Top 6 Risks and Opportunities of Consumer Goods Companies

Introduction to Consumer Goods Industry

Consumer Goods industry is classified in two categories namely durable and non-durable. During the time of recession when the consumers were cutting on discretionary spending, companies were having more products on their portfolio which have more value proposition. These products were as a result of the continuous innovation, the companies undertake regularly. Thus as a strategy to sustain during the times of recession companies go for innovation related expense so that they can develop new and improved products for consumers.

The rapid technological advancement taking place, led to the random development in the industry in recent times. Development in the front of Customer Relationship Management, Radio Frequency Identification, and E-commerce is some of the important developments which led to the growth of the industry substantially. Apart from this, the industry witnessed financial policies becoming more aggressive with companies entering into mergers, acquisitions, alliances, joint ventures etc. so as to capture bigger market and diversify on the product line.

The strategy helps organization to safeguard them from risk involved in creating new products or expanding into new markets, demographics. Also a policy of entering into the booming markets such as India, China, Russia, and Brazil by increasing on capital expenditure both organically (capex) and inorganically (by M&A in emerging markets) was on a rising spree. The year of 2008 downturn certainly changed the economic scenario and has fundamentally altered the behavior of numerous consumers who are now cutting down on their spending, thus the top-line growth became a primary concern for consumer goods companies. Consumer Goods companies having healthy capital manage to work through the economic downturn by acquiring and maximizing access to new markets thus enhancing their portfolio of brand which leads to future growth.

Consumer Goods Industry – Behavior & Key Factors of Growth

Profitability and Cash Flow are mainly driven by the brand strength and market share as these are the key factors for revenue generation. Also the growth in the sector is highly dependent on innovative product development and marketing. The commodity prices forms an important component and in an increasing prices scenario like the current time, profits and cash flow in the sector is seen by derivatives where the risk is hedged. Advertising and promotion related expense are high in the industry as compared to other industries and are used as major drivers of enhancing brand strength which in turn affects top-line sales growth. Consumer Goods industry (generally the non-durables especially food and FMCG companies are more resilient during downturns) is less cyclical than any other industries and segments such as food products, being less expensive and non-discretionary, are less affected by the economic cycle.

On the other hand expensive and premium products face pricing and demand related pressure during the economic instability. Also the risk associated with the price of commodities affects the pricing of the products and in most cases compels companies to increase on the price so as to meet the profit margins. “Make the most of the crisis” is a known proverb used in the business.

Advantages of Consumer Goods Industry 

Consumer Products industry is one such industry which which enjoys the advantage of making  the maximum utilization out of crisis period. Clearly on strategies, consumer products companies had a twofold path: Firstly, to mitigate revenue slowdown in matured markets, companies increased exposure in the emerging markets. Secondly, to mitigate the pressure of rising commodity costs, companies adapted various cost cutting initiatives. Other factors that help the industry during tough times are:

• Brand Strength – Strong brand names which are the result of years of effective marketing and operational execution are valued by the customers even in time of recession. The market sentiments for such brands are not degraded to a great extent.
• Overall Market Position/ Share – Portfolio of strong brands is always a boon to a company for its position in the market. Top ranked products in the respective categories are favored and more likely to be stocked by retailers.
• Diversification – Diversification in both products and geography plays an important role in shaping the growth of the company. Companies dealing in diversified product line are less exposed and less sensitive to the economic cycles and thus are less affected by changes in consumer confidence and spending pattern.
• Economies of Scale/ Relative Size – Larger companies are benefited from the ability to absorb larger costs and also the economies of scale have significant impact on marketing and advertising, as well as purchasing power.
• Innovation/ Responsiveness to Consumer Trends – One of the most important factor determining the growth in sales is the quality of product folio the company has. Product portfolio designed in accordance with the customers need is very important for companies especially during the time of crisis when the consumer becomes very choosy and particular for their expense
• Procurement/Supplier Relationships – Large companies maintain cordial relationship with their supplier and also are the need of the supplier due to the bulk order they provide. This relationship helps large companies to sustain their operations during the time of crisis as they have the ability to impact the suppliers and negotiate on discounts. A supportive supplier relationship has a dramatically positive effect on company’s success.

