The major global FMCG firms are starting to see the benefits of their efficiency drives and moves towards premiumisation with profit margins in the top 50 reaching an all-time high at 18.2% in 2018. This is up 0.4% on the previous year and the highest level since the Global 50, produced by OC&C Strategy Consultants, began in 2002 and marks a return to levels pre the financial crisis in 2008.
The growing strength of FMCG brands is further demonstrated in their improving organic growth, which increased to 3.2% up from 2.6% in 2017. The majority of that progress is now coming from volume growth, accounting for 1.8% points of growth, up from only 0.6% in 2017, with 1.4% points from price/mix.
Now in its 17th year, OC&C’s Global 50 report examines the financial performance of the world’s largest consumer goods companies and big themes that drive the sector.
The top five firms in grocery sales terms remained unchanged in the latest ranking with Nestlé leading the way, generating $93.4bn (+2.1%). It’s followed by Procter & Gamble ($66.3bn), PepsiCo ($64.7bn), Unilever ($60.1bn), and AB InBev ($54.6bn).
Will Hayllar, UK Managing Partner at OC&C Strategy Consultants, commented: “Despite the lack of blockbuster acquisitions in 2018, it was a very strong year for the Global 50 as prior M&A activity began to bear fruit. In the years before, the Global 50 were snapping up companies that cater to new and fast-growing consumer trends, such as the shift towards wellness, and consumers’ seemingly never-ending love affair with coffee. These acquisitions are beginning to pay off, resulting in a return to organic volume growth and record profit margins.”
OC&C identified two phenomena driving profit levels: premiumisation and efficient management of operating costs. It highlights that there has been a continued and increasing consumer demand for all things luxury. For example, in the coffee market, instant coffees have been usurped by the single origin expresso from the coffee machine. This has allowed producers to charge a significant premium for capsules and drive up profits.
As for cost efficiency, total operating costs were down 0.2% points compared to 2017. This was in part due to synergies from previous M&A consolidation being realised as well as ongoing efficiency drives.
Hayllar concluded: “For FMCG brands to continue to drive growth, staying one step ahead of consumer trends is vital. Adapting brand strategy to meet the ever-changing consumer needs and investing early in emerging sectors will continue to drive organic growth and profit in the market.
“Our research has identified five stand out FMCG businesses: Coca-Cola, Estée Lauder, Yili, Kweichow Moutai and Shiseido that have outperformed their peers this year. All five are united in having identified fast growing consumer markets and acted to serve them. Cola-Cola and Yili won the health-conscious crowds, Estée Lauder and Shiseido won over online millennials, and Kweichow Moutai quenched the Chinese thirst for premium spirits.”
NAM Implications:
- Major retailers will no doubt draw comparisons with their own meagre net margins.
- However, this should be resisted by pointing out differences in the retailer and supplier business models…
- In other words, as you know ROCE is driven by a combination of net margin and capital rotation.
- i.e. Suppliers have higher margins to compensate for slower rotation of capital (especially stocks)
- …whereas retailers can exist on wafer-thin margins providing they rotate stock fast.
- It all depends upon how you want to make your money…
