Asia Pacific has been the scene of rapid growth in the fast moving consumer goods (FMCG) sector over the past few years, with double-digit growth occurring in many countries including China, India and Vietnam. Thailand has also experienced solid growth – up 6.4 percent in 2010 compared to 2009 – but much of that growth came from increased volume, not value, thereby resulting in pinched margins for FMCG manufacturers. Nielsen recently examined this trend in, and how manufacturers might be able to counter it, at a recent seminar in Bangkok attended by about 200 senior level executives.
Since the end of 2009, margins have been increasingly squeezed due to a number of factors. First, the hypermarkets have been waging price wars to win shoppers, and three of the top six reasons for shoppers choosing hypermarkets and supermarkets are related to value and promotions. Second, a focus on value among Thai consumers has become a higher priority than before. Nielsen’s most recent Global Consumer Confidence Index found that almost half (47%) of Thai consumers said that they were concerned about their personal finances. More than one-third (37%) said that they were planning on switching to lower price grocery brands, and 87 percent said they react to promotion. Despite this, just 14 percent of Thais spend on promotion compared to the global average of 20 percent – interestingly upper and middle income families spend a higher proportion of their shopping budgets on promotions.
While margin tightening is affecting the overall FMCG sector, not all departments have been seen the same impact. Food, for example, has shown reasonable value growth over the past three quarters, and in Q1, was up 2.8 percent. Beverages have posted some of the highest overall growth over the past year, but in recent quarters, that growth has slowed, although slower volume growth has been accompanied with a value increase of 1.1 percent in Q1. Impulse goods recorded nominal growth of 17 percent in Q1, but value growth accounted for just 0.1 percent of that figure. Household goods showed no value growth at the start of the year and personal care recorded negative growth of 0.5 percent.
So how can FMCG companies counter these trends? There are number of ways above and below the line. In terms of advertising, recent Nielsen research has found that online advertising yields the highest return on investment. TV – while still important – is increasingly expensive and produces diminishing returns at some point. Below the line, tactics such as aisle end-cap displays can boost sales by 27 percent. They key for an FMCG marketer is to know the real financial impact of their promotional spending.
“The FMCG market in Thailand is undergoing a change. After several years of strong value and volume growth, the dynamics have shifted to a situation where volume growth continues to be solid in most categories, but corresponding growth in value is not as easy to find,” said Aaron Cross, Managing Director, Nielsen Thailand.
“Shoppers are the clear winners in the battle for customers, but for manufacturers and suppliers, this situation is not sustainable in the long-term. Suppliers are concerned about pressures on trading terms as well as increasing costs of raw materials and advertising. What’s more, private label goods have a tremendous opportunity to increase share, further complicating the matter for brand manufacturers.”
“It is critical that FMCG companies have an in-depth understanding of how their consumers respond to pricing strategies and as well as the impact promotional spending has. Further, new product launches can play a key role in boosting value and fighting margin erosion - provided they are done right,” said Cross.
Nielsen has observed that successful premium launches exhibit eight key traits: