The fast moving consumer goods industry has relied on economies of scale for growth… until now. Ever since World War II, the FMCG industry relied on mass production of products to generate revenues and growth. Shortly thereafter mass production was accompanied by mass distribution. But a new generation of consumers and now, post pandemic priorities are putting pressure on these growth drivers as changed consumer behaviours drive further changes in how and where these brands are sold.
Historical five part model of value creation
A study by McKinsey, a few years ago, identified the five part model of value creation for FMCG companies. As mentioned previously, this model hasn’t changed since WW II.
- Mass market production and brand building: This enables the sector to achieve economies of scale which for very successful FMCG companies, translated to gross margins above ~20%.
- Relationships with grocery chains that facilitate sales at scale: Securing in-store distribution with supermarket chains and convenience chains enabled FMCG companies to access and sell to a broad base of consumers than previously. Also, by partnering with their customers’ category teams, FMCG companies were constantly updated on new trends and needs.
- New market entry: Entering new markets (a result of globalisation) contributed to 75% of revenue growth in this sector.
- Constantly optimising their operating model for cost reduction: Over the last few decades the focus in this sector has been cost reduction. This led to offshoring, centralised sourcing and large scale sourcing contracts amongst others and have kept margins and costs within acceptable limits.
- M & A as a means to leapfrog ahead of competition: This industry has long relied on M & A as a means to stay ahead of competition. FMCG companies then applied their distribution network and processes to scale the brands they acquired profitably.
However, the shift in consumer behaviour that millennials brought with them, which accelerated with Gen Z, necessitated a new way of working, which was in the making when the pandemic hit. The pandemic accelerated behaviours (like e-commerce and sustainability) and brought in new ones (work from home, health consciousness). The Ukraine/Russia crisis only exacerbated the complexity that FMCG companies and grocery stores need to contend with and highlighted how urgently the old model needs to change.
Four new growth drivers
According to a recent white paper by Cognosis, the new growth drivers in this sector are:
Agility: Over the last 18 months, it has become clear that to survive and thrive in the uncertain times we live in, agility is key. An agile organisation enables FMCG companies to not just adapt their supply chain to any situation, but also their sales channels and product offerings.
Shared purpose: This has been in the making for a few years now. However, today, purpose is a key driver for growth and value creation in this sector. According to the study, the role of a shared identity in navigating change is vital for employees, customers and suppliers of any FMCG company.
Forward looking: While this has always contributed to growth, today, it is more important than ever that companies invest for the future and not for the present of even the next few months. To date, large FMCG companies that thrived during uncertainty all had one aspect in common – they invested in innovation, marketing and in their processes to future proof their business, even during difficult times. In the last few years, the relentless focus on reducing costs to preserve margins and profitability has distracted companies from this.
Consumer centricity: While you may argue that this has always underpinned the model of value creation in this sector, to date FMCG companies have been customer centric (or channel centric) and product centric. User or consumer centricity is a relatively new entrant; ever since the term ‘User experience’ was brought into focus by technology start-ups.
The case for urgent implementation of the new growth drivers
The above 4 drivers will be critical for companies to thrive over next few months and years, given the new ‘forces’ influencing consumer/shopper decisions.
Previously the forces influencing consumer/shopper decisions were simple:
Budgeteering: This one element hasn’t changed and still influences shopper/consumer decisions.
Reliability: Mass production ensured that the quality of the brand was reliable and consistent. This was key for consumers as the era that preceded this was reliant on people making this individually for anyone who placed orders which resulted in inconsistency in quality.
Availability: Similar to findability, availability was all about being able to find the product on shelf. However, solving this, previously, was simple as sales channels were restricted to grocery stores. Now there are several different channels and ensuring your brand has presence and stands out, so your consumer/shopper can find it, is more complex than securing a listing with customers.
So what are the new factors influencing decision making? The new forces driving consumer and shopper decision making as found by Growth from Knowledge are as below:
- Findability: The rising need to stand out amidst all the noise and availability
- Fluidity: Fluid shopping occasions – new schedules, home delivery and flash services
- Balance: Importance attached to health and wellbeing
- Purpose: Shopping behaviour that combines lifestyle demands with sustainability and driving positive change
- Budgeteering: Balancing a shrinking net income and lifestyle demands
How can you embed the new growth drivers?
FMCG companies are collaborating with an increasing number of innovation agencies and tech companies to put in place the processes needed for these new growth drivers. Careful change management is critical in ensuring that FMCG companies take their employees on this journey to inculcate the behaviours needed to embed these drivers into everyday decision making.
If you’d like to learn more about how to embed agility in your sales processes or to learn who can help with facilitating change within your organisation, email me on email@example.com