
new-economy euphoria of the 1990s.3 Wildly
different interest rates and inflation levelsacross European countries would make it
difficult to assemble a truly European long-
term perspect ive on P/E valuation levels, but
at least for the period that we could
reasonably construct a European ma rket
environmentsince 1997it followed t he
same pattern as the UK and US markets.
The conclusion we came to, when looking
at the economic fundamentals of European
countries, was that even during the bull
market it was impossible to justify P/E ratios
of 20 or more (Exhibit 3).4 Over t he past few
months, as with the US market, the P/Es of
European m arkets have returned close to t heirfundamental range, indicating that after a
period of extreme volatility, current valuations
are broadly in line with economic
fundamentals over the past six months.
We wont forecast near-term market
direction, but given that long-term economic
fundamentals have been surprisingly stable
over t ime, we can estimate that European
markets will generate around 6.5 to7.0 percent real returns over the next ten
years. In Europe, return ing to peak market
levels is likely to take a bit longer than in the
United States largely because the bull mar ket
rise was stronger in Europe, and the decline
steeper.
Exhibit 1 . European sectors outperformed UScounterparts in bull market
Median annualized TRS, percent; Dec 31, 1995Dec 31, 1999
Basic materials
Consumer, noncyclical
Consumer, cyclical
Oil & gas
Financials
Industrials
Information technology
Telecommunications
Utilities
Source: McKinsey analysis
Top 500: 17% Top 500: 21%
Sector S&P 500 Europe top 500
11
15
21
49
24
4
9
15
9
24
81
60
20
24
26
25
31
29
Exhibit 2 . European sectors underperformed againstUS counterparts in bear market
Median annualized TRS, percent; Dec 31, 1999June 23, 2003
Basic materials
Consumer, noncyclical
Consumer, cyclical
Oil & gas
Financials
Industrials
Information technology
Telecommunications
Utilities
Source: McKinsey analysis
Top 500: 1% Top 500: 12%
Sector S&P 500 Europe top 500
3
6
7
20
14
12
3
4
5
1
44
25
4
11
8
5
8
8
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A closer look at the bear in Europe | 1
Why might Europes markets have acted as
they did? Among the many possible reasons
for t he differences in t he European and US
bull and bear markets, a few seem most likely.
One could be a pervasive overoptimism among
Europeans in th e late 90s, looking forward to
the potential benefits of the European mone-
tary u nification and the expected additionalgrowth and productivity from further market
integration. After the bubble burst, over-
optimism may actually have swung in the
other direction, resulting in an even deeper
downturn when compared to the US market.
One could also argue that investors expected
European corporate incumbents to capture
more new-economy benefits than US incum-
bents because venture capital for start-up
companies in Europe was not as available as itwas in the United States. Finally, European
investors may have used the P/E levels of the
tech driven US market as a reference for
European valuations without fully realizing
how much more modest the role of technology
and telecom was in Europes markets.
Exhibit 3 . M arket fundamentals seldom justify P/E ratios as high as those during the bull market in the UK
Source: McKinsey analysis
1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2002
Actual P/E
Fundamental P/E
Range of uncertainty around fundamental P/E
0
5
10
15
20
25
Europes bull market was more bullish and its
bear market more bearish, than those in the
United States. But t he value of Europ es stock
markets now appears to h ave returned to long
term fundamental levels.
Marc Goedhart(Marc_Goedhart @McKinsey.com) is an
associate principal in McKinseys Amsterdam office,
whereAndr Annema(Andre_Annema @McKinsey.com
is a consultant;Tim Koller(Tim_Koller @McKinsey.com)
is a principal in McKinseys New York office. Copyright
2003 McKinsey & Company. All rights reserved.
1 Timothy M. Koller and Zane D. Williams, Anatomy of a bear
market, McKinsey on Finance, Number 6, Winter 2003, pp. 692 By 170% in Europe, compared to 140% for the US.
3 Marc H. Goedhart, Timothy M. Koller, and Zane D. Williams,
Living with lower market expectations, McKinsey on Finance,
Number 8, Summer 2003, pp . 711.
4 Note that these are all forward-looking P/E ratios and that the
typically reported ratios based on realized earnings were a lot
higher.
MoF
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Alliances in consumer and packaged goods
The sector lags in collaboration, but some companies are beginning to change
that. Its a good thing.
