Despite the pressure from retailers, global food and drink suppliers are still delivering healthy figures - so much so that they are, in fact, performing better than they were 12 months ago.

The latest '50 FMCG Champions' survey from OC&C Strategy Consultants shows that the return on capital employed (ROCE) across the world's top 50 food and drink companies by turnover has increased by 0.5% over the past year - a big improvement on the 0.1% growth achieved in last year's survey.

This takes the average ROCE across the group to 21.1%, up from 20.6% last year, which compares very favourably with the figures achieved by the world's largest retailers: ­

Wal-Mart reached 13.4%, Tesco 11.5% and Carrefour 12.7%.

Luke Jensen, head of OC&C's consumer practice, says: "For all the talk of retailers gaining power, you still have the ROCE of fmcg companies growing and it is higher in absolute terms than the retailers."

Further countering the view that retailers reign supreme is the 0.5% increase in operating margins that the large fmcg companies have achieved over the year, which takes the average level to 16.2%.

Although the average sales growth of 6.2% was marginally down on last year's 6.3%, it is notable that the top three companies in the table have outperformed this ­average: Altria (parent of Kraft Foods) achieved growth of 7.9%, Nestlé 7.2% and Procter & Gamble (P&G) 10.4%. The marginally better performance from Altria pushed the company to the number one spot in the top 50, ­replacing Nestlé.

Flat growth in overall year-on-year sales masks the impressive acceleration of organic growth, which has increased from 4.5% last year to 5.2%. Jensen highlights P&G, Danone, PepsiCo and L'Oréal as companies that have consistently delivered above average organic growth over several years.

"They have all consistently achieved more than 5%, with P&G the hero of 2005 as it had a fabulous level of organic growth at 8.0% and also pulled off the $57bn ­acquisition of Gillette. In its previous two years, it grew 6% and 8%," he says.

Unilever has struggled more than some of its contemporaries and delivered an average level of organic growth of only 1.7% over the past three years. But last year's 3% rate indicates that it is starting to turn things around, according to Trevor Gorin, head of UK media relations at Unilever.

This improved performance shows that Unilever's 2005 objective to return to top-line growth is beginning to pay off. "In 2004 we had stalled at 0.5% overall sales growth. We needed to get competitive again and get back to growth," he says.

When Unilever unveiled its results, the company said that its markets across its regions and categories were growing at between 2% and 4%. Gorin says: "We're confident of 3% to 5% going forward and if we do that then we'll be taking market share."

The business has chosen not to embark on any acquisitions that diversify from its core business areas. "Although we will look for bolt-on acquisitions of small to medium-sized companies, there won't be another Bestfoods deal."

Like many companies in the table, Unilever prefers to grow organically and only consider acquisitions where they would enhance the core business or allow it to enter new markets. Diversification through acquisition has definitely been off the agenda.

This focus on core strengths was a major feature of the table with 100% of companies stating that organic growth was a "strategic priority". Although acquisitions took place during the year - particularly in the drinks sector - and amounted to more in value terms than the previous year (helped by the $17.6bn Allied Domecq/Pernod Ricard deal), these were done primarily to strengthen core business.

One key to the success of P&G's organic growth has been its focus on what it calls its "billion-dollar brands". In 2002 these brands - including Ariel, Pampers and Crest - generated sales of $20.9bn (equating to roughly 50% of total group sales). By 2005 this had jumped to $34bn of annual sales - representing 60% of turnover.

This equated to an annual average growth rate of 17.6% compared with its other brands, which achieved a much lower 5.6%. The number of billion-dollar P&G brands has increased from 12 to 17 since 2002, with a further five added by the ­Gillette purchase.

The development of successful new brands suggests that fmcg companies are beginning to respond to the increased price point polarisation in the market, which is growing both at the premium and value ends of the spectrum. Rather than targeting the middle ground, the fmcg operators have increasingly developed new brands specifically for these two price points.

Jensen says: "The two areas of growth are premium and value. The middle market still represents the largest part of the market, but it is no longer a growing area. For a number of years the large fmcg companies have not focused on the ends of the market."

He highlights data showing that in the beer market there has been annual volume growth of 9% in both premium and value lines since 2000, compared with a decline of 1% for mainstream products.

Going down the value route does not necessarily mean less profitability, according to Jensen, who cites the success of the ultra low-priced Richmond cigarette brand, owned by Imperial.

He says: "It's the leading brand in the UK, which has helped Imperial grow, and shows how the volume mix can be moved to the value end and a company can still make money. It's not necessarily a trade-off."

The fact that the company still managed to increase its operating margin by 3.7% to 33% - the highest of any company in the top 50 - can be seen as proof of this.

Gorin admits that Unilever used to be poor at developing brands at different price levels, but says that it has recently tried to address this by "playing its portfolio of brands smarter". He says: "We'd looked at our big brands but we should have looked at the category as a whole in order to cover more price points. Using ice cream in the UK as an ­example, we've addressed this with the launch of value lines that we'd previously overlooked. We've now got a better mix."

