FMCG Companies Need To Drive Margins As Economy Turns

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Feb 25, 2014, 12:01 ET

LONDON, Feb. 25, 2014 /PRNewswire/ -- FMCG has been a safe sector for investors looking for predictable margins and stable returns during the economic crisis. However, as the global economy improves, the growth-challenged industry risks losing investor interest.

With profitability under pressure in both developed and emerging markets, EY's new Margin Unlocked report uncovers how consumer goods companies are going to have to work much harder to deliver value to shareholders.

CP margins demonstrate consistency compared to other sectors. (PRNewsFoto/EY) (PRNewsFoto/EY)

Low margin growth is impacting share performance. (PRNewsFoto/EY) (PRNewsFoto/EY)

Relative to other sectors FMCG margins have been predictable and stable since 2003. This has made the sector highly attractive to investors during the economic downturn.
But despite significant productivity programs and cost saving efforts, margin growth has been slow - only 0.6% during the period as a whole and 0.8% since 2009 - the turn of the economic crisis.
Since 2009, many other sectors have grown margins more progressively. For example technology has grown margins from 15.2% to 19.4% - an increase of 4.2%.

FMCG share performance is now lagging other sectors, reflecting investor concern around the sector's profit and growth outlook. This creates potential vulnerability.

"In the last 10 years, consumer products companies have only managed to increase margins by 0.6%", said Richard Taylor, EY Global Consumer Products Advisory Leader. "Although their shares have been something of a safe haven for investors during the downturn, companies are going to have to run much faster to keep their shareholders happy and retain investor interest as the world economy improves and other more volatile sectors potentially begin to out-perform FMCG".

"Consumer products companies are really hurting from what we call the Red Queen effect, where, like in Alice in Wonderland: 'it takes all the running you can do, to keep in the same place.'

Margin improvement is going to be critical to help them speed up their performance over the next 12-24 months," said Andrew Cosgrove, EY Global Consumer Products Lead Analyst.

Barriers to improving margin

Companies identified a variety of reasons why they are failing to grow margin more effectively. According to the report, 39% of companies believe limited margin mindset is the main barrier to improving margins. Other contributing factors include too many locked in fixed costs, insufficient data, a lack of focus from the leadership team, and a lack of margin-related skills and competencies.

Strategies for success that help companies run faster

Sustained improved profitability is one of the most effective routes to retaining investor interest; however consumer goods companies are being challenged from multiple directions. In both developed and emerging markets top-line growth has either slowed dramatically or declined, and continued downward pressure on prices from customers, along with rising input costs, make margin management a complex challenge.

In its Margin unlocked report, EY studied 183 global FMCG companies, including some that have adopted non-traditional margin management behaviours, to find out what makes the difference for high performing companies in the sector.

"On the whole, consumer goods companies recognize that they must apply a more rigorous focus to margin management than has previously been the case", said Gustav Mauer, EY Advisory Director. "The scale of the challenge facing the FMCG sector right now means that companies need a new, company-wide and integrated approach to margin management in order to deliver shareholder value. Our research shows that many consumer goods companies still take a tactical, reactive approach to sustaining or growing margins - making incremental, localized changes focused on a specific part of the profit or loss that fail to deliver sustained, company-wide margin growth."

Three critical success factors identified in research

The report demonstrates there is a considerable range of performance within the industry. Some companies have been able to buck the trend with high performers growing margins from 22.7% to 28.0% - more than seven times higher performance to the rest of the sector.

The report identified three keys to success for FMCG companies looking to outperform in the current environment:

Senior leaders who take an active approach to breaking down barriers across the organization and who apply innovative, non-traditional thinking to improve margin performance
Investment in data to improve business insights that enable better, faster decisions
Managing margin end to end by looking beyond cost reduction and price increases to embed an operating model with margin at its core

Notes

Copies of the report are available here: www.ey.com/CP-margins

The term "margin" refers to operating margin (operating margin/revenue, or earnings before interest, tax, depreciation and amortization EBITDA as a percentage of revenue).

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