Whether you are a directly involved in fast moving consumer goods (FMCG) or simply an interested observer, I’d argue that it’s not the industry it was 10 years ago. Its employment attractiveness has waned and it’s no longer a first choice for many new graduates starting their careers. Once the respected training ground for insight led classical brand marketing, its proposition has been eroded. There is much talk about the growing power of retailers, industry consolidation, critical roles going offshore and frankly many people are saying there are far more interesting industries to work in today.
Success is now typically seen as flat or low single digit sales growth with profit targets being met by repeated cycles of cuts in costs and investment. Is the industry ‘cutting its way to growth’ and is this sustainable?
This is a big question so should I be writing a eulogy for FMCG or issuing a rallying cry? There are arguments for both; having left my last role I wanted an opportunity to take stock and crystallise what it will take for the industry to restore its mojo.
But first quick a reminder of why we are where we are.
- Let me start by challenging a commonly held belief. This is not the fault of the key grocery retailers. It’s the industry’s failure to adapt to some major disruptive changes in the retail landscape that began 10+ years ago that upset the cosy manufacturer-retailer equilibrium that had existed before then. Real competition finally arrived in the form of Aldi, Costco and new management at Coles. At the time FMCG was blind and complacent to the future impact that this would have and have paid for this mistake by administering a huge transfer of margin to retailers in the absence of having any better idea of what to do.
- To pay for this, manufacturers stepped away from what they traditionally do best which is growing healthy brands through support and innovation.
- In turn many brands have lost relevancy as they fail to keep up with trends and meet consumer’s needs.
- We have seen the vicious downward spiral emerge. The bottom line is protected through cost cutting and cuts to brand support. Volumes respond by declining further. Trade spend is then increased in an effort to prop up volumes in the short term, but it doesn’t work. Retailers get upset and demand yet more support or suppliers risk delistings and so on. Round and round the spiral goes delivering a picture of increasing trade spend, declining margins, reducing brand investment and pressure on overheads in an effort to support the bottom line.
So this is not new news but retailers cannot be blamed for this. FMCG only has its self to blame. For the global players, there hasn’t been much sympathy coming from head office either. Australia often sits within Asia Pacific or SE Asia regional clusters where senior management, sitting in Singapore or the northern hemisphere, expect Australia to perform at the same rate as other markets in the region. It took them a few years to realise that Australia is different. For some companies, Australia is a similar size to their Netherlands business yet I don’t see many global players making an exception for the Dutch.
Couple this with Australia’s other problem of being a relatively high cost labour market, you can appreciate that the steady trickle of local factory closures and offshoring of key capabilities such as marketing, innovation and even decision rights has led to a lack of agility and responsiveness to market opportunities. I’ve often sat in conversations where I’m being asked ‘can you sell this (and at this time and at this price?’) as opposed to ‘what will meet the needs of your retailer & consumer?’
Many of the big FMCG companies have worked very hard to improve performance but most have simply moved sideways and some have not seen real growth for 4-5 years. Hence executive leadership teams have become short term focused and risk averse. It is the CFO and the Sales Director who now have the ear of the MD. Sadly CMOs have lost much of their influence around the leadership table and increasingly companies are looking to Finance and Sales as the future business leaders because the priority is the near term goal. Yet the industry needs to get back to ‘sales today, brands forever’ if it is to be sustainable in the long run.
But enough of this pessimism. There are some exceptions which gives hope for the future. There is plenty to learn from those who are winning and there are also some early signs that the big players can and are doing things differently. Let’s not forget; the major grocery retailers also want change. Despite the constant rhetoric around ‘value’ they know that they cannot cut prices forever and expect to win. They need help in growing categories through new ideas and value beyond price and much of that help can come from a partnership with suppliers. More on that later.
So what has to be done to turn this from a requiem to a renaissance for FMCG?
- Understand why smaller companies are more successful
These companies have filled the void left empty by the bigger companies becoming more conservative and are often leading category growth today. Their size and proximity to the market make them more agile and flexible in responding to consumer’s and customer’s needs. They have a ‘can do, will do’ mentality and start or respond to trends far faster than the larger multinationals. They operate different P&L and marketing models. Although their unit product cost may not be that dissimilar to the larger competitors, they often command higher retail prices and have a lower fixed overhead base which means they can offer more attractive margins to customers thereby ensuring shelf presence. Their innovation is fast and furious. They are happy to fail quickly and be ready with the next offer that may be more successful. Retailers love these guys because they bring excitement and variety to their shelves and can drive category growth.
