Fast moving consumer goods (FMCG) are defined as products that are sold quickly and at a relatively low cost. Examples include non-durable goods such as packaged foods, beverages, toiletries, over-the-counter drugs, and other consumables.1
Read Upside - Autumn 2019
Manufacturers and suppliers of these goods will often count supermarkets as their core customers and particularly the "Big Four": Tesco, Asda, Sainsbury’s and Morrisons with both Aldi and Lidl following closely behind. Behind these is a raft of smaller chains and independent buyers.
FMCG suppliers typically operate from the windowless units found on many industrial estates across the UK. They face several challenges in today’s marketplace from their customers, their supply chain as well as internal operational and financing issues.
In the battle for market share, supermarkets’ single most effective weapon is in product pricing. Aside from driving down prices in real terms, competition has developed into a culture of discounting and double-up promotions. These activities are now embedded into our shopping patterns, with half-price offers and similar expected on most gondola ends.
This has led to "feast or famine" as deal savvy consumers stockpile goods on promotion - shower gels, toothpastes to name common examples, and await the next offer before refilling their bathroom cabinet. In the last couple of years some supermarkets have tried to establish a regime of price stability and fairer consumer pricing by shifting to "everyday low pricing" but this has led, in many instances, to lower overall volumes than the "high low" model in key FMCG categories. Thus, ultimately causing retailers to introduce even deeper price discounts, for example Sainsbury’s "price lock down" and Tesco’s push on half-price offers.
Given the imbalance in the commercial relationship between supermarkets and most suppliers, the relationship can feel very one-sided and there is the constant risk of having products delisted by a supermarket chain – which is a big problem if a supplier is reliant on a small number of large customers. To try to redress the balance, the Government introduced the Groceries Supply Code of Practice and appointed a Groceries Code Adjudicator in 2013 to help prevent small suppliers to the supermarkets with turnover of more than £1bn from being treated unfairly; however, how effective this is remains to be seen, and anecdotal evidence suggests that suppliers are understandably unwilling to snitch on their biggest customers.2 Manufacturers and suppliers therefore find themselves vulnerable and under pressure to fund supermarket promotional activity, for example, buying premium shelf space or funding discounted products. While there will be a short-term spike in sales, it is inevitably at the expense of overall margin.
With retailers constantly pushing to be the best value in the market, this quickly spirals to a race to the bottom on pricing, predominantly funded out of the supplier’s margin.
Furthermore, suppliers have to manage the operational challenges associated with meeting this stop/start demand. This may involve sourcing raw materials which could have long lead times, managing fluctuating warehousing and logistics requirements and irregular shift patterns or staff numbers. While temporary labor can be utilized to meet fluctuations in production demand, that flexibility often comes at a premium, further impacting margin.
In addition to these factors, there is consolidation in the sector. The Tesco/Booker merger and its buying alliance with Carrefour, then the proposed Sainsbury’s/Asda merger in which it was recently announced would pass on £1bn of savings to consumers over the next 3 years and openly stated that this will be achieved by leveraging increased buying power against suppliers.3 The proposed merger was subsequently blocked by the UK’s competition watchdog, the Competition and Markets Authority.
In addition to significant pressure on price, there are also rising commodity costs, business rates, energy costs and national minimum wage increases to contend with; alongside fluctuations in Forex - commentators are suggesting that the value of £1 could fall below €1 in a no deal Brexit scenario.4 There could also be the additional tariffs to deal with, in the event of a no deal Brexit, which could impact raw materials coming in from Europe.5
Uncertainty surrounding Brexit means many manufacturers are having to stockpile both raw materials for production and finished goods to meet customer demand, to ensure product stays on shelves. This is placing a further burden upon precious working capital which is locked up in stock, at a time when investors are cautious about increasing lending.
It is also common to see strategic business decisions such as CAPEX investment being placed on hold as company directors are "waiting to see" what happens next with Brexit.6 Longer-term productivity levels have experienced a marked decline in growth in the UK since 2008 and with investment in future productivity on pause, companies may be creating problems for the future when UK PLC finds itself improperly equipped to compete in the post-Brexit world.7
While there are undoubtedly challenges to be faced, there are also opportunities and a well-capitalized business with the right funding structure can take advantage of gaps left on the shelf. Of course, negotiating with supermarkets will always be difficult for smaller suppliers, but with insurgents like Aldi and Lidl growing their market share, and online shopping growing in popularity, suppliers at least have a greater range of options outside the traditional "Big Four." With clarity coming imminently on the nature of the UK’s future relationship with the European Union, FMCG businesses should be able to start making plans for investments in driving productivity and adapting to the UK’s new business landscape.