OC&C Global 50: Have the giants grown too big for their boots?

The global giants of fmcg tower ever taller. The world’s 50 biggest players’ combined turnover has grown from $675bn in 2002 to a staggering $1.15 trillion, according to this year’s Global 50, a study carried out exclusively for The Grocer by OC&C Strategy Consultants and now in its 10th year. That represents CAGR of 6.1%. Impressive stuff… until you delve deeper.

Despite a decade of consolidation and international expansion, the 50 biggest are being outpaced by smaller, nimbler rivals, which turned in CAGR of 7.3% over the same period. So why are they slower? Which of the giants are being outmanoeuvred? And which are keeping up with fleet-footed upstarts and how?

One of the most intriguing findings of the Global 50 is that profit margins declined, in particular, for the top 10. “This suggests that the world’s largest fmcg companies may be struggling to keep control of such large businesses,” says Will Hayllar, a partner at OC&C.

With growth in many of the Global 50’s home markets hard to come by, there’s been a rush to develop in the high-growth BRIC markets. But some have been more successful (and less complacent) than others.

“In BRIC markets, you need a good network of local distributors to gain scale and you must adapt your proposition”

The Global 50’s share of fmcg sales in BRIC countries is just 26%. And it’s going down. Agile local leaders turned in organic CAGR of 14.4% over the past four years (14.8%, with M&A) while the Global 50 achieved just 11.6% (13.5%, with M&A). It shows, once again, that size doesn’t necessarily equal strength, says Hayllar. “You need a good network of local distributors to gain scale. There’s a need for companies to adapt their proposition to suit local tastes. In places like China there are already some pretty well established, large-scale local players to compete against.”

Commentators point to companies like General Mills (26), Heinz (43) and, to an extent Reckitt Benckiser (27), as well as a host of players from troubled Japan when it comes to identifying the laggards of the Global 50 in developing markets. “There’s a big distinction between the US and the European guys,” says one senior City source. “Fifty six per cent of Unilever’s sales are from emerging markets, for Danone it’s 51% and Nestlé is around 40%. Historically the US has always been a large enough market so generally US players have had lower emerging market exposure.”

The challenges giants face in BRIC are writ largest in China. Despite successes in personal and home care for P&G, in soft drinks for Coca-Cola and in beer for SABMiller and AB InBev, the Global 50 still only accounted for 17% of the total Chinese fmcg market in 2011. Their lack of exposure was most conspicuous in dairy, snacks and processed food. Meanwhile, increasingly powerful local players account for 40% of overall sales there.

With large regional differences and a highly fragmented retail landscape (hypermarkets are less than 10% of outlets), the market is as varied as it is vast. Chinese tastes and needs are different: the flavoured milk/juice drinks of players like Mengniu and Yili have no real Western parallels Chinese drinking yoghurts are worlds apart even Chinese hair requires different shampoo, apparently.

By adapting offerings for BRIC, some have gained ground. P&G developed shampoos for China, helping it to become the country’s third-largest fmcg player, and Kraft’s reformulation of Oreo in China (consumer research revealed that Chinese consumers prefer their biscuits significantly less sweet than the rest of the world) gave it a leg-up in the country’s cookie market.

Others have bought into unfamiliar categories in order to grow in BRIC. Last year Nestlé bought a 60% stake in Chinese giant Yinlu, giving it access to the county’s vast peanut milk market. PepsiCo’s 2010 buy-out of Russia’s Wimm-Bill-Dann was the group’s first foray into dairy in any country. In one fell swoop it opened up a new category for growth, became Russia’s biggest food group and gained access to a wide distribution network spanning the world’s largest country.

While the eurozone crisis continues to dampen deal activity in Europe, M&A in emerging markets has stepped up in 2012 and will continue to grow. In May, with a point to prove, General Mills agreed to buy Brazilian food manufacturer Yoki for $857m. And a month earlier Nestlé won a bidding war with Danone for Pfizer’s infant nutrition business, forking out $11.9bn, as much as 20% more than many analysts had expected the business to fetch.

“Nestlé is paying that kind of money because they can see the growth this gives them in China,” says Manfredi Corsini, director of Global Financial Advisory at Rothschild. The deal boosts Nestlé’s share of the Chinese infant milk market from 2.3% to 9.7% [Euromonitor]. As to Reckitt Benckiser, lacking emerging market exposure, “it had to do something about it, and bought Paras Pharmaceuticals in India in 2010. I’d say Reckitt perhaps has more catching up to do in personal and home care,” Corsini adds.

Acquisitive newcomers
Meanwhile a new generation of players from emerging markets is looming larger. For the first time a Brazilian - meat giant JBS - has made it into the top 10 with revenues of $35.2bn, up 14%. Fellow Brazilian meat supplier Marfrig turned in the highest growth of the year (33%) to $11.7bn, through M&A and migrating into higher margin categories.

