‘Control your own destiny or someone else will’ – Jack Welch
The tide has been turning on Consumer Health in 2017. Many FMCG leaders are currently wondering:
We surely cannot address in one article all the challenges of a $600bn vertical but here is a (brief) summary on our perspective on those points.
2. Historically, a strategic and attractive sweet spot… until 2017
Consumer Health (CH) has been historically an attractive and strategic sweet spot for different reasons:
i. Faster growth than the other verticals: CH grew at a CAGR of 5% over the last 10 years faster than on average Food, Household and Personal Care categories
ii. A stable and recession-proof vertical: if we except the cold & flu seasonality, this is a rather stable/resilient vertical with historically a low private label penetration (importance of confidence in the brand) (or at least lower than on Food and HPC)
iii. High barriers to entry that translate into higher margins: CH is regulated (manufacturing sites need to be certified, product launches need to be authorized by the local regulatory bodies, local commercial entities need to have pharmaco-vigilance capabilities…). Adding to this a fragmented distribution channel (if we except UK and US where drugstores rule, everywhere else pharmacies are still the dominant channel), all of these contribute to a higher profitability. It is not a coincidence if most CH business units display an EBIT of 20-30% vs. 15-20% for Food and HPC companies (at the exception of soft drinks, spirits and 3G owned FMCG companies)
Unsurprisingly many companies doubled-down on CH over the last decade to drive profitable growth – few examples (non exhaustive):
But in 2017, the market decelerated brutally…
3. An abrupt decline in 2017 felt by almost all key players for cyclical and structural reasons
Most players felt the pinch in 2017:
The slowdown was especially felt in OTC:
Several reasons for this slowdown:
The infinite digital shelf reduces barriers-to-entry through providing consumers transparency on all SKUs on offer and through pushing the SKUs with the most ratings & reviews, bridging in the process the trust gap between brands and generic
- The rise of e-tailers, especially Amazon, driving deflation across the trade:
4. Towards a Reset of the structural profitability/attractiveness of the most vulnerable categories (OTC/VMS) in the most exposed geographies/channels
Unsurprisingly, categories with the most space in the P&L and with limited differentiation versus private labels/generic (OTC, vitamins) are suffering the most. What we are starting to notice is an accelerated transition to e-commerce and a drastic reduction in the barriers-to-entry in those categories in some key geographies where OTC drugs are allowed to be sold outside pharmacies (US/UK for example)
Amazon is already playing (and will increasingly play) a critical role in driving deflation and enabling small players to compete with large brands.
We searched on Amazon.com for the keyword ‘analgesic tablet’: Advil did not show up. The brand Major did (40% cheaper per tablet). We had to search for ‘Advil analgesics’ to finally find it… worst Advil was paying advertising that showed up only when researchers taped ‘Advil’… and not ‘analgesics tablets’…
And this is in 2017… now wait that Voice kicks in and what will prevail will be Amazon private labels. We expect 50% of Search to be conducted by Voice by 2020. With the continuous progress in last mile delivery cost, it is a realistic scenario to expect that most large markets by 2020 will offer an e-commerce ordering facility in large cities within 30 minutes. So what is already happening on Kleenex should happen very soon to categories like Analgesics and Vitamins:
And this is in 2017… now wait that Voice kicks in and what will prevail will be Amazon private labels. So what is already happening on Kleenex should happen very soon to categories like Analgesics and Vitamins
On easily comparable segments like OTC and Vitamins with little product differentiation and in exposed geographies like the US and UK, we expect structural EBIT to reduce from 20-30% to 5-15% in the next 24-48 months (before fixed costs and marketing budget reduction/mitigation). A similar deflation as the one we noticed on blades & razors in the US will progressively take place, up to a point that large brands will have to modify structurally their pricing to remain competitive (if they do not activate the levers listed in point 10.). We made a similar prediction for blades & razors in the US back in December 2015 and it turned out to be right.
We expect structural EBIT to reduce from 20-30% to 5-15% in the next 48 months (before fixed costs and marketing budget reduction/mitigation). We made a similar prediction for blades & razors in the US back in December 2015 and it turned out to be right
Gillette, which dominates the global razor business, has long followed a simple and lucrative strategy: Add new features and raise prices. But the 115-year-old brand is changing tactics this month by slashing prices and putting a new focus on its cheaper products. The Procter & Gamble Co.