- Review & then cut your trade spend
Put an ROI lens over it. Is it driving incremental sales & profit? If not it’s time to question it. With 60-70% of volume now being discounted, I’d argue that the trade spend line on your P&L is the most obese and unproductive line and is typically 4 or 5 times what is being invested in building brands through marketing & innovation. The balance has tipped too far the wrong way. Companies are executing hundreds if not thousands of discount promotions a year and the majority are not building profitable sales. Therefore you have to question it. This can no longer be a taboo topic. There is a fear that it cannot be touched without impacting volume. Yet each year it is seen to creep up without any profitable increase in volume. I think you’ll be surprised when you challenge this line and dig deep into this huge drain on profitability. There is a large prize available in sensibly rebalancing this P&L line based on ROI. Imagine what you could do by repurposing these funds into more profitable promotions or into more sustainable growth driving plans? Likewise imagine the time saved by the sales team in not having to administer so many promotions. They could return to actually selling.
- Focus on your core first
It’s very easy for FMCGs to be pre-occupied with innovation as the major and sometimes only driver of growth. I’m not saying don’t innovate but assess your core business for easier opportunities before you do. They will have a stronger ROI. For example restoring full distribution across your core SKUs often involves no extra investment and offers a greater sales upside & ROI than innovating & launching a new SKU and building distribution from scratch. The former could be achieved through a straight forward customer negotiation whereas the latter requires the mobilisation of the whole business, lots of time and investment and is at high risk of not being accepted by consumers anyway. And how many times have we deleted healthy core SKUs from our range in order to help ease in the listing of a new yet unproven SKU?
- Innovate but balance your risk
So choose to innovate wisely. As we know most innovations drain cash from the business yet don’t survive on shelf beyond 2 years. To avoid this I am a strong advocate of ‘proof of concept’ innovation which means launching innovation with minimal capital and investment in the initial launch phase. For example use co-packers before installing a new line. Initially market your product selectively and only invest heavily once you have confidence around the ROI. It may mean launching with a higher unit cost but at least you are not writing off huge sunk costs should it fail.
- Put shoppers at the heart of your strategy
Expand channels & be prepared for more disruption in retail. Given today’s share of market of the key retailers, it’s almost impossible to achieve your growth targets without you growing with them too. However new channels such as discounters, e-commerce and drugstores are growing rapidly. Why? Because this is where today’s shoppers are increasingly shopping and it offers a lot of opportunity for higher margin sales for FMCGs. Do you have a competitive strategy in place to grow in these? When you couple this to a forthcoming technology revolution across retail I believe there is advantage to those companies that embrace this quickly and further pain for those that don’t.
- Simplify & focus your marketing
Frankly this is the easiest change to make. The marketing services industry would like their clients to believe that the world of marketing has become very complex and fragmented as a result of the digital revolution and the gradual decline of traditional media. Well fear not. The fundamentals have not changed. The need to create strong brand saliency and penetration by driving physical and mental availability remains. FMCGs are still in the business of needing to achieve mass reach all of the time. Of course, this may involve changing creative and media channel to reflect changing media consumption habits. However my learning is understand what works and stick to it. By all means experiment but don’t be tempted to shift large budgets on a whim. Prove it before you do. One traditional skillset that does need an overhaul in order to remain competitive is ‘path to purchase.’ Now more commonly known as ‘consumer journeys,’ we need to map out what these look like and how we connect at crucial moments. Search, social media and influencers are just some examples of new touchpoints that FMCGs need to be across.
- Partner with retailers
This might sound obvious but simply put retailers and suppliers actually want the same thing; growth which is a problem for both right now. Firstly agendas need to be aligned around annual joint business plans that deliver ‘win win’ outcomes for both parties and are agreed at senior levels within the business. This will enable the relationship to be based on mutually agreed goals and strategy and limit the risks that come from being day to day transactional. Secondly understand the shopper dynamics of each retailer. They are increasingly different and offer up opportunity for both parties.
So in summary, it’s clear there is great potential for a renaissance in FMCG. Today it’s the smaller, local companies who are leading the way and it’s great to see them succeed and demonstrate that local can beat global. Agility, flexibility and relevancy are all opportunities for positive change. I’m sure there will be a healthy FMCG sector in another 10 years’ time but it will continue to evolve and look very different to what it is today.
Thanks for reading this. If you would like to explore any of these thoughts in more depth please do not hesitate to reach out to me at LinkedIn. I am happy to go into more detail. Please note the above is opinion only which is drawn from my last 10 years of experience working for a various local and multinational businesses. The opinions expressed are mine alone and may or may not be reflected by the organisations I’ve worked for.
By marketer John Broome, who is ex-Unilever Australia CMO and former Kellogg marketing director