Large FMCGs are being compelled to implement models such as zero-based budgeting that focus relentlessly on cost reduction. These approaches, in turn, typically reduce spend on activities such as marketing that investors argue do not generate enough value to justify their expense. While this approach is effective at increasing short-term profit, its ability to generate longer-term winning TRS, which requires growth, is unproven.

To gain investor confidence, FMCG companies would need to invest their excess savings on initiatives that are more likely to increase the firm’s long-term future profits, such as a strong advertising campaign, small innovation or improved manufacturing efficiency.

Investors can, however, help to tackle these issues.

For example, disclosures about how the cost savings from shrinking the business are being reinvested can be helpful in understanding whether management is effectively prioritising their spend.

Companies can also simplify their marketing practices to make it simpler to understand whether spend on one category of advertising spend is effective or wasteful.

And investors can directly drive real change by pushing companies to think differently about their own marketing practices.

At the moment, this may not be sufficient to assuage investors concerns over spending transparency, but it will at least help make the case for a business-driven future.

Acquisitions and capex:

FMCG companies are undertaking capex and acquisitions to expand their distribution channels and global reach. In addition to achieving long-term value by focusing on TRS, M&A may also enhance shareholder returns by improving return on invested capital (ROIC). However, M&A adds potential strategic risks and adds additional complexity to cost structures that are already subject to a major commodity-price and currency risk.

Multi-brand portfolio expansion:

FMCG companies are experimenting with multi-brand portfolio expansion to increase their reach in some emerging markets and capture incremental growth opportunities. Multi-brand portfolios tend to bring with them additional operating complexity, including the risk of increased cost volatility and supply chain disruption.

A shift in structure and the capital-return ratio: FMCG companies are adopting a model that enables them to invest in the business without diluting shareholder return through equity issuance. One way this is being accomplished is through a shift in the capital-return ratio from equity to cash, which has driven strong operating profit growth in 2017 but has been weighed down by cash outflows from M&A. The erosion in the return on invested capital (ROIC) due to M&A has the potential to offset the benefits of higher growth in net operating cash flows (NOCF), which are essential to supporting the dividend payout. In addition, FMCG companies tend to invest cash flow back into the business, in part to fund innovation. In 2017, these companies invested more in marketing than any other expense, highlighting the need to accelerate innovation for future growth.

Emerging competition:

Many of the world’s largest FMCG companies, such as Nestl√©, Unilever, Procter & Gamble and Danone, are facing increased competition from rapidly emerging consumer goods companies (CPGs).

These are typically start-ups that specialize in emerging, high-growth and/or niche markets such as health and wellness, organic foods or beverages, or premium goods, such as skin care or personal care. Firms in these sectors have greater pricing flexibility, wider geographic reach, and faster innovation cycles, making them far more competitive against FMCG companies.

Firms in these categories, including Dollar Shave Club, Casper Sleep, Glossier, Harry’s, and Takeaway.com, have expanded rapidly by introducing products that are sold online. The rapid emergence of many new brands, and the related change in consumer behaviour, are creating a challenging operating environment for FMCG companies, resulting in price competition and revenue volatility. However, unlike other industries, FMCG companies are best positioned to navigate this environment because they have longstanding relationships with retailers and long-term relationships with suppliers.

They are also better positioned to respond by acquiring or partnering with these brands to increase market share, strengthen their portfolio, and add scale. For example, FMCG companies’ focus on organic and natural products will enable them to capture incremental growth and capture market share. Moreover, since many new entrants lack an established reputation, their products face less brand recall and can therefore be purchased at a much lower price. FMCG companies therefore have the opportunity to attract customers through price and convenience.

Are you a finance/accountancy professional looking for a new opportunity?, or perhaps you’re currently hiring?

Let me help.

Colin Walsh – Finance & Accountancy Recruiter – FMCG – Circle Select

I provide specialist Finance & Accountancy recruitment services within the FMCG sector, placing into permanent, temporary and interim positions. I can help find you the right career opportunity – one precisely fitting your appetites, abilities and ambitions. I’m in tune with the latest industry news and on hand to offer relevant advice about the market, companies in the sector and current opportunities..

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