Driving FMCG growth in developing Asian economies

Fast-moving consumer goods (FMCG) companies that offer high-volume, low-cost items that are bought frequently to serve consumers' daily needs have long competed for market share in India and China. The sector is now finding that the quickly developing nations of South-East Asia such as Indonesia, the Philippines, and Vietnam are also rapidly growing in importance.

Emerging markets across the globe accounted for 51% of worldwide FMCG spending in 2017, according to Kantar Worldpanel, an international consumer behaviour research firm based in London.

The developing markets of Asia contribute significantly to this large slice of the pie. According to Pinakiranjan Mishra, partner and national leader for consumer products and retail at EY India, FMCG businesses that do not develop a strategy for robust growth in these markets do so at their peril. "Much of the global consumption will shift to the emerging parts of the world in the future, and underinvesting now could turn out to be a big mistake," Mishra said.

However, while the opportunity in these emerging Asian markets is exciting, the market terrain in these countries is complex and dynamic. A large and growing population that is increasingly digitally connected is flexing greater spending power and demanding more choices. Add in rising costs and stiff competition from local brands, and suddenly leading FMCG companies are struggling to build a rule book for growth across the region. Here, experts offer pointers on how FMCG businesses can find a foothold in these dynamic, fast-growing markets.

Growth versus profitability

According to EY research, while finance leaders recognise that growth needs to be prioritised during initial forays into emerging markets, they should identify markers that indicate how much they are willing to risk, and for how long, before turning profitable.

"The biggest change that CFOs could effect in these growing markets is to focus on growth ahead of profits and investing for the long term," Mishra said.

However, rising costs in many Asian markets are placing pressure on profitability. FMCG players should look at keeping costs below those of rivals, according to Nikhil Prasad Ojha, a partner in Bain & Company's Mumbai office who focuses on strategy, consumer products, and retail.

Being on the constant lookout for opportunities to generate savings is a means to win in these markets, Ojha said. A lean structure and low overheads will help keep prices down, maintain margins, and drive growth. This approach will also alleviate threats from opportunistic new entrants and activist investors.

Also, maintaining a sharp focus on just a few products and brands in a core set of Asian markets will help global FMCG players provide the scale support to ensure success, he added. As part of this focus, they can tailor strategies to the category and country, using market position as a guide. They can also lookfor market commonalities, matching strategies in urban markets across several countries, for example.

Go local

The last few years have seen local brands in developing Asia take centre stage, growing at a much faster pace than their global counterparts, according to Kantar Worldpanel.

Typically, these homegrown brands not only understand the local consumer better, but also have the advantages of being nimbler and lower-cost with deeper relationships in the complicated network of retail partners FMCG businesses need to work with in developing Asia. Some, such as Universal Robina Corporation of the Philippines and Thai Union Frozen are even expanding across the region and growing into multinationals, Bain has observed.

There are multiple ways finance leaders at FMCG organisations looking to expand into Asia's developing markets can help their businesses take on the local competition. First, resources should be allocated to developing an understanding of local consumers and markets. Accurate market insight should be collected on cultural norms while building marketing campaigns or developing products. A good grasp of the traditional and modern trade landscapes is important as well to counter local competition in developing Asia.

Asian consumers, for instance, are already displaying behaviours observed in mature markets. These savvy, new customers are seeking deals and discounts online or offline, said Nehal Medh, president, UK and Western Europe, of Brandscapes Worldwide Consultancy Services Ltd., a global marketing strategy consulting organisation.

Local partnerships and acquisitions are another route to outpacing domestic rivals. Winning organisations look for acquisition targets that are closest to their core and can reinforce organic growth, Ojha said. A few other factors need to be considered when acquiring a domestic brand. Local products are sourced, assembled, and packaged to suit domestic tastes, and tampering with any of this to achieve efficiencies of cost and scale is likely to put consumers off, Medh said. Consequently, finance teams at FMCG businesses looking to buy local brands should consider the feasibility of delivering products with the same pricing and benefits that initially made them popular with customers.

Most importantly, global companies often find that their structures are too onerous to translate local understanding to their global headquarters and get adequate funding in time to respond to domestic competition, Mishra said. Getting top management to spend time in emerging markets and including locals on global boards and as part of decision-making processes make a good start to understanding these markets better, he added.

A hands-on approach

"How companies respond to evolving dynamics of market and product categories over the next five years will determine which brands will thrive for decades and which brands will potentially need to evaluate possibly less-promising markets for their future," Ojha said. Clearly then, finance should co-operate proactively with other business functions and stakeholders to make sure their organisations succeed.

CFOs and their teams should work together regularly with sales and marketing to ensure that brand financials are in good shape, said Medh. Brands and variants that are not adding significant value should be weeded out to redirect these funds to brands that are making a difference. Also, while finance should appreciate why variable amounts of money need to be spent on brand-building and sales activities in these markets, sales and marketing teams should also reciprocate by accepting timelines and return-on-investment measures.

Outside the organisation, finance should partner closely with retailers to extract money from a price-conscious, highly competitive market, Medh added. Efforts should be made towards remodelling the supply chain, and opportunities identified to release money by relocating or subcontracting manufacturing or even bringing certain intermediate products in-house.

In fact, these guidelines would help FMCG majors deal with what US News & World Report has recently described as an increasingly high-pressure global scenario as consumers turn to newer entrants, novel variants, and digital channels such as Amazon.

A final piece of advice

EY research recommends that finance teams consider a pay-as-you-go model after an initial time frame in developing markets so margins finance further growth. While CFOs need to consider alternatives to keep rising costs in check, it should never be at the expense of product quality or customer experience. Finally, while it is essential to empower local managers to react quickly in these fast-evolving markets, CFOs should put in place a clear governance framework, and set key performance indicators and targets, so that local teams are supported and motivated, and act in line with company strategy.

Shilpa Pai Mizar is a freelance writer based in the UK. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.