'Pressure pushin' down on me, pressin' down on you, no man ask for' - David Bowie & Queen (Under Pressure lyrics)

'Pressure makes diamonds' - General George S. Patton Jr.

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The summer break is now over and it will be remembered as an eventful one:

• Mars completed the 4th largest acquisition in the industry since 2000 (here are our summarized views) deploying now more than $100bn capital since 2000. Second only to Ab-Inbev. Alone the value of this deal is equivalent to the cumulated amount spent on M&A by the world 50 largest FMCG companies over the last 24 months...

• The world largest FMCG company (Nestle) terminated its CEO with 9 days notice (here are our summarized views)

• If last year Q2 earnings season's summer hit was 'The Beat Goes On' (cf. our Q2 2023 results publication), this year the summer hit is definitely 'Under Pressure' from Queen/ Bowie (we recommend you to click on the below link and to listen to it while you read the rest of the publication):

Here are our summarized views on Q2/H1 2024:

• In a context pricing gains are slowing down (now contributing to only +2.8%, down from +10% last year)) & volume development remains challenging, 49% of the world largest listed FMCG companies missed their Q2 top-line consensus (including some historic outperformers like P&G, MDLZ, PepsiCo, L'Oreal or even Beiersdorf)

• Profitability picture remains for now rosier (71% beat, now 59% have recovered their pre-covid profitability level)

• If most (71%) increased A&P in an attempt to boost volume, most failed for now (48% recorded a volume decline in Q2) & some (11%) are already lowering their guidance for the year

• In a context where the world largest FMCG companies have increased their prices by +32% since pre-COVID (+6% pricing CAGR over 2019-H1 2024), their volume growth was only +3% (+0.7% CAGR) over this period

• If the above shows a historically low price elasticity for the FMCG industry, perspective for the next quarters remains challenging (disinflation & deflation forces) putting pressure on the growth/ profit algorithm

• In this context, most are progressing on their growth acceleration journey through activating the below levers but results will take time to materialize considering the amount of pricing taken over the last years:

i) A&P increase on top brands/ markets

ii) Price Pack Architecture (PPA) reshuffle to offer to consumers lower price points

iii) Innovations acceleration on the largest brands/ markets

iv) Cost-cutting & mass layoffs to create more space in the P&L to get back to pre-covid profitability level & fuel reinvestment

v) Divesture of the most growth and profit dilutive businesses (e.g. UL Ice-Cream)

vi) Progressive acceleration of scale & growth driven M&A (cf. Carlsberg/ Britvic, Mars/ Kellanova deals) & more will come

• In this context, FMCG companies should be ambitious & take advantage of this increasing pressure to take bold steps on their portfolio, on organic growth, on the markets/ channels with the greatest incremental growth potential (emerging markets & ecommerce) and on divesture/ M&A. Specifically, we continue to advocate for:

i) A radically ambitious approach to portfolio management & organic (volume) growth acceleration that is more granular, more holistic, more consumer-centric & more actionable (Zero-Based-Growth®- cf. below publication for more details)

ii) Tailored strategies truly adapted to Emerging Markets that continue to account for 2/3 of the global FMCG growth (cf. below publication)

iii) A new approach to Ecommerce (Ecommerce 2.0®) that is designed to identify rapidly breakthrough improvement across the e4Ps in a context ecommerce still accounts for 20% share of global FMCG growth (and up to ~50% on CHC & Pet Care) - cf. below publication

iv) A sharper M&A strategy that is deeply embedded in the acquirer strategic framework, that granularly understands the success drivers of the targeted space & that leverages the last two decades of FMCG M&A learnings to maximize ROCE (cf. Best Acquirer® approach in the below publication)

We remain optimistic that in this high pressure context will emerge a number of high performing diamonds

Exciting times

Here is our detailed take on Q2/H1 2024 results of the world largest listed FMCG companies in 20 key charts/ messages:

1) More top-line misses (49%), less bottom-line beats (now 71%)

2) All driven by the slow-down in pricing gains (now down to +2.8%). 48% of the world largest FMCG companies recorded a volume decline in Q2

3) On average the world largest FMCG companies increased their price by 32.3% (!!!) since 2019 (6% CAGR) while increasing volume by only 3.4% (a 0.7% CAGR)