John D. Cook, Tammy Halevy, and C. Brent Hastie
That logic hasnt been lost on those CPG
companies that are leading a wave of new
alliance activity. The quest for higher
earnings and the shortage of good M& A
targets has led companies such as Nestl
and Procter & Gamble (P& G) to make
alliances an important part of their growth
strategy. These companies report good
returns on their alliance activity. Our
analysis of 77 leading consumer-packaged-
goods enterprises1 found that the most
alliance-intensive companies delivered
average total returns to shareholders nearly
five times higher than companies that did not
part ner. What s more, t he highest-performing
companies captured a disproportionate share
of the alliance oppor tunities and locked in the
best partners.
Where the opportunities are
From our perspective, alliances tend to fall
into four categories. Some aim to generate
innovation and spur commercialization.
Others are designed to extend products to
new channels, consumers, and occasions
the time and place in which a consumer uses
a product or service. Still others focus oninternational expansion or are designed to cut
costs or otherwise boost performance
(Exhibit 1). Most companies pull just one or
two of these levers, while the most successful
practitioners use alliances to pursue a full
range of strategic goals (Exhibit 2).
16 | McKinsey on Finance Autumn 2003
H istorically, executives in theconsumer-packaged-goods (CPG) sectorhave preferred mergers and acquisitions to
partnerships. In this intensely competitive
industry, such a stron g bias in favor of control
frequent ly made sense. Yet faced with pressure
for earnings growth and a paucity of M& A
targets in most produ ct categories, some
leading CPG players are beginning to rethink
this predilection. Its a trend that augurs well
for th e sector as a whole.
These days, global corporations routinely tie
up 20 percent or more of their assets in
alliances, yet as a group CPG companies lag
behind. Indeed, the ten largest ph armaceutical
companies entered five times the number of
alliances between 1998 and 2002 than did theten largest CPG companies. But by staying on
the sidelines, CPG companies have missed
some of the benefits that alliances offer as
alternatives to outright acquisition. They
typically avoid the acquisition premium paid
by buyers and the capital gains taxes for
sellers. They are a quicker, less risky way to
bring together complementary assets and skill
sets (geographies with products, new channels
with products, or different functional skills).And they are also well suited for the kind of
top-line growth that so many companies
seekparticularly in industries where
consolidation has largely precluded the
opportunity for further mergers or
acquisitions.
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Alliances in consumer and packaged goods | 1
Innovation and commercialization
In the competition among CPG compan ies
to win customers, innovative products and
packaging and development of new categories
are essential. Yet most CPG companies are
sensitive to the fact that the risks (and costs)
of new product R& D are higher than business
as usual. M oreover, successful innovation
often requires pooling capabilities and/or
assets from previously unrelated product or
functional areas. Many CPG companies can
benefit from employing alliances across the
entire innovation life cycle to tap into basic
research from par tners or conducting it jointly
to improve returns on product development
and reduce the risks and costs associated with
taking products to market.
A joint venture that P& G a nd C lorox unveiled
last year demonstrates how such collaboration
can work. P& G had developed and performed
test marketing on a plastic food wrap product
but op ted not to commercialize the product in
part because of the high costs of competing
in the category. At the same time, Cloroxs
Glad business was generating lower marginsthan a t ypical Clorox unit, in spite of its
strong consumer brand and leading market
position, and the company was facing long,
capital-intensive lead t imes for innovation.
Instead of going it alone, these erstwhile
competitors joined forces to commercialize
new plastics technology. Rather than simply
licensing the technology in exchange for a
royalty stream, P& G contr ibuted its patentpor tfolio applicable to bags and wraps from
its baby, feminine care, and tissues businesses,
along with research and development team
resources, in exchange for a minority stake in
the Glad business. In exchange, Clorox gains
access to all of P& Gs current and futu re
technology related to plastic food and t rash
bags, wraps, and disposable containers. This
structur e permits P& G to reap the equity
upside without having to invest huge sums to
compete against an entrenched brand and
market category leader.
CPG companies can also use alliances to
collaborate to develop new categories of
products when their skills and capabilitiesarent likely to produce successes on a go-it-
alone basis. Consider th e experience of Pepsi
in entering the ready-to-drink-coffee category
Instead of going it alone, Pepsi entered into a
joint venture with Starbucks in 1994. At the
outset, each partner contributed a cash
investment, in addition to know-how and
capabilities in their respective areas of
expertise. Nearly two years later the result
was Frappuccino,
a leading product in theready-to -drink-coffee market. By 2002, the
joint venture had grown into a $400 million
business with significant market share in
grocery, drug, and mass merchandise outlets.
The venture has also created value in more
subtle ways. For Pepsi, the venture locked up
Exhibit 1. CPG companies have used alliancesto pursue four types of strategic goals
New product development,
and commercialization
New channels/consumers,and occasions
International expansion
Cost reduction andperformance improvement
Source: McKinsey CPGdatabase
1Percent of 622 announced deals, identified by category.
