The FMCG market is being disrupted on several fronts; by retailer brand and category strategies around private label, increasing consumer preferences for fresh, and structural changes in food retailing with growing popularity of online grocery shopping.
The biggest disruption, however, is the role of promotions in the Australian FMCG retail market. Recent research has shown that Australia, along with New Zealand, has become a retail promotion capital of the world, and consumers are growing weary.
In the quarter ending August 2014, 40.2% of total grocery sales were sold on promotion. An even higher percentage number was recorded in New Zealand (NZ) where 56.9% of total grocery sales were sold on promotion over the last 12 months. This compares with peer markets such as the United States (36.7%) and the United Kingdom (33.4%).
FMCG manufacturer sales growth lagging retailers
This huge reliance on promotions has come about due in part to a lag in Australian FMCG wholesale sales volume and value growth since 2010. As shown in the chart below, wholesale sales value has actually declined for three of the last four years as have wholesale volumes. The two biggest influences on FMCG wholesale volume performance has been consumers’ preference for fresh with resultant weakness in dry grocery, non-food grocery, frozen foods and health and beauty and growing preference for private label (+180 basis points in market share since 2012) and in particular premium private label as a substitute for core ranged national brands.
This decline in wholesale sales value is due to the Australian market structure. A highly concentrated market for food retailing has meant net wholesale pricing has declined in the past four years as trading terms also decreasing supplier profitability.**
Likewise, FMCG retail market volume and value growth has performed better than wholesale during this period, but growth remains slow post GFC with annual price inflation at 1.5%; 200 basis points below pre-GFC levels.
Global markets are also struggling for growth
Comparisons with regional and peer markets reveals Australia and New Zealand are not alone in struggling to find growth although there are different price and volume combinations existing in markets.
For example Australia, New Zealand and the United States are currently growing around 1.5% with volume +0.5% and price +1.0%. Many of the same trends are evident in these markets including consumer preference for fresh at the expense of traditional FMCG food types, growing retailer private label penetration and growing preference for out-of home brands.
In contrast the United Kingdom market is showing lower value growth as retailers try to compensate for lost volumes (-1.9% over 12 months to June 2014) to hard discounter sub channel by accepting manufacturer price increases which is driving price growth of 2.9%. Market growth in Western Europe is stronger driven by volume growth of 2.3% but price deflation is spreading with the bigger economies of France, Italy and Spain with close to zero price growth or deflation. Market growth in APAC of 4.9% is being driven by population growth and rising incomes.
Promotions globally tell a different story
Across continental Europe the percentage of FMCG sales sold on promotion is inversely proportional to the market development of hard discounters. European markets where ALDI Nord or Sud and Lidl operate and dominate tend to have a lower percentage of sales on promotion. Conversely markets where there is no hard discounter sub channel such as New Zealand have very high percentages of sales sold on promotion.
Markets without a dominant hard discounter sub channel such as Australia and the United States (which has many discounters but few “hard” discount chains) tend to have high levels of promotional sales. The United Kingdom however is in the midst of a hard discounter sub market development phase which would be expected to reduce the proportion of sales sold on promotion as more widespread EDLP pricing influences promotional activity.
Promotions losing appeal amongst Australian customers
Strong promotions have been favourable for brands in limiting the growth of retailer private label ranges. However, in Australia, price promotions are increasingly being viewed as undifferentiated and merely good value. As a result promotional effectiveness is diminishing as promotional fatigue amongst consumers increases.
On the other hand, weaker brand performance is also creating opportunities for more retailer private label offers. In particular, premium private label ranges in categories including bakehouse, frozen, dairy, health and beauty, homecare and pantry.
It is interesting to note that in most of the categories being favoured for premium private label expansion by retailers, the percentage of sales made on promotion in Australia exceeds that of peer markets such as the United States and United Kingdom, in some categories very significantly!
Nielsen’s Marketing Effectiveness Practice has shown us that the promoted price elasticity (PPE), or the effectiveness of promotions, have dropped (i.e. closer to zero) in many countries indicating reduced sales uplift from promotions. For example, average promoted price elasticity in Australia had declined from a 2.2 in 2012 to 1.8 in 2013. Similarly in New Zealand average promoted price elasticity has declined from 4.0 in 2013 to 3.3 in 2014.
Looking at other developed peer markets we find inconsistent patterns but with PPE reducing nevertheless! The United Kingdom has proved to be the most volatile market with some of the highest and lowest promoted price elasticity numbers. For example, across 2011 promoted price elasticity was 2.6 falling to 1.4 in 2012 only to rise again in 2013 to 2.3. In contrast in the United States price elasticity has remained fairly steady across 2010-2013 averaging 1.5 although showing a 20 basis point decline across the period to 1.3 in 2013.
So, will we see a decline next year?
In short, yes. Retailers and manufacturers are both aware of the reduced impact promotions are having on volume uplift and the detrimental impact on margins.
Based on responses to Nielsen’s 2014 Retail Landscape Survey, manufacturers and retailers see the need for changes in promotional programs and have plans to reduce activity although manufacturers seem to be more aggressive in their intentions.
|70% change in depth||27% change in frequency|
|50% change in frequency||27% change to EDLP|
|25% change in number of|
items on promotion
|27% no change|
But will reduced promotions restore growth to the FMCG category?
Manufacturers may achieve higher realised pricing through reduced promotional activity. However, consumer preference for fresh, private label growth, reduced ranges due to optimised assortment and a growing trend in eating out are still going to challenge growth.
With these trends growing in popularity, it is unlikely that FMCG manufactures sales volume and value growth trends will reverse to match growth in retail. Despite this, there will likely be exceptions found in categories that are innovative, unique and drive loyalty for retailers such as health, wellness and gourmet.
** Refer 2013 and 2014 Australian Food and Grocery Council (AFGC) annual Competiveness and Sustainable Growth reports for details on supplier sales growth, trading terms and profitability.