The fmcg industry is at a real turning point, with consumer trends and channel shifts moving faster than ever. This is even before factoring in the current earthquake in geo-politics, the impact of the Iran war on hard-pressed consumers, and what it means for pricing, volumes, and margins.
Extreme levels of volatility have become the norm, not the exception. Covid, the Russia/Ukraine war, tariffs and now the Iran war all occurring in the past five years has put a big premium on both productivity savings (to provide a buffer) and agility, with supply chain flexibility at the sharp end. Companies that have invested in developing next-generation AI-driven supply chains will likely be better protected.
The rules of fmcg have changed: the old business model is broken and will not be returning to pre-Covid norms. The fmcg industry must reimagine strategy and constructively disrupt itself even faster.
No risk, no reward
One thing is sure, being behind the consumer is not a comfortable position – but avoiding this requires taking more risk. Playing not to lose doesn’t work anymore; the sector needs to play to win. This mindset shift demands laser-focus on the three real value drivers of fmcg success: volume, mix, and gross margin expansion.
We are moving into the era of consumer pull, rather than fmcg push, and this will only be accelerated with agentic e-commerce. Consumers will discover the best brands with the best science at the best prices. This challenges the entire marketing model of fmcg companies, putting more emphasis on R&D to deliver the most differentiated brands in the first place.
Simply put: R&D is the new A&P. With increasingly sophisticated digital tools to measure ROI, advertising spend may have peaked, but those savings should be reinvested in R&D. In advertising, the sector has been slow to fully embrace the new model using social media and influencers.
There is of course a risk in going down this path, but there is an even bigger risk in not embracing it. This is where consumers are spending their time.
The uptick in M&A
It sounds obvious, but fmcg CEOs need to focus on where they have a genuine competitive advantage and a real right to win in the biggest profit pools. Too many vanity projects have been indulged. What is now concentrating minds is anaemic volume growth, elevated interest rates, and valuation multiples at multi-year lows.
We have seen before that when valuations start to suffer, fmcg CEOs need to get imaginative, often leading to a pick-up in M&A activity. This is happening right now.
In beverages, Pernod is looking to join forces with Jack Daniel’s maker Brown-Forman. Estée Lauder is in merger talks with Spanish listed fragrance player Puig. However, Unilever’s move tops the lot with the planned exit of its Foods division to US player McCormick, valued at €45bn.
The plan is to create a €40bn-revenue pureplay HPC company, and a separate €20bn flavour global leader in a single transaction. For Unilever this deal will complete a long journey to shed its food assets, starting with margarine and tea and then ice cream last year, and now Foods. Effectively this transaction undoes the $25bn acquisition of Best Foods in 2000, which brought with it the Hellmann’s and Knorr brands.
Investors typically dislike big acquisitions, because more often than not they destroy value. Typically, mid-sized deals work best because they reduce execution risk but many companies are chasing the same assets, pushing up valuation multiples. Either way, in an industry short of growth, CEOs are now more prepared to make bold moves to drive growth and find more productivity savings to deal with the speed of change.
Focus is in vogue, with conglomerates rapidly moving out of fashion, and this level of activity may be just the tip of the iceberg. Investors crave the fmcg consistency of history, but to get there probably involves more hard-nosed decisions on portfolio.
However, the jury is out as to whether this stepped-up level of M&A activity will ultimately create value, and to what degree shareholders and broader stakeholders will benefit.
Warren Ackerman is head of European consumer staples research at Barclays
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