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In the current business environment, large FMCGs are facing increased competition from niche brands and sub-markets. These emerging market segments are driven by some major shifts in consumer preferences and behaviours. Today’s consumer demands products and services that are both ‘ultra-convenient’ and conscious of health and environmental factors. To stay competitive and continue to grow, FMCGs are eager to capitalise on the on the evolving consumer environment. But – how?
Changing customer demands require a response
Consumers are becoming ever more selective in their food and beverage choices. Whist demand has traditionally been driven primarily by ‘value’ (price relative to quality), we’re increasingly considering a range of other factors when selecting products.
Our research, Meaningful Brands: Connecting with the consumer in the new world of commerce, reinforces that while traditional drivers such as price, taste and convenience remain important in their buying decisions, today’s consumers have a new set of value drivers, one that is more intrinsically linked to their core values and beliefs. New evolving drivers such as social impact, health and wellness, locality and experience have emerged to the forefront. These changing consumer preferences are driving market fragmentation and market share challenges, within FMCG categories that can be highly profitable.
Major players vs niche brands
Local, small-scale, niche or craft brands, have responded to the changing consumer landscape by taking risks and using their flexibility to quickly bring new products to market – and they are reaping the rewards. Consumers are becoming more experimental and are embracing start-up, and niche or craft brands to meet their demands. Nielsen’s 2018 Product of the Year Consumer Survey, indicated that more than half of Australians have tried four or more new brands in the past year.
In contrast, major players have been slower and less nimble when it comes to innovating and addressing the changing market. As a result they are losing market share to small brands – a recent US food and beverage industry data indicates that more than half of the growth in industry sales was driven by the smallest brands, including start-ups. This trend is starting to become evident in Australia, with many larger brands starting to explore their options in the need to react.
The options for major players - build, buy or partner?
To stay relevant multinational brands need to look to innovative solutions in their bid to capture growth, in a market favouring niche brands with local relevance. Large FMCGs should look to these smaller brands who are benefiting from this changing landscape and explore build, buy or partner opportunities to gain back their market share.
1. Build a niche brand organically, or extend an existing brand
As the saying goes…if you can’t beat them, join them. Large FMCGs brands are starting to look within and build their own innovative niche or craft brands with huge successes. Lion, for example, developed Furphy Beer, which has achieved growth of more than 300% year-on-year. Magnum, a Unilever-owned brand, has launched into the vegan space by releasing non-dairy ice creams. Another example is Hungry Jacks, who have released vegan burgers to target Australia’s place as the world’s third fastest-growing vegan market.
2. Buy a niche brand
Acquisition of an existing niche or a start-up brand can help major players keep up with changing consumer demands – particularly if that brand has demonstrated significant growth and/or aligns with a major brand’s values. Utilising their established distribution networks, and gaining control of a key niche or craft brand in the market can provide unlimited upside. Major brands can expand their reach to the new class of consumer and instantly gain back market share.
A word of warning – to ensure return on investment the major brand must understand and preserve the value of the acquired business. Innovation or speed to market can quickly be eroded if a small business is fully integrated with a large multinational.
Recent examples of large FMCGs seeking to target niche, growing markets include AB InBev’s acquisition of the 4 Pines and Pirate Life brewing businesses in 2017, as well as Coca-Cola Amatil’s (AUS) acquisition of Feral Brewing, and The Kin Group’s purchase of Cobs Popcorn business.
3. Partner with a niche brand for exposure to their success
Partnering with a niche or craft brand enables major players to establish values and processes from the ground up. Major players can adopt innovation and practices learnt from their partner, where smaller brands can benefit from access to management expertise and extensive networks of a multinational.
Partnership options include corporate-sponsored incubator funds or food-focused venture capital funds. A number of big global food and beverage companies offer programs as alternative investment structures, with examples including Coca-Cola Amatil’s AX Ventures, Chobani’s incubator, and Mars’ SEEDS of CHANGE Accelerator.
Through partnerships, large brands are often awarded the option of a first look-in and a gateway for potential joint venture or acquisition. Some recent examples include Diageo’s Distill Ventures acquired a stake into Melbourne-based Starward Whisky in 2015, helping to rapidly grow production capacity and facilitate the launch of the product into the United States in 2018.
Last year, the Coca-Cola Company (USA) and Coca-Cola Amatil (Australia) announced a joint acquisition of a 45% minority interest in the Made Group (Nutrient Water, Cocobella, Rokeby Farms, Impressed Juices, Schnobs) to support market reach growth and distribution.
Speed to market, cultural fit and financial impact should all be considered
A global brand’s innovation strategy needs to include options to build, buy and partner as they look to innovate in a rapidly evolving consumer environment. However, the best option will inevitably be determined on a case-by-case basis, considering the following factors:
In their quest for growth and in the face of increasing competition from niche brands and sub-markets, FMCGs will inevitably be faced with the important decision of whether to build, buy or partner, often with a limited window of time to act. The above considerations can provide a framework to guide the thought process and select the most appropriate option, allowing companies to grow and thrive in this challenging and ever-changing consumer landscape.
Vanessa is a strategy partner at Monitor Deloitte and leads Deloitte Australia’s Consumer Products sector group. With more than 20 years' experience advising clients in the consumer products, Agri, FMCG and retail sector, Vanessa has a deep understanding of the industry dynamics, consumer and market trends and related growth opportunities. She combines her skills in corporate and commercial strategy, turnaround programs as well as the design and management of large transformations with her passion for food to drive positive commercial results with progressive societal outcomes.
Maud has over 10 years of experience in both buy and sell side M&A. Maud has served public and private companies and has experience in public and private company mergers, acquisitions and divestments as well as equity and debt capital raisings.
Championing the issues that matter to consumers, and society more broady, requires investment – and can deliver returns – according to new Deloitte research focusing on the FMCG and food retail sectors.