Online may well account already for more than 100% of the total category growth in the US
E-commerce penetration on OTC and VMS are grossly under-estimated by traditional market research firms and online may well account already for more than 100% of the total category growth in the US and that the weight of online has already passed the 10% tipping point, explaining the brutal offline growth deceleration
Most drugstores will likely reduce their shelf-space allocated to OTC/VMS to the minimum to make space to categories that are more defendable/less ‘amazonable’
5. Unsurprisingly most Big Pharma are divesting their Consumer Units
LONDON (Reuters) – Pfizer plans to kick off an auction process for its consumer healthcare business in November, paving the way for a potential $15 billion-plus sale of the headache pill to lip balm business, sources close to the matter told Reuters.
With VMS and OTC representing 94% of its sales and the US 56%, Pfizer Consumer Unit is the most vulnerable to channel shift/disruption. If no major intervention takes place, we expect a brand like Advil to lose up to 50% of its profitability (before cost/marketing cuts mitigation) within the next 24-48 months
Important step in executing science and technology focused strategy Next phase to support Consumer Health’s successful future development Early stage in the process with no final decision taken Darmstadt, Germany, September 5, 2017 – Merck KGaA, Darmstadt, Germany, is preparing strategic options for its Consumer Health business, including a potential full or partial sale of the business as well as strategic partnerships.
With VMS accounting for 55% of its sales and Europe for 61%, Merck Consumer Health unit displays also a vulnerability to channel shift disruption. But one probably that will materialize fully 2-3 years after the US channel shift (lower e-commerce penetration)
The above does not mean that those assets are doomed. It just means that their structural attractiveness (revenue growth/profitability) will very likely decline unless major interventions are made
The above does not mean that those assets are doomed. It just means that their structural attractiveness (revenue growth/profitability) will very likely decline unless major interventions are made (breakthrough innovation to achieve meaningful differentiation, business model innovation – cf. section 9. below). And this needs to be reflected in the price of those assets.
6. And unsurprisingly, most FMCG companies (Nestle, J&J, Sanofi) passed on those Consumer Health assets
7. Health retailers are anticipating a reset of the entire health sector (cf. AMZ-Berkshire-JP Morgan announcement) and are getting ready mostly through achieving greater scale and getting vertically integrated
The recent announcement of a health alliance by Berkshire Hathaway, Amazon and J.P. Morgan promises to disrupt the health-care industry (but with few details), and it has thrown the market into a tizzy. The overall reaction in the press has been that the initiative is the business community saying, “Government has failed; let us take over.”
(Reuters) – U.S. drugstore chain operator CVS Health Corp () said on Sunday it had agreed to acquire U.S. health insurer Aetna Inc () for $69 billion, seeking to tackle soaring healthcare spending through lower-cost medical services in pharmacies.
8. Likely way forward for the different players:
i) Food FMCG companies: the great convergence towards nutrition while avoiding commoditized/generic vitamins businesses with its low barriers-too-entry / low differentiation (mostly Danone, Nestle and RB with MJ)
LONDON (Reuters) – Nestle is buying Canadian vitamin maker Atrium Innovations for $2.3 billion, expanding its presence in consumer healthcare as it seeks to offset weakness in packaged foods. The world’s largest packaged food company said on Tuesday it will buy the maker of vitamins, probiotics and meal replacements from a group of investors led by Permira Funds.
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ii) Household Personal Care FMCG companies: the great convergence towards personal, beauty care and skin-care in particular while avoiding OTC with low barriers-to-entry / low differentiation
In an effort to bolster its higher-margin oral care, personal care and pet nutrition businesses, Colgate-Palmolive Company announced this morning it has agreed to purchase professional skincare brands PCA Skin and EltaMD, in two separate transactions. 2017 has been like a gold rush with beauty conglomerates making strategic acquisitions and investments in independent beauty brands.
Procter & Gamble has acquired natural deodorant brand Native for an undisclosed amount, the company said Wednesday. Native has built up an online following on its website. The deal will help P&G broaden its portfolio, which already includes Secret, Old Spice and Gillette, reach a growing segment of consumers who want products that are free from certain ingredients or full of natural ones, chief brand officer Marc Pritchard told CNBC on Wednesday.
New Zealand skincare company Snowberry has been acquired by multi-national consumer goods company Procter & Gamble. Snowberry New Zealand general manager Greg Billington told the Herald the deal was signed last Thursday, adding the brand to a portfolio which also includes SKII and Olay.
iii) Pharma companies with OTC assets: Should I sell or should I lean in?
