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:
Some sectors like over-the-counter drugs will see greater competition for deals, especially as large assets grow scarce and private-equity firms provide more and more funding.
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.
Perfected mass-market brand building and product innovation. This capability has achieved reliable growth and gross margins that are typically 25 percent above nonbranded players.
Many of the world’s largest FMCG companies, such as Nestlé, 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.
Many small consumer-goods companies are capitalising on millennial preferences and digital marketing to grow very fast. These brands can be hard to spot because they are often sold online.
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.
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