8
23
18
51
Four types of al liances Percentage of al liances1
8/14/2019 MoF Issue 9
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a powerful partner in the coffee market. For
its part, Starbucks dramatically reduced its
risk exposure by relying on Pepsis beverage
know-how and its distribution muscle.
Starbucks also used the experience as a model
for subsequent par tnerships, including a 50-
50 joint venture with Dreyers to develop a
new line of superpremium coffee ice creams.
Extending to new channels andconsumers
CPG companies have successfully used a
variety of alliance types to reach new
consumers, channels, and occasions, including
licensing brands to and from o ther compan ies
and pa rtnering to reach new consumer
segments and channels. Licensing brands tooth er companies has proved at tractive for
many companies including M&M/Mars,
which licenses several of its candy brands in a
par tnership with Dreyers Grand Ice Cream.
Another is Tropicana, which recently entered
into a 20-year licensing agreement with
Coolbrands International to open a chain of
Tropicana Smoothies stores.
Alliances can also be used t o b etter penetrate
new consumer segments. In an effort to tap
the growing Hispanic population in the
United States, ConAgra entered into a 50-50 joint venture with Sigma Alimentos, a leading
Mexican frozen food company. The partners
manufacture, market, and distribute frozen
prepared food in the United States and
Canada, in addition to Mexico and Central
America. ConAgra brings product
development and manufacturing expertise as
well as its American and Canadian
distribution network to the joint venture.
Sigma brings expertise in formulatingMexican food, its Mexican customer base,
and an established distribution network and
plants. Or consider the alliance between Kraft
and Starbucks to distribute Starbucks Coffee
in US groceries. For Kraft, the deal fills a gap
18 | McKinsey on Finance Autumn 2003
Exhibit 2. Companies that pursue more different types of alliances have considerably higher TRS
4
3
2
1
Source: McKinsey CPGdatabase
12
12
19
23
0 11
Total: 77 Total: 622
Number of types of alliances Number of companies
309
139
96
78
0
Number of alliances announced,19982002
4
8
18
20
5
Average TRS (19982002),percent
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Alliances in consumer and packaged goods | 1
in its brand portfolio at the superpremium
price point and generates more than
$100 million in incremental annual revenues.
For Starbucks, the alliance has extended its
reach into more than 18,000 grocery stores
without any of the investment required to
establish and manage a distributor network.
Expanding internationally
Alliances are a natural way for CPG
companies to enter new markets and improve
performance in places where they may lack
scale. Hooking up with a partner with a
complementary b rand can also allow a
company to make the most of distribution
and o ther in-countr y assets.
Using alliances to enter new geographies is not
a new game, yet some CPG companies have
been more successful than o thers. That makes
it importa nt for CPG companies to consider
twists on their traditional approach to market
entry, particularly in emerging markets. One
company that has successfully pursued global
expansion is General Mills through its ongoing
participation in Cereal Partners Worldwide, aprofitable 50-50 joint venture with N estl to
manufacture and distribute br eakfast cereal
outside of the United States. General Mills
could have entered Europe and other
geographic markets on its own. But the risks
and costs of establishing a distribution
network and manufacturing capabilities in
multiple markets, not to mention the costs of
learning to compete in each, would have been
much higher. Moreover, by cooperating withN estl, General M ills co-opted a p otential
competitor. For its part, Nestl is able to
compete in the breakfast cereal market by
relying on General Mills cereal brands and its
global operating infrastructur e. Annual sales
now exceed $1 billion and represent a
21 percent share of the combined worldwide
cereal market.2
In some emerging markets with strong
potential, CPG companies might even conside
partnering with local players to build local
brands into regional or global brands. Coty
has successfully pursued this strategy in China
through a 50-50 joint venture with Yue-Sai
Kan Cosmetics to build a global Chinese
brand of cosmetics. Revenues from the
venture exceeded 400 million yuan in 2001,
making it th e third-largest skin care company
in China with a reported 95 percent brand
awareness. The partnership permits Yue-SaiKan to extend its product lines, increase
R& D, and enhance its manufacturing
capabilities. At the same time, the joint
venture gives Coty immediate access to the
Chinese consumer mar ket and a launching
pad for the rest of Asia.
Reducing costs and improvingperformance
In addition t o o ffering top-line revenue growth
alliances can also help to reduce costs and
improve operating efficiency. CPG compan ies
might use them to r ethink ownership of
manufacturing assets, improve process
In some emerging markets with
strong potential, CPG companies
might even consider partnering with
local players to build local brands
into regional or global brands.
