• accounts payable
  • accounts receivable
  • cash conversion cycle
  • consumer goods
  • inventory

Consumer goods giants grow inventory, extend receivables amid Covid-19 shift


Working capital for consumer goods multinationals reached a 5-year record high of $38 billion in Q2 2020 as companies support distributors or pivot to consumer sales in the midst of the pandemic.

by Nicholas Dunbar & Manpreet Singh

Published: 1 September 2020

Ten consumer goods giants – Procter & Gamble, Coca-Cola, PepsiCo, Colgate, Johnson & Johnson, Nestle, Unilever, AB Inbev, Danone and Heineken – have collectively shown an increase of 32% in their working capital from the end of 2019. This comes at the time when companies’ traditional distribution networks, such as retailers or restaurants, have been disrupted by the pandemic.

A set of companies such as Nestle, Unilever, AB Inbev, Danone, Heineken, Coca-Cola, PepsiCo and Johnson & Johnson have shown a rise in Days Sales Outstanding, most prominent in Heineken, Coca-Cola and PepsiCo. DSO is calculated as being proportional to the ratio of revenue of the company to average accounts receivable in two periods.

Coca-Cola and Heineken have emphasized the importance of B2B and B2C channel wherein Coca-Cola said they would be accelerating their B2B platforms to ‘streamline the value chain with modern trade’ while Heineken echoed this, stating that it would further accelerate investment into B2B and B2C. In an investors’ earnings call, Heineken CEO Dolf van den Brink said that where traditional platforms failed, B2C channels helped them reach customers while a lockdown was in place.

In order to protect the interest of the distributors, companies are extending the credit period for them which is evident as DSO has increased for 7 out of 10 companies taken for study. Danone’s CFO, Cécile Cabanis during an investors call said that the company made sure to protect their ‘ecosystem of customers and suppliers in offering them some easing in their payment delay or receivables’.

Another set of consumer goods companies such as Coca-Cola, Colgate, Nestle and Danone have shown a substantial increase in Inventory levels and this has contributed much to their working capital increase and increase in Cash Conversion Cycle. Unilever disputed EuroFinance’s calculations and said its working capital actually declined in H1 2020, but does not provide half-yearly disclosures that permit this to be independently verified.

The cumulative value of accounts receivable for these consumer goods companies fell by $1.3 billion while inventory value increased by $2.8 billion from 2019 to Q2 2020. In the same period, accounts payable saw a massive fall of $7.9 billion. Overall, working capital stood at $38.7 billion in Q2 2020, up from $29.2 billion in 2019.

Major reduction in accounts payable was seen in European consumer goods companies where it fell by $6.9 billion.

Consumer goods companies in their investor earnings calls emphasised on the fact that compared to the supply chain disruption which occurred in Q1, markets in Q2 are slowly recovering as lockdowns are getting lifted in parts of Asia and Europe. Companies had to put up additional expenditure to maintain supply chains during lockdowns which ultimately meant that they would take a hit in terms of earnings and cash flows.

A looming credit loss problem

The extension in payment terms seen in DSO may be masking looming problems with doubtful accounts or credit losses. US-based consumer goods multinationals, barring Procter & Gamble which did not reveal its doubtful accounts/credit losses, reported a sharp rise. Coca Cola, PepsiCo, Johnson & Johnson and Colgate Palmolive saw an increase in allowances for doubtful account/credit losses from $931 million at the end of 2019 to $1.2 billion in Q2 2020.

Among European companies, AB Inbev registered a rise from $51 million to $122 million and Heineken from $49 million (€44mn) to $151million (€144mn) in the same period. Nestle, Unilever and Danone did not disclose this information. Reflecting the pain the pandemic is inflicting in South Africa where alcohol sales have been banned, AB Inbev also announced a $2.5 billion goodwill writedown related to its SAB Miller acquisition.

Driven by the need to boost working capital, the debt of consumer goods companies has gone up from $342 billion at the end of 2019 to $387 billion at the end of Q2. The most prominent rise was seen in US-based multinationals where it went from $135 billion to $164 billion in the same period, outlining a 21% increase.

The average DSO among these companies is 40 days while DIO stands at 71 days. The substantial rise in DSO and DIO lead to a rise in Cash Conversion Cycle among consumer goods companies from (-)11days in 2019 to (-)3 days in 2020.

Among these companies, Procter & Gamble, PepsiCo, Unilever, AB Inbev and Danone have a negative Cash Conversion Cycle.

To learn more about working capital, attend “Working capital harder” or Lab 2 at International Treasury Management Virtual Week, 21 – 25 September.

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