Heightened competition and currency fluctuations limit FMCG growth

18 June 2018 Authored by Consultancy.uk

Large fast moving consumer goods (FMCG) companies have seen their revenue growth and operating profit growth slashed significantly in the past years. New analysis shows currency headwinds, divestment, and an increasingly competitive market as major causes.

As the ecommerce boom continues to eat into the profits of traditional retailers across the global market, currencies fluctuate dramatically, and geopolitical instability threatens to hit imports and exports with tariffs amid a major trade war, large consumer goods companies face a rapidly changing environment. As a result, while the consumer goods segment can expect global demand to rise, key developing markets such as Brazil, Russia, India and Mexico have undergone periods of slower than expected growth.

Most notably, the largest entities in China’s consumer goods economy have seen revenue growth fall as much as 60%, with foreign owned fast moving consumer goods firms taking a particularly hard knock. To better understand the global changes, and explore how firms might shield themselves from the effects of disruption, Bain & Company has published a paper into the key trends of the market.

Revenue and profit growth declines

Aside from slowdowns in developing markets, consumer package goods (CPG) companies face other challenges, such as undergoing a number of divestitures, and acquisitions – with the former tending to outstrip the latter, while also creating integration factors. Furthermore, considerable shifts in consumer tastes have taken place, resulting in uncertainty for CPG portfolios, particularly as some types – such as craft beer – are hard to develop at scale. Big brands are also finding it increasingly difficult to compete against smaller more nimble operators meanwhile, which are 65% more likely to outgrow their category. While finally, CPG companies are increasingly facing pressure from activist investors, creating additional board level uncertainties.

The result of the host of factors, among others, has seen the industry see growth slow from 7.7% annually between 2006-2011 to 0.7% between 2012-2016. The average yearly operating profit growth, meanwhile, has dropped from 6.1% over the same period, to 1.3%.

Major impacts on growth

In terms of concrete numbers, the firm notes that foreign exchange difference, mainly the appreciation of the $/€ contributed -3.3 percentage points of the growth decline, followed by the M&A policy environment – which contributed -1.8 percentage points to the decline. Loss of performance related to market categories and performance, organic growth, contributed -0.7 and -1.3 percentage points respectively.

The segment faces a number of different challenges to overcome – with large brands seeing declines across the board in almost all segments, between 2012 and 2016. The UK soft drink market took a significant shift with large brands losing 12% of their market share over the period to small brands, while China and Brazil saw 9% and 7% shifts in the same direction respectively.

Top consumer package goods firms market share slide

In the packaged food segment, the US saw the most significant shift of 6% away from large brands to small brands, while China and the UK were the only regions to see positive shifts for large brands – at around 1% market share growth respectively. The beauty and personal segment has seen only slight movement in favour of small brands in the period, at around 3% shift in favour of small brands.

The sector is facing continued pressure, with changing consumer behaviour about the kind of stores they visit, including online; finding sustainable and predictable growth is unlikely to become easier in the coming period, with new markets such as Nigeria and Myanmar relatively unpredictable, while protectionism mounts; a shift in consumer behaviour to shop around; as well as uncertainties around scale costs and benefits. Over the longer term, researchers expect that many will likely see revenue growth rebound to around 5%.

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