With the increase in appetite for commodities i.e., the demand of commodities in emerging markets like India, China, Russia, etc. and also with the improvement in disposable income, the future of consumer goods industry looks bright as demand is likely to increase. Thus we can see a change in financial policy in recent times and in times to come when the companies would go for higher Capex, Shareholder rewards and acquisition.

Opportunities of Consumer Goods Companies

Following are the opportunities for consumer products sector:

1. Increase in emerging market demand and rise of global middle class – With the rapid development taking place in the global economy, the size of the global middle class is expected to increase three fold by 2030. Thus a lot of potential customers could be tapped in this market leading to improvement in sales and revenue.
2. Development of new marketing channels and rising impact of social media – The world is now resembled to as “A Global Village”, the development of the communication channel and the rise of Information, Communication and Technology Industry, a rise in media across the world is seen. Number of people with internet access has increased drastically and it has thus created a new opportunity for companies to position/market their products in a better way using improved and more efficient marketing channels. Social media too is playing vital role in shaping the position of the product.
3. CSR and eco-friendly green technology used as Competitive differentiation – The mandatory environment regulations and CSR imposed on companies in a way turned out to be a differentiation factor. Almost 75% companies in the consumer product sector consider CSR “as a must” and this has improved on their sales.
4. Multichannel approach – Growth of mediums such as e-commerce and m-commerce has provided retailers to stay in touch with consumers via various mediums and thus increase on their sales by constant promotion of products.
5. New products and services – Dynamic consumer behavior demands different products. Thus, continuous R&D and Innovation, has resulted in development of different products and services and thus can be a driver for improved sales and growth for the company.
6. Supply chain management – Supply Chain has always been one of the key factors which shape the growth of any industry especially the retail, consumer goods and healthcare. Efficient supply chain management presents retailers with a significant opportunity to reduce inefficiencies while competing on cost. Companies are also diversifying region wise to procure the raw materials from low cost regions which is considered as credit positive most of the times.

Risks involved with Consumer Goods Companies

Following are the risks:

1. Low-growth consumer markets – Despite favorable conditions developing in the global economy after recession of last three years, risk remains significant due to the significant after effects of the recession which led to a shift in low-demand growth environment and thus low growth condition prevails.
2. Rising cost and input prices – Rising input prices such as the selling, general & administrative expense along with the COGS is difficult to control and thus a reduction in profit margin is seen. Despite the fact that the consumer products companies in most cases are able to pass on the cost to the consumers but the same is not likely seen during the downturn when a lag effect of few quarters is seen when the earnings of the companies gets pressurized.
3. Disruptions in supply chain – The supply chain disruptions in both the developed world and in emerging markets majorly affected the sales.
4. Hindrance in penetrating emerging markets due to local competition – For companies operating in foreign market, it is very important to have a critical mass in terms of stores and revenues so as to operate successfully in emerging markets. Absence of such pre-requisites leads to inability to penetrate in new emerging market. Also the competition from Local retailers makes it difficult for companies to operate in such markets.
5. Inability to respond to dynamic consumer behavior – The recent recession has completely changed the consumer spending patter and also a major shift in consumer behavior is seen. Cut back on lavish and impulsive shopping behavior and increased used of discount coupons, price comparison etc. were seen as some of the major trends in consumer’s behavior. This sudden change in behavior is not in line with the pre-recession consumption trends and thus it becomes difficult for companies to cope up with such changes.
6. Risk from sourcing of materials – In a globalized market where raw materials for a specific product is procured from different locations across the world, location specific risks has impacted largely on costs, profitability and market position. Also the taxation related risks, and risk of employee, turmoil which has been seen with more diversification in emerging markets has been one of the important factor adding to the risk for the industry.

 Also read about Fast Moving Consumer Goods (FMCG) Manufacturers in India.