Fmcg is famous for sprawling empires of brands and SKUs. Nestlé has 2,000 brands and close to 100,000 SKUs.
However, in a world where capital is no longer free, and consumers and retailers are becoming more discerning, making the right choices is key. Demand is under pressure, supply is coming back, and competition is intense. Consumers have never moved faster and channels have never shifted quicker.
Fmcg CEOs are learning to better pick their battles and prioritise finite resources. It is forcing them to really understand where they have genuine competitive advantage and right to win. In practice, this means redirecting efforts to the biggest profit pools, which will move the volume and topline needle. Boiling the ocean just doesn’t work in fmcg.
Powerbrands
The word ‘powerbrands’ is a much overused term in staples, but it does reflect the direction of travel. Unilever has more than 400 brands but is focusing resources on its 30 powerbrands, which account for 75% of group sales.
It is now going one step further in prioritising its top 24 markets, which account for 85% of sales. Unilever’s biggest brands and geographies have a margin structure that is far superior to the rest of its portfolio. Volume growth is therefore more valuable in driving gross margin, which allows resources to be freed up to reinvest.
Nestlé has more than 30 brands with more than CHF1bn in revenues, but has been guilty of SKU proliferation over decades. In a hard-hitting interview with the FT, Nestlé’s new CEO Laurent Freixe said his predecessor’s moves into areas such as VMS weakened the fabric of the company. He went on to say Nestlé’s previous approach neglected its core categories of coffee and petfood. He candidly observed losing market share across its core was not a winning proposition.
To address this challenge, Nestlé is doubling down on its core with six big bets, where the aim is to build new CHF100m revenue platforms. They will be scaled across multiple countries more quickly than previously.
The six are: iced coffee (Nescafé Espresso concentrate); a next-gen coffee machine called Neo; choco bakery including Kit Kat Tablets; Gourmet wet catfood pyramids; a new infant formula technology called Sinergity; and brands adapted for use with the growing air fryer trend.
Consumer health
In HPC and consumer health, we are seeing a similar trend. Reckitt had an investor event recently where it deep-dived into its 11 powerbrands across four categories: germ care, self care, household care, and intimate wellness.
These 11 powerbrands account for 80% of core Reckitt, where the objective is to grow 4%-5% consistently. However, the potential of these powerbrands is being diluted by its non-core divisions of essential home and Mead Johnson. When market conditions allow, Reckitt plans to exit these two divisions, which account for 30% of revenues. That will leave a smaller, more focused and – in theory – higher-growth core business.
With this refocus on the core and powerbrands, the obvious question is what happens to the rest of the portfolio or the tail. It can’t be an afterthought because, done poorly, it can be a drag on growth that can quickly undo the good work done on the core. To combat this risk, Unilever is maintaining absolute marketing spend on its non-powerbrands.
Clearly there is still a place for local brands, especially in emerging markets. Haleon recently indicated it wants to drive consumer health penetration in emerging markets with lower-income consumers, through local brands. Many consumer health categories are nascent in emerging markets, where the penetration opportunity is significant. Local brand relevance can be a big differentiator.
Given this new strategic thrust, the upshot is that more disposals are likely. However, market conditions for selling non-core assets are getting tougher because of elevated interest rates, but also because private equity buyers are wary about catching falling knives as well as their exit options.
Nestlé has indicated it would be open to partnerships for its bottled water business and there might now be more questions on its VMS unit. Unilever is in the process of separating ice cream and has also said up to €1.5bn of its food brands, mostly smaller brands in Europe, could be non-core.
The question some investors are asking is whether these moves are simply running to stand still in a world where consumer brand loyalty is falling. Maybe, but the chances of driving sustainable volume growth would be lower if these efforts weren’t being made. Unilever and Danone have shown their focus strategies have been paying dividends, with a decent uptick in volume growth.
However, the genie is out of the bottle and many companies are playing the same game. The winners will be those that can skilfully grow the core whilst carefully managing the tail without risking volume leakage. This is far from easy in a volatile and uncertain world.
Warren Ackerman, head of European consumer staples research at Barclays
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