'The true sign of intelligence is not knowledge but imagination' - Albert Einstein

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It's a wrap for the (calendar) Q1 2024 earnings season for the world largest listed FMCG companies (n=44 reported in Q1).

Here is our take in five key messages:

1) We are shifting from a 'shrinking-to-glory' era (most missing top-line yet most delivering bottom-line) to a 'shrinking-to-misery' era (most missing both top-/ & bottom-line and reducing guidance). In that regard Q1 marks a real shift (52% top-line miss, 60% bottom-line miss, 81% lowered guidance for the year). And It is not a vertical specific trend, it is true across all FMCG verticals. It is the consequence of the end of three super-cycles (end of high pricing, end of China as global tailwind, end of post COVID growth acceleration on few specific categories like VMS, Beauty, Pet, Alcoholic Drinks) along with now a (cyclical) weakness in US consumption. The overall makes objectively a challenging context

2) Volume development stopped to improve in Q1 & suggest (as shared previously) that volume recovery will be everything except linear. For those that want to blame tariffs, let's not forget that most of the tariff noise was made early Q2, not in Q1. Acknowledging the above, few FMCG companies shared their plans to take pricing in the BTG to cover tariffs headwinds

3) Gap between winners & losers keep increasing. It is true across all verticals (cf. charts below detailing diverging market cap dynamics over the last years & on day of results' release)

4) The majority of FMCG companies are ill-prepared to manage this situation (71% are yet to recover their pre-covid profitability level, most have been on average steadily losing market share over the last decade). One-off reinvestments into growth are likely to be a negative sum game (most FMCG companies neutralizing each other with increased pace of innovations & increased A&P)

5) In this context, the delta between the cost of inorganic growth and the cost of organic growth is progressively reversing driving, as expected, an acceleration in M&A. Unsurprisingly mid-size growth oriented M&A on same categories large developed markets benefiting from GTM synergies are driving this trend (highest ROI deal type over the last two decades in the FMCG industry)

Spotting the above trends are rather obvious. What is interesting is to determine how to go about it. In that respect, our views remain unchanged. Here are our seven key thoughts:

1) Generally, let's first fully remember the lessons learnt from the ‘lost last decade’ to prevent ‘shrinking-to-glory’ & resist to the two main 'deadly temptations' (getting wrong the cost take-out vs. top-line balance; solving structural organic growth problems with mega-M&A deals)

• The 'lost last decade' & the expected return of the 'growth gap' from 2024:

• Organic growth as key shareholder value creation driver:

• The need to balance top-line & bottom-line growth

• Large M&A as the key driver of shareholder value destruction

2) While we acknowledge the positive steps taken in 2024 to accelerate organic growth (portfolio optimization/ divesture, increase in marketing & promotion spend, acceleration of innovations, progressive acceleration in bolt-on M&As) & the time it will take to yield results, those one-off steps must be complemented by a holistic & replicable consumer-centric approach to organic growth outperformance that drives sustainably category expandability (vs. just grabbing shares or being obsessed by private labels) & that is deeply embedded in the entire organization. We call it Zero-Based-Growth® (cf. below ZBG® publication explaining in details the approach)

• Some companies like P&G are a good illustration of this approach (cf. below P&G turnaround case)

• More perspective also on how to drive category expandability in our last episode of the Growth FMCG CEO Podcast with Pablo Perversi (President Europe, Danone) (cf. chapter 7 to 10):

• Private labels remain for the immense majority of the FMCG industry not only statistically irrelevant but also a strategic distraction (more in our last publication below on Private Labels):

3) In a context Emerging Markets (EMs) are expected to continue to account for ~2/3 of the global share of FMCG growth, it is critical to adapt our global strategies to EMs and specifically to localize our 4Ps to outperform. China structural slowdown pushes us not only to reinvent ourselves in China (because of the sheer size of the market - cf. the now famous 'the next China will be China') but also to dramatically diversify our growth engines in EMs starting with India, Brazil, Mexico & many others. That is what we call the $1 Trillion race (the incremental sell-out value at stake in emerging markets outside China in the coming 5 years). Below a publication with our detailed perspective on how to unlock this $1 Trillion opportunity illustrated with cases

4) In a context Ecommerce contribution remains significant (~22% steady share of growth on average with great standard deviation ranging from ~50% for Pet Food/ Beauty through ~30s% for Consumer Health/ Diapers to ~5-15% for the rest – F&B, Household), external environment becomes more demanding (lower ecommerce growth, higher competition, increasingly fragmented & rapidly evolving e-customers landscape, higher pressure on profitability from the world largest pure players, rise of retail media putting all FMCG companies in a dynamic prisoner dilemma situation that can drastically increase the cost of growth as seen in 2024 in few large retailers) & the Ecommerce strategies of the world top 50 FMCGs still display significant improvement potential (unsustainable targets, out dated where-to-play/ how-to-win choices, insufficient consumer-back approach, unsustainable investment level with insufficient ROI, enhanced risk of omnichannel value destruction):

=> How to update our Ecommerce strategy to outperform & maximize incremental omnichannel value? (cf. the below publication for our detailed perspective)

5) As a result of the increasing cost of organic growth (pricing gains slowdown & muted volume for most, reinvestment into A&P and growth capabilities, increasing pressure from (r)etailers), the decreasing cost of inorganic growth (decreasing interest rate, compressed valuation, increasing assets availability) & increasing balance-sheet availability, we see an increasing case for M&A in 2025 & beyond. But risks remain abundant (majority of M&A transactions over the last decade did not pay-back, majority of current assets on the market have no future-proof value creation case)

In this context, the key strategic question becomes:

=> How to leverage M&A to complement effectively and with high ROCE our organic growth strategy? (cf. the below publication for our detailed perspective)

6) If the above priorities focus on the short-/mid-term, what are the few initiatives that should continue to be prioritized considering their high ‘future-back’ value-at-stake?

