LONDON- Self-preservation will force Unilever and Nestlé to bypass supermarket shelves. The duo are caught between grocers striking tougher bargains, new ways of shopping that make marketing less effective, and activist investors demanding fatter margins. Selling direct to shoppers is the inevitable but risky response. Consumer giants can no longer mass-produce products and sell them at a huge markup to retailers. Supermarkets are forcing down prices to maintain their own profits and growing less reliant on branded goods. Grocers’ own-label products now account for more than a third of all packaged food sales in the UK, Euromonitor data shows.
Startups, meanwhile, have become formidable rivals. Viral marketing helped dairy minnow Chobani corner a fifth of the U.S. yogurt market in a decade. The smallest companies captured 64 percent of growth in the U.S. market for branded goods in the five years to 2015, while the biggest took 4 percent, according to Bain analysts.
New challenges are emerging. Devices that allow consumers to shop online by voice, such as Amazon’s Echo, will make it harder to influence shoppers via marketing. And activist investors such as Third Point founder Dan Loeb have started holding big consumer companies to higher standards. Nestlé, Danone , and Unilever in 2017 raised their operating margin targets by roughly a fifth.
In the worst-case scenario, European consumer companies could see their operating margin decline by 45 percent over the next five years unless they address this array of challenges, Bain reckons. One solution would be to bypass retailers altogether. Major consumer goods producers can sign up to services such as INS that directly link consumers to manufacturers. They might also buy smaller competitors that already deliver to shoppers’ doors.
The strategy has risks. It would cause tensions with powerful retailers like Walmart and Carrefour, which still generate the lion’s share of manufacturers’ revenue. And boosting direct-to-consumer sales through acquisitions is expensive when valuations are high. Take Unilever, which makes just 3 percent of its sales online. To grow to the roughly 8 percent that Tesco manages, the Anglo-Dutch group would need to buy another 16 Dollar Shave Clubs based on the $1 billion startup’s estimated $200 million of sales last year. The price that will have to be paid may not be as high as the cost of inaction.
CONTEXT NEWS
- Nestlé, the world’s largest food company, aims to achieve an underlying trading operating profit margin of between 17.5 and 18.5 percent by 2020. Anglo-Dutch group Unilever’s underlying operating margin target is 20 percent.
- The two consumer companies’ operating margins rose to decade-highs of 15.3 percent and 16.4 percent respectively in 2016.
(Editing by Swaha Pattanaik and Bob Cervi)
© Reuters News 2017
Startups, meanwhile, have become formidable rivals. Viral marketing helped dairy minnow Chobani corner a fifth of the U.S. yogurt market in a decade. The smallest companies captured 64 percent of growth in the U.S. market for branded goods in the five years to 2015, while the biggest took 4 percent, according to Bain analysts.
New challenges are emerging. Devices that allow consumers to shop online by voice, such as Amazon’s Echo, will make it harder to influence shoppers via marketing. And activist investors such as Third Point founder Dan Loeb have started holding big consumer companies to higher standards. Nestlé, Danone , and Unilever in 2017 raised their operating margin targets by roughly a fifth.
In the worst-case scenario, European consumer companies could see their operating margin decline by 45 percent over the next five years unless they address this array of challenges, Bain reckons. One solution would be to bypass retailers altogether. Major consumer goods producers can sign up to services such as INS that directly link consumers to manufacturers. They might also buy smaller competitors that already deliver to shoppers’ doors.
The strategy has risks. It would cause tensions with powerful retailers like Walmart and Carrefour, which still generate the lion’s share of manufacturers’ revenue. And boosting direct-to-consumer sales through acquisitions is expensive when valuations are high. Take Unilever, which makes just 3 percent of its sales online. To grow to the roughly 8 percent that Tesco manages, the Anglo-Dutch group would need to buy another 16 Dollar Shave Clubs based on the $1 billion startup’s estimated $200 million of sales last year. The price that will have to be paid may not be as high as the cost of inaction.
CONTEXT NEWS
- Nestlé, the world’s largest food company, aims to achieve an underlying trading operating profit margin of between 17.5 and 18.5 percent by 2020. Anglo-Dutch group Unilever’s underlying operating margin target is 20 percent.
- The two consumer companies’ operating margins rose to decade-highs of 15.3 percent and 16.4 percent respectively in 2016.
(Editing by Swaha Pattanaik and Bob Cervi)
© Reuters News 2017