There’s a host of Chinese players poised to break into the Global 50 in coming years, too. Dairy and soft drinks giant Wahaha - originally from Taiwan and now China’s biggest fmcg player with 2010 revenues of $8.1bn - is already big enough to make the table but is omitted due to a lack of an annual report. China’s n02 player Tingyi comes in at 56 with 2011 revenues of $7.9bn, up 17.7%.

“It’s not that the power brand strategy is inherently wrong but it does reach a point where you can struggle to get the growth you want”

After acquiring the Chinese distribution and bottling rights for Pepsi, Tingyi is set to become the first Chinese player to enter the Global 50 in 2012. And then some. “It will catapult them into the top 40,” says Anthony Gent, associate partner at OC&C. “Pepsi has done a good job of building a strong brand position in China with youthful Chinese who associate it with celebrity. It’s got a great position but its distribution isn’t always good. Now Tingyi can plug it into its existing distribution.”

Other Asian players are looking to follow the acquisition trail into the global major league. These include Thai groups like CP Foods, rumoured in May to be eyeing Birds Eye owner Igloo, John West’s new owner Thai Union and China’s Bright Food, which snapped up 60% of Weetabix in a deal that valued it at £1.2bn. “This is a classic example of a company that’s reached a high profile in China and is now looking for brands that could do well on home turf,” says Corsini, who was involved in the deal. “Therefore they were not afraid of paying a high multiple, which the developed market might think looks aggressive. For them this is more about importing a brand and making it successful in China.”

African opportunities
There is another area of opportunity for the Global 50 outside BRIC. In many parts of Africa per capita consumption and economic growth matches or exceeds that of China, yet the markets lack the kind of well-established regional players of BRIC. However - save for brewers like Diageo and SABMiller, which have long -established operations in Africa - the market is still relatively untapped.

Just 15 of the Global 50 have material African interests outside South Africa, according to OC&C, although things are changing: Nestlé plans to invest CHF1bn (£660m) in Africa this year, in December L’Oréal opened a new Kenyan subsidiary and just last month Danone took a controlling stake in Morocco’s biggest dairy player Centrale Laitière.

More African activity is on the cards. “Players are able to introduce products and product categories that didn’t really exist in Africa previously,” says Hayllar. “Household and personal care products are particularly interesting. Moving in the with the right products and right strategy will be important as people begin to afford detergent and tooth paste and things like that.”

As Africa grows, so do the opportunities for companies based in relatively affluent South Africa. Chief among them is Tiger Brands, which turned over $2.4bn last year (up 5.8%) after making a series of acquisitions. Just as Taiwan’s Tingyi and Wahaha capitalised on the huge growth on their doorstep to dominate the Chinese market, Tiger is aiming to derive 20% of its medium-term growth from Africa in coming years.

The lure of markets like this will continue to grow as organic growth becomes harder to come by in the developed markets of Europe, the US and Japan. Since hitting a peak of 17.6% in 2007, the Global 50’s operating profit margins have steadily declined to 15.8% in 2011, reflecting escalating costs, dampened consumer spending and increased competition in developed markets. “Many of the brands have had to promote more heavily to compete with value brands or private labels,” says Hayllar. “They’ve accepted some margin erosion to keep people loyal to their brands. If you look at P&G and Unilever, they have been more aggressive in promotions and P&G has been focusing on cost savings and investing those savings back into advertising. They are turning up the heat on each other. Where you only have a couple of large competitors in a market you have a recipe for that kind of dynamic.”

Examples abound. In Europe Coca-Cola’s Innocent juice brand extension is going head-to-head with PepsiCo’s Tropicana and private label offerings. “They’ve been promoting aggressively to try and build scale in a category they haven’t previously been present in,” says Hayllar. And it seems to be working. With a little help from new carafe-style packaging, Innocent Juice is now worth more than £34m in the UK [Symphony IRI 52 w/e 21 Jan 2012].

So-called ‘golden eggs’ - innovative start-up brands like Innocent that can create entirely new categories and deliver astounding growth (see box) - are a key way of kickstarting growth in the often sluggish West. OC&C suggests the fall in average deal value of Global 50 acquisitions, from $775m in 2006 to $268m last year, illustrates a growing appetite for smaller acquisition targets among the giants.

In their sights are brands with high growth but relatively low turnover, like Ella’s Kitchen, Dormen, Salty Dog and Genius. The incentives are clear. While organic revenue growth was healthy last year at 6%, up from 3.8% in 2010, the surge in growth is explained by commodity-driven price inflation being passed through to consumers, while deal value was at a nine-year low of $25bn.

“The deal slowdown could be a consequence of focusing on a fewer number of core brands,” says Hayllar, “but it has its limitations. It’s not that the power brand strategy is inherently wrong. But it does potentially reach a point where you can struggle to get the growth you want without buying brands you are able to build into the billion dollar brands of tomorrow or without new markets to achieve that critical mass.”