8/14/2019 MoF Issue 9
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efficiencies thr ough innovations or changes in
scale, re-design supp lier relationships, or to go
beyond outsourcing in non-strategic business
pro cesses. In many cases, these arrangements
go far beyond standard outsourcing
agreements, becoming instead long-term
strategic par tnerships.
Many CPG companies today should be
asking whether they need to own their
manufacturing operations, or whether they
can increase efficiency, improve the balance
sheet, or focus on core activities through
cooperative agreements. These partnerships
would free up assets and unleash the creativity
of marketing people, who would be less
constrained by what we know how to make.
Several compa nies have recently pursued th is
path with good results. Pillsburys Green
Giant unit, for example, sold six of its US-
based manufacturing plants to Seneca Foods
in exchange for a 20-year supply agreement
and partnership. Green Giant retains
responsibility for sales, marketing, and
customer service while Seneca assumes
responsibility for vegetable processing and
canning operations. As a result, Green Giantreports having increased its operating margins
by 5 percent and reduced its cost of goods
sold from 75 percent to 66 p ercent in four
years. Moreover, it reduced corporate assets
by more than $700 million and improved time
to market of new products by 50 percent. In
turn, Seneca enjoys improved margins because
it can allocate overhead over its larger
guaranteed volume.
CPG companies that enjoy advantages of
scale might also consider combining their
industry expertise with a partner to develop a
technology or service solution for operations
in consumer product companies. For example,
Procter & Gamble recently teamed up with a
20 | McKinsey on Finance Autumn 2003
leading developer of supply chain solutions to
license its Reliability Engineering process,
now branded as Power FactoRE, to help
companies reduce costs by improving the
efficiency of their manufacturing.
With the global commoditization of back-office
functions, there is a significant oppor tunity to
cut costs and free up management t ime by
out sourcing to o thers. We have begun to see a
surge in outsourcing of noncore functions and
expect that these kinds of alliances are part of
a tr end that is likely to cont inue.
Most consumer companies have yet to tap
the full pot ential of alliances in pursuit ofgrowth. But as the sectors leaders take
greater and greater advantage of part nering,
those who cling to a control mind-set risk
getting edged out of the most attractive
opportunities.
The authors wish to thank David Ernst and Mark
McGrath, whose insight and guidance contributed to the
development of this article.
John Cook([email protected]) is a director inMcKinseys Chicago office, Tammy Halevy
(Tammy_Halevy @McKinsey.com) is a consultant in the
Washington, D.C.office, andBrent Hastie(Brent_Hastie
@McKinsey.com) is an associate principal in the At lanta
office. Copyright 2003 McKinsey & Company. All rights
reserved.
1 Our database of alliances included 622 partnerships announced
between 1998 and 2002. To ensure a broad sample of CPG
companies, we included the ten largest (based on 2001
revenues), ten highest performing, and ten lowest performingcompanies (based on five-year average TRS) in each of the
beverage, food, and cosmetics industries according to the
Compustat database. Because of the overlap between
categories, that population included 71 companies, to which we
added the three largest general merchandise and three largest
household products companies, for a total of 77.
2 According to press reports in November, 2001.
MoF
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AMSTERDAM
ANTWER
ATHEN
ATLANT
AUCKLAN
AUSTI
BANGKO
BARCELON
BEIJIN
BERLI
BOGOT
BOSTO
BRUSSEL
BUDAPES
BUENOS AIRE
CARACA
CHARLOTT
CHICAG
CLEVELAN
COLOGN
COPENHAGE
DALLA
DELH
DETROI
DUBA
DUBLI
DSSELDOR
FRANKFUR
GEN EV
GOTHENBUR
HAMBUR
HELSINK
H O N G K O NHOUSTO
ISTANBU
JAKART
JOHANNESBUR
KUALA LUMPU
LISBO
L O N D O
LOS ANGELE
MADRI
MANIL
MELBOURN
MEXICO CIT
MIAM
MILA
MINNEAPOL
MONTERRE
MONTRA
MOSCOWMUMBA
MUNIC
NEW JERSE
NEW YOR
OSL
PACIFIC NORTHWES
PAR
PITTSBURG
PRAGU
RIO DE JANEIR
R O M
SAN FRANCISC
SANTIAG
SO PAUL
SEOU
SHANGHA
SILICO N VALLE
SINGAPOR
STAMFORSTOCKHOL
STUTTGAR
SYDNE
TAIP
TEL AVI
TOKY
TORONT
VERON
VIENN
WARSAW
WASHINGTON , D
ZAGRE
ZURIC
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