4) Impulse F&B (KO System, PepsiCo, MDLZ), P&G & Colgate outperformed since 2019 whereas Henkel Consumer, the US-centric F&B companies (KH, GenMills, Conagra, MolsonCoors) & the paper-household businesses (Essity, P&G Baby & FemCare, KC) underperformed the FMCG-wide industry

5) EBIT% wise: 74% of the world largest listed FMCG companies improved their EBIT% vs H1 2023 while 41% are still below pre-COVID EBIT% levels

6) But absolute EBIT wise, 78% of the companies grew their absolute EBIT by ~50% on average vs pre-COVID (H1 2019)

7) In an attempt to boost volume, most FMCG companies (71%) increased their A&P over H1 2024. A minority of companies (11%) are now taking stock of the difficulty to accelerate growth over the short-term & lowered their guidance for the year

8) Overall the world largest listed FMCG companies grew by 3.7% over H1 (down from 9.6%) as pricing gains slow-down & volume declines. Household was the only vertical to grow on average volume

9) On F&B: top-line growth slowed down and profitability improved for most. Most of US-centric players face volume declines. KO continues to outperform (+13%!)

10) KO System continues to deliver positive pricing and volume while outperforming the F&B vertical

11) Most brewers grew volumes and pricing (low to mid single digit). Situation is much more challenging on Spirits except for Campari that shows remarkable resilience

12) Overall, BPC continued its growth momentum with slight deceleration. BEI, COTY, LOR outperformed; EL is recovering while Shiseido continues to under-perform

13) Most players recorded positive volume & pricing growth. Profitability gains continue. Colgate continues to outperform while P&G Baby, Clorox & Essity underperform

14) On CHC: volume growth is normalizing after a weak Cold & Flu season. Most players struggle with their US market for different reasons (customer destocking, poor performance of the drugstore channel, ecommerce channel shift, local portfolio challenges)

15) The market cap of the top FMCG companies has been directionally stable since 2022 reaching $2.9Tr (as of Aug’ 24), yet with high standard deviation across companies. $2.9Tr is also the market cap of Nvidia at end Aug '24

16) Looking at the top listed next-gen FMCG assets, most continue to suffer. Hims & Hers and E.L.F. are bright exceptions growing strongly. Oatly continues its turnaround journey

17) Carrefour/ LVMH selective retailing/ Costco continue to out-perform while US Drugstores continue to struggle with significant market cap erosion

18) Ecommerce pure players wise: MELI/ AMZ continue to outperform while CN players (BABA & JD) have been accelerating topline growth

19) Q2 saw another decline in M&A activity for multiple reasons (historical M&A ROI challenges, scarcity of well-priced quality assets)

20) If Q3 started with a sharp acceleration on M&A with two large deals (Carlsberg/Britvic for $3.8bn and Mars/Kellanova for $36bn), we do not expect a widespread movement of consolidation in the FMCG industry but rather an acceleration of mid-sized ($1-6bn EV transactions) growth oriented transactions (cf. our summarized views in the below article)

Bringing it all together, after a period of unprecedented pricing, we expect an increasing pressure on the growth/ profit algorithm of the world largest FMCG companies, especially considering the disinflation/ deflation forces ahead. Specifically:

• If most companies took steps to refocus on organic growth, results will take time to materialize & in some cases, will require a much deeper & radical approach (cf. Zero-Based-Growth®)

• FMCG companies must also continue to adapt their strategies in the markets that account for most of the growth but also where they underperform most (Emerging Markets accounting for 2/3 of global FMCG share of growth - cf. our views on the same); and on the channels that display both the most significant growth & improvement potential (cf. Ecommerce 2.0®)

• M&A wise, we see now a window of opportunity opening for divesture with a rising appetite from large PE funds and for the acquisitions of well-priced mid-sized growth oriented assets for the players with the right B/S and satisfactory M&A track records (cf. our views on M&A and Best Acquirers®)

We remain optimistic that in this high pressure context will emerge a number of high performing diamonds.

As Winston Churchill used to say: 'Never let a good crisis go to waste'

Exciting times

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No FF&A employees own any stocks or financial instruments of any FMCG companies or companies mentioned in the above article. All the above information are public information