It all depends exposure to disruption, synergy with current portfolio and appetite to dedicate resources to rebuild barriers-to-entry.We have not done the analysis for each pharma owned consumer health units but the case seems clear for a sell for Pfizer and Merck units at least
9. How can companies with large OTC/VMS assets that decide to keep them can survive/thrive (so far mostly RB, J&J Consumer and GSK):
Companies have a very different exposure to disruption. OTC represents only 30-40% of J&J Consumer division and it can leverage its portfolio to hedge its exposure like with Beauty for example with its OGX acquisition.
RB on the contrary is the company the most exposed with OTC/VMS accounting for the majority of its health division revenue and profit.
Here is the short-list of the key levers:
i) Optimize the Core:
ii) Extend the Core
iii) Invent the New
10. Looking beyond
2018 OTC growth numbers will look fine because of an exceptionally strong cold & flu season and numerous ‘one-off’ hits in 2017. It will only hide the accelerated channel shift. 2019 will be the ‘annus horribilis’ for OTC with major price corrections
2018 OTC growth numbers will look fine because of an exceptionally strong cold & flu season and numerous ‘one-off’ hits in 2017. It will only hide the accelerated channel shift. If no structural interventions are made by key OTC players, 2019 will be the ‘annus horribilis’ for OTC with major price corrections. Furthermore, an increasing number of countries will deregulate soon OTC to drive down health-care costs allowing mass retailers and e-tailers to sell OTC products. It will only accelerate deflation and the profitability reset of the category.
Beyond OTC and VMS, some other segments are also particularly exposed. Condoms will see their structural profitability declining sharply (extremely e-commerce friendly, large space in the P&L). Skin care will become progressively a ‘red-ocean’ where absolute differentiation/cost leaders will take significant shares (e.g. Beauty Pie and Deciem below) and where competition between large FMCG companies will heat-up
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The future belongs to FMCG leaders that can anticipate those risks and address those opportunities…. they will have to display humility and a sense of emergency. They will have to look beyond the traditional definition of categories, connect the dots and understand the future source of competitive advantages. They will have to invent new business models. It is in those times of transition and acceleration that we will recognize the true leaders
Channel shifts and digital disruption bring exponential risks but also exponential opportunities. The future belongs to FMCG leaders that can anticipate those risks and address those opportunities. In this process, they will have to display humility and a sense of emergency. They will have to look beyond the traditional definition of categories, connect the dots and understand the future source of competitive advantages. They will have to invent new business models. It is in those times of transition and acceleration that we will recognize the true leaders.
We have never lived in so exciting times. Time to be bold, time to manage for Growth.
‘Control your own destiny or someone else will’ – Jack Welch
For the one keen to continue the conversation, we will host an exclusive and unique European FMCG Executive Conference on Friday, March 16th 2018 from 11 am to 2 pm in Zurich in our exclusive office on the Bahnhofstrasse (lunch will be served – and potentially on the rooftop overlooking the lake weather permitting). The event is exclusively reserved to senior executives in the FMCG industry (managing a P&L > €1bn or Head of Strategy) and is limited to only 12 attendees. For more information and to RSVP, please contact: firstname.lastname@example.org
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Frederic Fernandez does not own any stocks or financial instruments of any FMCG companies or companies mentioned in the above article. All the above information are public information.
About the author:
Frederic Fernandez is an expert and thought leader in the FMCG industry. He is the Managing Director and Partner of Frederic Fernandez & Associates a bespoke Strategy Consulting Firm exclusively focused on the FMCG industry. Before joining the world of management consulting, he worked with Fortune 500 companies like Procter & Gamble, Reckitt Benckiser, PriceWaterhouseCoopers and Societe Generale in leadership positions across Europe (France, UK, Nordics, Germany, Switzerland, Austria), Central Africa and India. His focus areas are mainly direct-to-consumer, consumer eco-systems and business model innovation; growth and profit turnaround and corporate strategy in the FMCG industry. His passion is to help FMCG leaders co-creating the future of the industry and to develop, achieve and exceed the potential of their business. He spends our time advising Fortune 500 FMCG senior leaders globally. He is based in Zurich, Switzerland. He is also a sought-after speaker and speaks across the globe at trade associations and for corporate clients (CEO strategy meeting, yearly strategic reviews, senior management events) about the FMCG industry.