The FMCG sector has faced many challenges over the last few years, and because of the nature of the industry, any global and economic changes can affect them quicker than other sectors. As 2017 draws to a close this blog takes a look at how the FMCG market can control costs and increase their profits as we go into 2018.
One of the biggest worries for any industry currently is Brexit. The uncertainty surrounding trade agreements and tariffs, where companies will be based ongoing and how easy it will be to find the labour and staffing are all considerations for FMCG brands. Already having an effect on profit margins is exchange rates and an increase in cost of base materials and ingredients. Many brands will have absorbed these extra costs short term, but the time will not be far off (and for some already here), when the profit is being squeezed for too long and the increases will have to start being passed on to consumers.
It is likely that by now most of the top brands will have looked at their sourcing and pricing strategies mid and long term to see where savings can be made, but with so much uncertainty still, many brands will be approaching 2018 cautiously.
It may seem that it is impossible to plan with so much uncertainty in the market, but if brands are to survive and thrive, planning will be critical. Brands will be keen to plan demand effectively. No one wants to waste money on over buying products or packaging, but equally wasting money on storage of products will not be something brands will want to entertain.
However, if you under-plan you risk missing opportunities in high growth areas in the FMCG sector. Areas that can get you noticed and obtain market leader status.
What is clear is that it will be an interesting balancing act for the sector to get right.
Growth of discounters
Without doubt the growth of discounters like Aldi and Lidl have rocked the FMCG sector in recent years. The Drum quotes The UK Discounters 2017-22 report as saying that the discounter market, “has increased by 72.4 per cent, since 2012 and is expected to rise by 36.1 per cent (an extra £8.6 billion) within the next five years.” This has squeezed profit margins for many of the big chains as they try to compete, but it has also highlighted that perhaps the perceived consumer appetite for wide product ranges and choice is not so strong anymore.
For smaller, entrepreneurial brands getting a foot in the door of these retailers is a wise move as they continue to grow. However, historically they have not been the easiest to deal with, so perseverance will be key for any smaller brands wishing to develop a presence in this growing area . Whilst there are opportunities for small brands with the discounters, the smaller brands do need to offset developing products that can sustain the lower prices that discounters will want, against developing the type of products they want their brand to be associated with.
There has been some significant coverage in the media on Shrinkflation. Many FMCG brands have been reducing pack size in a bid to control their bottom line, with McVitie’s Jaffa Cakes and Cadbury’s Double Decker giving two high profile examples. These brands have cited keeping the products affordable as a major motivation, but it is often an unpopular move with consumers.
Impact on promotional plans
We have already seen the reduction of deals in most of the big supermarket chains. There are less multibuys or promotional deals to be had. Part of this can be put down to the culture that the big discounters have started implementing in the UK. There is more focus on everyday low prices.
Brexit can also be attributed to this change of tack. As Mark Ritson in Marketing Week said earlier this year “With sterling taking a major hit versus other currencies the cost of producing many of the products in the British supermarket has risen and so have prices.” It is not cost effective for supermarkets to hold large quantities of stock for promotional purposes or for suppliers to be producing it whilst consumers are taking a more cautious approach to buying.
What is clear is that the big retailers and brands are taking a more cautious approach. They are adopting a “let’s wait and see attitude” in these uncertain times, which means less risks are being taken with new product development etc.
For the entrepreneurs in the FMCG sector this presents some interesting opportunities. For those that are willing to invest in innovation and do the leg work in proving a new products marketability, they may start to unlock opportunities from the big brands and retailers.
Change is already happening in the industry as a whole, to ensure the right cost/profit balance is maintained. It will be interesting to see how this continues into 2018.