Consumer confidence was fragile even before the introduction of tariffs by the US. But now, visibility for fmcg CEOs is close to zero.
Consumers are reading headlines every day about tariffs causing another bout of massive inflation. Having barely recovered from the record inflation and knock-on impact to grocery pricing over the past few years, many consumers feel short-changed and under constant attack. These tariff headlines are only likely to further erode their confidence.
Shoppers hunker down
Many consumers were already in ‘hunkering down’ mode, which meant volume growth was hard to come by in 2024 for most fmcg peers. The early signs are that 2025 is shaping up to be just as challenging.
The short-term picture for consumer disposable income is probably a bit more nuanced, thanks to lower oil prices and the prospects of lower interest rates. However, fearful consumers are more likely to save than spend, and when they do spend, it will likely be more focused on essentials.
The risk now is that middle to lower-income consumers won’t be the only ones to feel the squeeze. Higher-income consumers are also seeing wealth eroding due to falls in stock markets and higher living costs. The big threat on the horizon is the very real prospect of a US recession and a prolonged trade war between the two largest economies: the US and China.
‘Educated guess’ territory
Companies will navigate through Q1-25 results in the next few weeks, but this reporting period is already backward-looking. Trying to set guidance for the balance of the year will be more of an educated guess and there is little incentive to be bold. It is just as likely some fmcg companies may choose to withdraw guidance altogether, or at least until the tariffs picture gets a little clearer.
Longer term, fmcg CEOs will need to focus on controlling the controllables in a rapidly de-globalising world. Although the situation is very different today, dusting down the great financial crisis and Covid playbooks may offer up lessons of how fmcg companies can try and adapt quickly.
We suspect this is likely to mean reassessing supply chain agility globally, possibly moving towards more local production. This process already started for many post-Covid, but for the laggards, they will need to catch up fast. Capex will also need to be scrutinised more closely, and we expect many decisions to be postponed until there is more clarity.
CFOs will need to think about cash and balance sheet management as well as risks around employee pension pots and possible P&L volatility. We expect a lot of M&A activity – both disposals and acquisitions – to be postponed, so companies will need to largely work with the portfolios they have and rein back their ambitions on this front.
Pricing & promotions
It may also be tempting to limit advertising spend and push the promotion lever harder at a time where affordability remains front and centre of consumer worries. For some companies, this might be the right choice. But for others, it could be a mistake.
Compelling innovation that really cuts through with consumers will become even more important, but with wallets squeezed, the bar for what is compelling only goes up. Me-too imitations are unlikely to cut the mustard.
In general, pricing should pick up in the balance of the year. Inflation hasn’t gone away – whether it is raw material, currency or salary driven. Procurement teams will need to be nimble and make the right calls around when to lock in raw material prices. Ultimately, companies need more of a buffer. So it would be prudent for management teams to look for savings and eliminate costs at quickly as possible – there is only so much consumers will pay for.
The key thing is understanding where consumers are going as they navigate these tariff and inflation headlines. Companies are doing too much navel-gazing and scenario planning around tariffs. Those who lose sight of the consumer could become unstuck. For now, unemployment rates remain modest, but in a scenario of a US recession and a spike in unemployment, this is when consumption habits can really change.
No one knows the future, but right now agility and optionality are crucial for fmcg companies. Staying laser-focused on the consumer, while building real portfolio resilience, has never been more important.
Warren Ackerman, head of European consumer staples research at Barclays
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