Globe's largest FMCG companies buying their way to faster growth

20 July 2018 6 min. read

As markets become increasingly volatile amid changing consumer habits and heightened digital competition, many firms now look to acquisitions as a root to spreading risk as well as boosting financial performance in the short term. M&A activity accounted for around 15% of growth in the FMCG sector, according to a new study.

In a new market analysis, OC&C Strategy Consultants has examined the performance of the globe’s 50 largest Fast Moving Consumer Goods (FMCG) companies. The annual Global 50 report, in collaboration with Grocer, examines the financial performance of the world’s largest consumer goods companies.

One of the headline results of the study in 2018 was that the revenue of top 50 FMCG companies has risen strongly in the past year. This was on the back of a dramatic recovery in revenue growth across the sector, from 0.5% in 2016 to 5.7% in 2017 – as the FMCG market reached its highest level since 2011. This was exemplified by the growth of the top 10 players in the sector.

Top ranking Nestle held their position from last year, along with Procter & Gamble, Pepsico and Unilever. In fact, while the odd group moved up or down by one position, drinks titan AB INBEV, JBS, Tyson Foods, Coca-Cola, L’Oreal and Phillip Moris International also completed the top 10 last year. Of those, the most impressive performer was undoubtedly AB INBEV, buoyed by merger and acquisition activity, which saw its local currency sales improve by 24%. Indeed, in line with AB INBEV’s success, a lot of growth was driven by M&A. The number of deals for the Global 50 jumped to a 15 year high in 2017, constituting a 45% leap from the previous  term.

Revenue growth of the Global 50

Responding to this, Will Hayllar, Partner and Head of Consumer Goods at OC&C Strategy Consultants said, “While the underlying challenges the Global 50 face to restore organic growth and satisfy activist investors seeking margin improvement have not gone away, the report shows that the globe’s 50 largest FMCG companies are actively addressing those challenges and using M&A as a key tool to do so.”

Key drivers of M&A

Examining the 60 deals, worth $145 billion in 2017, the researchers found that there were four key trends which drove the ramping up of M&A activity in 2017. First, a continued emphasis on emerging markets saw 37% of acquisitions occur in such economies. On top of this, OC&C said that there was a clear pattern of portfolio optimisation on display. Global top 50 firms acquired and divested in order to boost their growth ambitions in their existing portfolio areas, with one example cited as the purchase of Mead Johnson, a US-based infant milk formula producer by Reckitt Benckiser, which at the same time divested from its food business.

Third, “better you” products appear to be remaining relevant. There were five such acquisitions of companies making ‘healthy/natural’ products, including P&G’s deal for a manufacturer of aluminium and paraben free deodorants, as information about the potential health benefits of this spread via new and old media. Finally, there were a number of acquisitions in non-core areas, as businesses explored new avenues to supplement their traditional businesses. These included fashion retailer Kimberly-Clark purchasing a Mexican logistics service provider.

The 50 top FMCG firms are still experiencing a slower than industry average organic growth rate, however, in terms of organic growth. In this respect, growth remains subdued, stuck at 2.6% and with volume growth at only 0.6%, thereby highlighting the need for M&A to adapt business portfolios and access new growth.

The number of deals for the Global 50

Some of the biggest deals included British American Tobacco’s acquisition of Reynolds American, contributing to $61 billion in value, and Reckitt Benckiser Group’s $18 billion purchase of infant formula maker Mead Johnson and Company. Elsewhere in the 10 largest deals, the Campbell Soup Company spent $6 billion on Snyder’s-Lance, and Tyson Foods sunk $4 billion into AdvancePierre Foods Holdings.

Tyson Foods was of further interest to OC&C’s study, as an example of how beyond the typical M&A routes, the Global 50 have increasingly been investing in innovation. The investment in plant-based meat alternatives, Beyond Meat and Sweet Earth, which both produce technology for creating convincing meat equivalents, Tyson Foods weighed into the market. With a small yet dedicated global movement of vegans taking root, particularly among younger generations, meat producer Tyson Foods’ investment in Beyond Meat in 2017, seems like a smart hedging of bets, in a world of ever more environmentally conscious consumers.

However a lot of growth was driven by M&A

Will Hayllar continued, “The investment in emergent businesses that are well positioned to address the changing needs of consumers is a key part of major FMCG players hunt for growth. We’ve seen that this hunt doesn’t stop with new brands, as investment is also going into partnerships with digital technology businesses that can help equip brand owners with new tools to drive growth.”

He concluded, “All of this highlights the importance of addressing one of the central questions facing FMCG management teams today, how to nurture and grow small propositions to scale without losing the distinctiveness that made them appealing in the first place.”

OC&C further demonstrated that this M&A activity was extremely important driver as a driver in growth, by examining the effect of purchases on a firm’s performance. Organic growth stood at 4.4% compared to the ‘acquisition effect’, which accounted for 14.7% of top FMCG companies.