Retailer consolidation, the growth of online sales, as well as health and well-being trends are all contributing to a challenging operating environment for large FMCG businesses that used to make making money look easy.
Most big FMCG companies are facing an existential crisis characterised by low growth, margin-pressure and sustainability issues. Retailer consolidation, the growth of online sales, as well as health and well-being trends are all contributing to a challenging operating environment for large FMCG businesses that used to make making money look easy.
In an increasingly transparent world, brands are struggling to justify their significant price premiums over own-label and brand owners are therefore having to revamp their business models.
Kraft Heinz, the poster boy for radical cost cutting at the expense of top line growth, has succeeded in generating industry-leading margins and put players like Unilever on their toes. Many analysts questioned whether they could maintain this over time and Kraft Heinz’s recent dramatic financial correction would suggest they were right to be sceptical. Growth is now back at the top of the list of most companies’ strategic goals.
Mars, the world’s largest pet-food manufacturer, is shifting its focus to more holistic pet-care and has spent billions acquiring veterinary practices in the US and Europe. General Mills, Campbell, Kellogg, Mondelez, and others have followed the lead of Unilever in setting up a venture capital arm. With growth proving elusive in their core business they are hoping to unearth the next Innocent or Ben & Jerry’s as an early-stage investor.
Two of Unilever’s high profile investments, Gusto and Dollar Shave Club, are emblematic of the new competitive environment where old world manufacturers look to access new routes to market with enabling technologies. In the same track Nestle’s buy out of tails.com (the subscription pet food business) provides evidence of their move to buy what they cannot build. However this shift towards direct-to-consumer has potential for conflict with existing traditional retail customers, and requires careful management.
As traditional retailers focus even more on their eCommerce efforts, at the same time we see Amazon move in the opposite direction into physical retail with their acquisition of Whole Foods in the US; watch this space as we expect there will be other purchases by them to come…
This shifting of the tectonic plates in FMCG has some significant implications for leadership. Some of the key people and cultural challenges that need to be addressed include:
Big FMCG companies have traditionally recruited large numbers of top graduates and developed them through to senior executives in a relatively stable environment. With the increasing pace of change in the markets they operate this is no longer viable. Given this, where and how should they aim to strengthen their competitive advantage?
Low growth means legacy businesses will need to be run lean and milked for cash. The new, technology-enabled, high growth ventures will, in all probability, require external talent from outside traditional FMCG, if the owners are to maximise their potential. Kraft Heinz has an ex-banker running their European operations. Nestle has a CEO (their first from outside the ranks since 1922) from healthcare. Dave Lewis ex Unilever is turning the dial in Tesco. Other household names may well need to bolster their ranks with executives from different backgrounds if they are to successfully transition to a growth plane in the coming years.