Chains of pain: FMCG remains one of business’ toughest segments

Phil Ruthven Columnist

Chains of pain: FMCG remains one of business’ toughest segments

Published 06 November 2013 11:37

Acronyms abound these days and FMCG is one of them; standing for fast-moving consumer goods. Marketers define this category of spending as consisting of high-volume goods, low margins, wide distribution networks and high stock turns. While the consumers do not readily relate to the term FMCG, their behaviour identifies with these products through frequent purchase, low prices, and low involvement in choosing items other than those with strong brand loyalty. It is a sector worth about $200 billion in 2013. That expenditure represents about a sixth of household income and virtually half all retail sales.

The make-up of the FMCG retail sales is shown in the first exhibit. Clearly, supermarkets epitomise the concept of fast-moving, cheap commodities; and indeed they account for some 44 per cent of this market.

But there are plenty of other players.

The second biggest is service stations (21 per cent), nowadays mostly owned by the same giants that own supermarkets anyway, and cross-linked with discount systems to generate loyalty. Ditto with the third-biggest category, liquor stores (9 per cent). The two big players – Coles (parent Wesfarmers) and Woolworths – had combined revenues of $119 billion in financial year 2013, although their FMCG sales components were less at $83 billion. Nevertheless, these sales made up a whopping 43 per cent of the FMCG market, leading to perceived, if not actual, hegemony in the eyes of their suppliers.

Less dominance

There is far less dominance in the giant-free retail activities of pharmacies, butchers, bakers, greengrocers, tobacconists, newsagents and florists. But they make up just 38 per cent of the retail FMCG sales.

Of course, we could add some other retail activities – or parts of them – that might qualify as selling low-cost, high stock-turn goods. They would include clothing, stationery and some hardware. However, the acronym usually excludes these fringe area products. The expenditure by households on non-durables (roughly correlating to FMCG) has risen all through the past century or more, as the second exhibit reveals. However, the spending is in current dollars and would be far less impressive if deflated to constant 2013 prices.

In 2013, the household spending on non-durables, at $212 billion, was about $18 billion more (9 per cent) than the FMCG revenue because of the inclusion of such items as electricity, clothing and other non-durables.

But the telling part of this second exhibit is the expenditure as a share of household income.

It shows a decline from 54 per cent of all income in 1900 to 16.2 per cent in 2013, on the way to under 14 per cent by the end of this decade.

This is the result of manufacturing productivity, cheaper imports (more recently), blow-torch buying power by big retail groups, self-service and, now, online retailing, logistics and approaching consumer saturation (of goods but not yet services).

We should be in no doubt that the FMCG market is one of the toughest in our economy, and the further up the chain from the retailer – the final reseller – the tougher it is. It is the result of a revolution in the mid-1960s that saw the consumer end of input-output chains usurp the input supplier end of the chain and those manufacturers and even wholesalers further down the chain to the retailer and end consumer.