The FMCG marketplace has faced some profound changes in the Australian marketplace over the last couple of decades, which we have all seen with the decline in manufacturing and broader Australian governmental shift to a services-based economy.
Having spent close to 20 years in finance, most of which has been within the FMCG, retail and manufacturing industries, I’ve witnessed first hand this transformation and similarly, witnessed the never-ending death by a thousand cuts around promotional planning, trade spend, price investment and the ongoing rubber bands of back and forth strategy.
We hear a lot of media about price inflation/deflation and the strategies that key retailers play in the market in driving consumer foot traffic and market share. But there is a key to unlocking profitability that does not get the airwave it should. Large corporates like Amazon and Toyota are a testament to this ‘key’ and strategically where they have focused to drive profitability for the long term.
Supply chain – the key to long-term value
Intentionally or forcibly, most FMCG organisations in Australia have had to evolve into the import and distribute model, yet their influence on their brands in the marketplace wanes. With so many brands, suppliers and the growing impact of private label, what are these organisations left with strategically? It is the effectiveness of their supply chain and the opportunity to build longer-term strategic partnerships with key retailers.
Stay with me now.
What is a key issue facing retailers? Inventory. Too much or too little. Quality and wastage. Woolworths and Coles have a combined turnover in the vicinity of more than $75b, so the opportunities for releasing stock in the network has a huge opportunity to invest back into the business.
Comparing this to, for example, the automotive industry that generally operates under a pull replenishment model, leading to just in time manufacturing. If FMCG could move more towards a just in time environment the opportunities, particularly around perishable products, would be profound.
And whilst you may be thinking all this is obvious, let me take this a step further. Coming back to supply chain, the Australian retailer operates in an environment with a myriad of suppliers vying for the same shelf space, brand awareness etc. It’s like an episode of Game of Thrones with a long-term play in the red ocean, using historically blue ocean strategy. Range deletions, NPD, private label – these are all minutiae strategies in the context of the competitive marketplace and positioning businesses for, or to be at risk of, disruption.
If FMCG could move more towards a just in time environment the opportunities, particularly around perishable products, would be profound.
The retailer-supplier relationship here is fundamental in transforming the value chain. The moves by Coles and Woolworths on re-establishing trust with suppliers is a counterbalance to years gone by of gouging suppliers to maintain margins in the face of short-term priorities. Let’s be real, there is little real trust here. While the recent trends to improve these relationships are a step in the right direction, they are chipping at the edges of what will transform and lead the inevitable consolidation in the marketplace. Peel away the perception of say ALDI as a price-focused destination and in reality, strategically here is a business model based on simplification – smaller SKU range based on strategic supplier relationships. The lower complexity provides scalability.
Is vertical integration compelling again?
So is greater vertical integration/partnerships key? How do FMCG businesses in Australia partner to consolidate their distribution and supply chains to deliver economies of scale beyond their brands? Fundamentally, this is Amazon. They are less a brand-oriented company and more a distribution and supply chain business. The drone deliveries are coming!
This supply chain and distribution network, along with technology and innovation is the disruptive potential that will shape the winners and losers over the next 10 years.
Some key thoughts to ponder
- Australian FMCG businesses effectively continue to operate in silos across retail, brand, logistics in managing the value chain to the consumer
- The current views of enhanced retailer-supplier relationships are a step in the right direction, but simply are repairing issues of the past and the industry has made little real progress in a shifting landscape
- Focus on retail price, while creates great media attention, does little overall in enhancing the effectiveness of the Australian FMCG value chain
- The disruption will come from who is boldest in strategically establishing the supply chain into the Australian marketplace across brands/suppliers in driving economies of scale and leveraging the global economy.
So, are our retail heavyweights in Woolworths and Coles just copying what our global counterparts have done? Building stronger supplier relationships are great for business but does it go far enough to invest and collaborate with key suppliers in a true partnership?
My realisation – who will be a winner or loser!
The Australian retail landscape is a vehicle, a platform for brands to be distributed. Focus on retail pricing will only do so much and it is an endless game of cat and mouse. The opportunity to create real value and position for long-term strength is in the distribution model and the value of the supply chain in connecting product/service to the consumer.
The question here is are our Australian businesses truly ready to collaborate?
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