Although the move to value will have pitched the brand manufacturers against strong private label products from the major grocers, they have been competing fiercely. Philippe Guyard, sales vice president at Danone Group, speaking at the IGD Global Retailing conference earlier in the year, expressed confidence that the branded manufacturers could put up a strong defence against private label goods.

"Those brands that have disappeared at the hands of the private label products must have had their own problems. Are Carrefour stores full with private label? I don't think so. Private label has grown, but then so has the market share of Danone. If a brand is strong, then it can create a point of difference," he suggests.

Danone Group, for instance, has moved up two places in the table to 12th ­position with a 6.1% increase in sales. Its success has been down to a combination of focusing on organically growing its core brands and moving into new markets.

However, it has plans to step up the pace of its expansion into new territories. "We want to develop international networks. Fifteen years ago the French business was 50% of sales, but now it's only 23%."

Danone is not alone in targeting emerging markets, which now provide the greatest opportunities for growth. For BAT they represent its only growth area, as worldwide sales are down 13.4%, whereas its emerging market volumes increased by 7.9%. The company now has 18.9% of sales in these new markets, ­Unilever has 25.9% and P&G has 28% - the latter enjoying an impressive 47.2% sales increase in its emerging markets over the previous year.

Steve Newiss, vice president of global customers at Kraft Foods ­International, says that these markets provide great opportunities: "There is a pace of growth in Asia as the markets are going ballistic. Europe is consolidating and there's margin pressure, but in Asia there are fantastic opportunities."

Although there are risks in some of these developing markets, they are outweighed by the opportunities, argues Robert Leechman, managing director for global and key customers in Europe at the Coca-Cola ­Company EU group. "We spent a lot of ­money on 11 plants in ­Russia and we had to buy them all back at the time of the crash."

The companies that have done well in these markets have been those that have successfully developed new products aimed specifically for them. Nestlé has developed new brands that is says offer "affordable indulgence", such as Munch in India, which is now distributed in a million outlets compared with fewer than 600,000 for Kit Kat.

"Previously western products were sold into the developing world - and in some markets they took some cost out - but now they are seeing what customers can afford and then working back from there to develop new products," explains Jensen.

At P&G, for instance, about 30% of its R&D spending is on developing products for the low-income markets. For drinks companies such as Carlsberg, it is not cost-efficient to launch new value products (with the high costs of marketing) for emerging markets and it instead employs a typical drinks industry strategy that is based on acquisition and joint ventures. It buys into ­local brewers and seeks to introduce its global brands to sit alongside the domestic ales.

Jens Peter Skaarup, international media relations manager at Carlsberg, says this strategy enables it to introduce its key global brands into these emerging markets (as premium products) and also - where it chooses - to take the local beers from these new markets and export them into other territories where it already operates.

This has proved particularly effective and the company is increasingly shifting its focus to emerging markets - especially Russia, Eastern Europe and Asia. The move has resulted in Carlsberg announcing a long-term plan to close half of its 29 breweries in Western ­Europe, including its historic brewery in Copenhagen.

As well as tapping into the opportunities in the emerging markets, the fmcg companies have benefited from the increasing desire of the hard discounters to stock branded products. Some have adapted their offers to provide the likes of Aldi and Lidl with different pack sizes, packaging and brand variants.

Branded sales in the hard discounters in Europe now represent 6% of sales - a growth rate of 20% over the past year. According to Jensen, Nestlé is among the most active in this area. It has openly stated that it wants to grow its sales in this channel and has been working on a lower "cost to serve" for its customers in this part of the market.

That the development of such products, and the creation of the new value brands in the emerging markets, have come at a time when the major R&D spenders have been reducing their levels of expenditure in this area shows that they are now achieving much greater returns for their money.

P&G has been particularly successful, helped by its 'connect & develop' initiative that has seen it shift from the traditional R&D model to one that seeks to find innovation outside the company and then utilise it within the organisation.

The result is that, although R&D spending was down by 0.1% to 3.4% of sales compared with a hefty 4.8% of sales in 2000, productivity has increased by almost 60%, with 100 products launched in the past two years, according to the company.

This reduction in spending on R&D fits in with the general cost-cutting that continues to play a major part in the strategies of many large fmcg companies. OC&C reckons that 86% of the top 50 have implemented, or intend to implement, global cost-cutting programmes, which compares with 68% in last year's survey.

Along with cost-cutting, many companies have also focused on trying to reduce complexity within their operations. Anheuser Busch, BAT, PepsiCo and Nestlé are all running complexity reduction initiatives to streamline their operations and adopt best practice in the markets in which they operate.

Such initiatives provide yet more evidence that major fmcg companies are looking to improve every aspect of their businesses and demonstrate that, despite the challenges in many of the markets in which they operate, they are positioning themselves well for further healthy trading in the future.n