The fallout from the war in Ukraine coupled with lingering global supply chain disruptions from the pandemic and natural disasters have all contributed to increased prices and inflation in the fast moving consumer goods (FMCG) industry.
While historically the MENA region has been attractive for FMCG companies, today’s “unprecedented inflation environment,” has led to consumers changing their spending habits in an effort to adapt to the increased prices, explained Faisal Sheikh, partner at Bain & Company Middle East.
Speaking exclusively to Arabian Business about the new report the consulting company had recently released on the region’s FMCG companies, Sheikh further discussed the increasing prices on consumer goods and how companies can manage this challenge and manage their supply chains.
Could you comment on the supply chain disruptions currently impacting the global FMCG industry?
Covid-19 wreaked havoc with global retail and consumer goods supply chains, exposing critical shortcomings.
Companies with supply networks designed for maximum cost efficiency were unable to respond quickly to sudden shocks and demand spikes thus the price of efficiency came at the cost of resilience.
Disruption has hit supply chains at a moment of rapid change for the industry. Even before the pandemic, retailers and consumer goods companies were grappling with a dramatic rise in customer expectations. Big retailers like Amazon and Walmart have been steadily raising the bar on the speed of shipping, adding to the urgency to improve network speed and agility.
Well before Covid-19, as they grappled with increasing customer expectations and a series of disruptions from natural disasters and escalating trade barriers, retail and consumer goods leaders were beginning to see the limitations of their cost-efficient yet rigid supply chains. When the pandemic paralysed global supply chains, it concurrently triggered a massive surge in online sales – a double shock that few retailers and consumer goods companies were prepared to handle.
Many companies, for example, struggled to adapt when employees were forced to work from home. Some had operating models that allowed them to quickly train and redeploy idled workers to other crucial areas, such as moving retail-store floor employees to e-commerce fulfilment roles. But many others floundered. Nowhere was the lack of resilience more obvious than in supply chains. Boards and executive teams are now taking a hard look at the lessons learned.
Traditional supply chain management has been all about streamlining, but the pandemic exposed the risk of a narrow focus on cost efficiency at the expense of customer convenience, concentrating supply with one or two large sources and limiting buffer capacity. Our study shows that the share of executives rating cost efficiency as one of their top two supply chain goals fell by 13 percentage points, while agility rose by 24 percentage points.
The recent trends in raw material price inflation is putting significant pressure on FMCG companies in the region. We don’t expect the price inflation to recover in the coming months, and companies will need to deploy a new set of strategies to mitigate the raw material price inflation. These strategies will range from optimising costs, shifting product mix, and potentially passing on pricing to consumers.
Which segments have the highest complexity and who was able achieve profitable growth?
Historically, the MENA region has been one of the most attractive regions for FMCG companies, and companies enjoyed fantastic growth with double-digit growth in consumer spending, high GDP growth, low inflation, high per capita disposable income, after which growth of the GDP slowed and consumer spending decreased due to expats leaving the region around 2015 or 2016, putting FMCG companies under pressure and forcing them to resort to low prices, resulting in low profitability.
Today, there is an unprecedented inflation environment, with the risk of a shortage of certain products. The prices of raw materials have also increased, resulting in a negative impact on prices for consumers.
The pandemic helped FMCG companies as there was a change in consumer behaviour, with consumers spending more time with their families at home. Food companies did well, and sales of packaged foods increased.
Similarly, categories that pivoted to e-commerce have also done well. Surprisingly, other categories like luxury items have rebounded quicker than expected as consumers shifted other discretionary spending (e.g. travel) to electronics and luxury items. With the opening of the economies in recent months, we see consumer behaviour slowly resemble pre-pandemic behaviours, although we don’t expect them to fully revert.
Cloud kitchens have seen an exponential growth in the region. Do you think they will be able to sustain their business model for long?
Cloud kitchens have resulted from the convergence of the on-demand and sharing economies, with food preparation costs lowered, delivery time and costs reduced, and overheads like rent and utilities greatly decreased, while delivering exactly what people want, when they want, fast.
The cloud kitchen industry is currently booming, especially as more customers, and mainly millennials, are opting to order in instead of dining out, in a world that is still recovering from the pandemic.
Cloud kitchens rely on the population density of cities, and with Riyadh and Jeddah being the two most populous cities in the GCC, the kingdom can be expected to play an important role in determining the size of the region’s market. Saudi Arabia’s cloud kitchen market is thought to be growing at such a hurried pace that the total addressable market for Saudi Arabia alone will be larger than that of all five other GCC nations put together by 2025.
The global cloud kitchen market is projected to touch $2.63billion by 2026 at a compounded annual growth rate (CAGR) of 17.2 percent, from as low as $650m in 2018. This will be supported by the rise of online food delivery applications and the growing use of mobile and smartphones for food orders.
What health trends did the report identify?
Consumers in the region care about health, affordability, and taste, and are more satisfied by convenience and e-commerce but less satisfied with taste and freshness.
Based on our research, approximately 69 percent of consumers in the UAE and 63 percent in Saudi Arabia are willing to put a premium on quality and pay more, especially when it comes to health benefits. Nearly 75 percent of UAE consumers have purchased a healthy alternative while shopping, 33 percent have purchased an organic product, and 23 percent chose to buy a sugar-free alternative.
This health and wellness trend is driving growth in many categories, such as milk and tea, where health-promoting offerings are growing much faster in relation to the overall category.