Does Wall Street Know Innovation?

Two stories this morning made me consider whether Wall Street (the Street) is good at identifying innovation. A follow-up question would ask whether innovation that benefits the Street actually benefits customers? The first is a story about Kimberly-Clark and its efforts to improve profitability. Evidently, they are going to “desheet” some of their products. This is a fancy way of saying they are going to offer less to the consumer by reducing the number of sheets in their paper towels and toilet paper. The WSJ article quotes the CFO, “…Kimberly-Clark Chief Financial Officer Mark Buthman said product innovations negate the effect of desheeting.” Right, we’re giving customers less of the core product because the core product is better. That really does not work with consumable products. Kimberly-Clark’s financials are being skewered by Wall Street and this is the answer? Making each sheet of toilet paper or paper towel “bulklier” might mitigate some of the desheeting, but at the end of the day we still will grab one paper towel to wipe the counter, not 95% of a paper towel because it’s bulkier. Despite of all the potty humor you want to connect to this situation with toilet paper, this stinks of faux innovation. Innovation is supposed to make things better (a loose word), cheaper, faster, stronger, etc. Making something “bulkier” in order to keep the same size roll is not innovation if the overall product remains basically the same while the consumer receives less for the same money. In fairness to Kimberly-Clark, every Consumer Goods Package (CPG) company seems to be doing this. Interesting to see if other companies term this as innovation.

related story, at least in my mind, is the news that hedge fund manager William Ackman has set his sights on Air Products,  an Allentown, PA company in my region of the world. Air Products distributes commercial gases and chemicals for industry. A few sources state that Air Products lags in a few of the metrics for their industry. Overall, the economic downturn has impacted Air Products’ ability to diversify across different industries. For me, this relates to innovation because innovative companies, either real or perceived, are never the target for hostile takeover. Takeover specialists roll into under-performing companies and increase productivity, decrease headcount, and tighten supply chains. Sometimes this is effective, and sometimes it’s disastrous to workers and the human capital. But companies that innovate or remain committed to innovation are rarely targets for this kind of shareholder activism. If a company is paying attention to innovation then it does not need shareholder activists to do it for them.

I’ve always thought highly about Air Products. They have a great safety record and solid reputation in industry. But they had no answer to the industrial slowdowns that resulted from the economic problems here and abroad. Interestingly, the company remained focused on its core businesses which left the stock stagnate and opened the door for Ackman’s Pershing Square Hedge fund.

Both Kimberly-Clark and Air Products answer to the Street. Kimberly-Clark met its numbers and continues to improve its balance sheet through faux innovation, fooling no one but not attracting any activist shareholders. Air Products didn’t call any of their attempts at cost cutting or process improvement “innovation”. So tell me, is the Street good at identifying innovation? Or is it just good at identifying companies that meet short-term financial goals?

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