Getting a raw deal?
November 17, 2015
Lower prices on raw materials should be good news for consumer goods companies, but sustained deflation creates a completely different set of challenges.
One of the biggest challenges for consumer goods companies in mature markets is finding ways to grow the top line. Volumes are growing slowly, if at all, but until quite recently that’s been disguised by ongoing price inflation. But not any more. And that leaves the consumer goods companies with two challenges: the first, how to grow revenue in a deflationary environment; and the second, how to ensure they keep as much of the benefit of falling commodities prices. The latter is tough – it takes either very strong customer relationships, or very strong brands, to resist pressure from retailers to pass on price cuts. And even if the benefit can be retained, currency fluctuations can easily erode a large amount of the gain.
Why is this relevant for the M&A market? Because investors see cost of sales as a key factor in assessing the long-term prospects of possible targets, and raw materials typically make up 60-70% of that in the consumer goods sector. They’re increasingly looking at not only what exposures a potential acquisition has, but how the business is managing them. In other words, they want to see proactive management of these risks, from market hedging, to customer negotiations, to long-term sourcing partnerships. The most sophisticated consumer goods companies are now developing long-term strategic collaborations with some of their most important suppliers, as a way of smoothing the impact of commodity price volatility. Diversifying into new product lines can also provide some degree of protection, as different commodities will be in different stages of the price cycle.
Building stronger brands is another effective strategy: products that are number one or two in their category are much more likely to be resilient to price pressure, and have the best chance of growing the top line. There are many facets to this, and it’s not just about marketing. For example, we worked with a chilled food manufacturer on improving their customer service levels and production efficiency, which has bolstered their position with customers, despite having a complicated product range. We also helped a large food producer improve their manufacturing efficiency and technical expertise, and hence their product quality. On both assignments we helped the company to anticipate changes in commodity prices and react more quickly when they occur. It’s all about speed and agility, and that’s vital whatever segment you’re in.
To learn more about some of the key deals that took place in Q3 2015, read our new publication, 'the Consumer' here.
How do you see the rest of 2015 playing out? Share your thoughts below or schedule a meeting to discuss your situation in confidence.