Street talk: FMCG firms must adapt amid power shift
The prospect of a slow recovery in the West and the rise of the emerging markets in the East means FMCG companies in the US and Europe must change how they operate at home to survive, writes SymphonyIRI's Rod Street.
In the West we are facing a new, unique inflection point in the market economy. Many grocery markets in Europe are not just at a standstill but have declined in terms of sales volume as households face a mammoth squeeze on their budgets. Economic pundits are now starting to understand just how long the recovery from a debt laden recession might be.
At the same time the pressure for earnings growth on every public company does not change. A quick scan across the leading FMCG manufacturers tells you that they are all racing at new geographies to fuel growth, relying on the emerging markets to underpin their revenue and profit expansion, which is so critical to underpinning their share price.
Company analysts are dissecting the portfolio of some of the world's largest FMCG companies to calculate their emerging markets rate of growth and share of turnover. This is turn is seen to determine their overall potential for organic development. The grocery sector is not alone and the same analysis is happening in other industries with more potential for growth than the mature grocery sector - including pharmaceuticals, electronics and mobile phones.
All of this pressure to grow is going to have an immense effect over the next decade: on FMCG companies, on the economy and perhaps most markedly on the psyche of those working in the Western business units. Just as they face the most immense squeeze in their markets - all positive corporate attention goes East.
Some have not realised the scale of the shift we are facing. The Institute of Fiscal Studies published a paper this week that highlights the extent of the income squeeze in the UK: an expected 7% reduction in average income will mean that real incomes will not attain 2008/09 levels until the middle of the decade. The same squeeze has already arrived in Greece and Ireland but will be arriving in most other heavily indebted Western economies before too long.
When Goldman Sachs created the term 'BRIC economies' in 2001, it predicted that by 2010 they might comprise more than 10% of global GDP. Even before the recession, in 2007, they had reached 15%. By 2020, the Conference Board estimates that emerging economies may have a 50% bigger share of global GDP than the advanced economies. China alone may be as much as a quarter of world GDP and by then there will be many places in China where GDP/head will be as high as parts of Europe.
This represents a shift that the advanced Atlantic economies have never seen before – the centre of gravity is suddenly 8000 km away.
As a result we will see a massive shift in focus and energy in FMCG companies. For the successful the impact will be a transformation. The ‘key’ country units of the post-war period (USA, Europe Big 5 etc) are about to be overshadowed by the new BRIC country units that offer the huge scale and opportunity needed to feed multinational growth.
This presents a real leadership challenge to those running these operations here: What should be our goals and strategy when growth is limited or non-existent? How do we secure investment and innovation for our markets? Do we need to rethink our operating models to succeed in the next decade?
Most efforts to simply continue with past strategies for topline growth are doomed to fail in the face of brutal trading conditions, concentrated distribution channels and frugal, sophisticated shoppers. Investment cases internally will struggle to meet both internal hurdle rates and prospective revenues from the emerging markets because they cannot offer the same growth trajectory and prospective incremental returns.
To succeed companies will need a shift in mindset.
This needs to be a shift that exploits the new reality and deploys this insight in rethinking go-to market approaches, business models and operating structures.
The streamlined businesses that take this on board will be adept at tackling a wider range of shoppers, penetrating new channels, pressing category adjacencies, tightening pricing skills, and avoiding waste in every function (including marketing and sales spend). Such a step change will require new managerial skills in established markets. Those that lead here will have assimilated the new reality and reflect the reduced importance of the old established markets in the corporate mix and the wave of new ideas coming from the emerging economies.
The winners, as there are always winners, will succeed in the face of a growing war of attrition in established markets, where the near term demands adequate financial returns and the long term a game to eliminate weaker participants.
Sectors: Baby food, Bakery, Canned food, Cereal, Chilled foods, Commodities & ingredients, Condiments, dressings & sauces, Confectionery, Dairy, Dried foods, Fresh produce, Frozen, Ice cream, Meat & poultry, Natural & organic, Private label, Retail, Seafood, Snacks, World foods
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