For FMCG companies with large exposure to fragmented channels (mostly Food & Beverage, Professional Beauty, CHC), we favour EB2B that we predict will be a key enabler to protect & expand share of profit capture in those highly strategic/ profitable fragmented channels:

=> How to leverage EB2B to protect & expand our share of profit in fragmented channels? (cf. the below publication for our detailed perspective)?

• On Pet Care, Beauty, Consumer Health & Premium Coffee, we still see large unrealized value behind DTC & sometimes ecosystems: from eliminating low right-to-win organic initiatives through turning around or divesting acquired DTC assets to start differentiated DTC value propositions on the largest & most DTC friendly brands that have the potential to deliver large incremental omnichannel value

=> How to make DTC worth doing & how to maximize its incremental omnichannel value? (cf. the below publication for our detailed perspective)

7) Strategizing rigorously sustainability: last but not least, we see a large future-back value-at-stake (combined risks & opportunities) behind Sustainability, mostly through true-costing/ taxation of Water & CO2 but also sometimes through natural resources availability (agricultural products, water in some specific regions). Our models suggest a profit at stake of up to 50% on some FMCG categories. In this context, it is critical to have a detailed & fact-based perspective on the following questions:

• What is qualitatively (key drivers) & quantitatively (EBIT at stake) the different level of value at stake behind Sustainability depending on different scenarios of true taxation & regulation/ scope enforcement?

• What are the opportunities to create holistic value across the value chain (consumers, other stakeholders), and then turn Sustainability risks into opportunities?

• What should be a holistic, commensurate to the value at stake & gradual strategic response (considering the significant value at stake and the fact that most initiatives will not deliver a pay-back until (if?) true taxation kicks-in)?

Those are uncomfortable & difficult questions. The FMCG industry, like many others, has been ‘subsidized’ by (almost) free natural resources (CO2, water but not only) which enabled us to propose cost-effective products to masses despite them being extremely resources-intensive. Unless we understand finely our value at stake, deeply rethink our products, supply chains & iterate from the holistic consumer job to be done, we will not be able to solve it. This is our exciting challenge. We will share our full perspective in a publication in 2025

As usual, full details below on Q1 results in 15 key messages/ charts:

1) Majority again of FMCG companies missed their top-line consensus. What is new & worse though is that most (59%) missed also their profit (EPS) consensus and reduced their EPS guidance for the year (61%) which is objectively unprecedented

2) If volume showed timid signs of recovery quarter over quarter last year, Q1 showed a broad-based volume decline across most verticals (except BPC) and FMCG companies (55%) suggesting that volume recovery will not be a fast & straight journey. On the vertical where commodities inflation was moderate to inexistent (everywhere except F&B - with coffee & cocoa - being the key ones), top-line situation is objectively challenging (e.g. Household)

3) The majority of FMCG companies (74%) that reported profit in Q1 are yet to recover their pre-COVID profitability level. Which is increasingly a challenge as most FMCG companies do not have the space in their P/L to reinvest in demand generation (A&P, innovations, capabilities)

4) If we except CHC, growth slowdown is broad-based. Situations on Alcoholic Drinks, BPC & Household are the most striking

5) On F&B, we notice a top-line growth slowdown & declining profitability across majority of players. KO, KDP, Danone continue to outperform. US-centric players (KH, GenMills, Conagra) continue to suffer on the back of a very challenging category/ country growth footprint

6) If the KO System performance slows down, it continues to outperform the F&B vertical & the entire FMCG industry

7) Alcoholic Drinks is an increasingly challenged vertical. Post COVID growth normalization, end of the high pricing era, higher cyclicality than the macro FMCG industry & some increasingly structural consumption challenges create all a 'challenging cocktail'

8) BPC remains the most resilient vertical but the gap between winners & losers keep increasing (Estee Lauder/ Shiseido/ Coty vs. Galderma/ UL/ L'Oréal/ Beiersdorf)

9) Performance has considerably worsened on Household: half of our coverage reports now negative revenue growth (Henkel, Ontex, Clorox, KC) while most of the others stagnate (0-1% growth)

10) CHC remains resilient. If most market-performed, Kenvue underperformed

10) All of the above gets increasingly translated into diverging stock price dynamics. Very clear on day of earnings release. US names suffer now most on the back of US economic situation/ consumer sentiment

11) Looking at a longer perspective, top FMCG companies market cap continue to underperform the broader financial market. Within the top FMCG companies, large standard deviation between FMCG winners & losers

12) At a time cost of inorganic vs. organic growth turns again positive, we notice a progressive acceleration in M&A activity (volume & value), especially on mid-sized assets ($0.5-5bn EV) on same categories with top-line value creation driven by GTM synergies. It was again the case with Carlberg/ Britvic ($5b) & PepsiCo/ Poppi ($1.7bn) that both accounted for nearly 90% of total transaction value over Q1

13) Next-gen listed assets: HIMs & ELF continue to impress. Oddity strongly bounced back while situation on rest remains challenging

14) Retailers remain resilient (top & bottom-line wise)

15) MELI continues to impress while BABA/ JD show their resilience in what remains a challenging domestic Chinese market

'The true sign of intelligence is not knowledge but imagination' - Albert Einstein

In this unprecedented context, we need more than ever imagination. Knowledge is essential but it will not make alone the difference

Exciting & decisive times

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FF&A solves the most complex strategic problems of the world largest FMCG companies across Corporate Strategy, Organic Growth, Digital RTM (Ecommerce, DTC and EB2B) and M&A. 14 out of the world 20 largest FMCG companies are repeat Clients

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