Deflation stalking FMCG firms but consumers win
It's a tough time for marketers working for manufacturers of fast-moving consumer goods (FMCG), not just in Ireland but around the globe. For most of them, particularly those supplying their wares to the cut-throat retail sector, growth has been at best sluggish and at worst non-existent.
In the USA, for example, sales of FMCG goods at bricks-and-mortar retail stores for the first quarter of 2017 were nearly $3bn (€2.7bn) lower than in the same period in 2016. While some of this decline is attributable to consumers shifting a chunk of their shopping online, a large part of the blame can be placed on the deflationary pressures that have ominously gripped hold of large chunks of the FMCG market, leading many of the big retail names into what seems like a zero-sum battle for the wallets of shoppers.
It's also being reflected in the share prices of many FMCG manufacturers around the world as the struggle to become more innovative and cost-effective gathers pace. For many of them, however, battling the deflationary pressures within the market is an uphill struggle.
Deflation has also hit these shores, with FMCG manufacturers in both Ireland and the UK feeling the pinch. According to figures from research firm Nielsen, the value of FMCG sales in the Republic of Ireland were up a modest 1.5pc in the year to date, to €16.4bn.
This compares with £150bn (€171bn) in the UK, a 1.4pc increase, while in the North the market was up 3.7pc to €3.7bn.
While the volume of FMCG sales in the Republic were also up by a modest 2.7pc, according to Nielsen, when it came to across-the-board actual prices, the deflationary impact can be seen in an overall 1.3pc decrease.
And if you strip out the impact of the price hikes in a pack of cigarettes, this deflationary trend points to a 1.9pc decrease.
So FMCG marketers have every reason to be concerned.
Although economics and marketing often make for uncomfortable bedfellows, it's probably fair to say that deflation is also an enemy of marketing as it forces many brands to cut back on their advertising and marketing spend, often to focus on more short-term tactical initiatives like one-off price promotions, generally at the behest of a retailer which is calling the shots and waging its own war against competitors on a completely different front.
Unfortunately, short-term strategies are all too common in marketing and advertising these days and they have the potential to undermine the long-term health and growth of established brands. This is one of several reasons why many big, often global, brands, are finding it extremely tough to grow their sales in a meaningful way.
A quick look at Nielsen's AdDynamix figures, for example, shows the impact that deflation has on advertising spend in the Irish market. According to the figures, advertising spend by FMCG manufacturers in Ireland is down by around 3pc year on year. This compares with an overall increase in media spend of 6pc for the market.
What is interesting, however, is that these all-powerful retailers, on which these global brands depend, have significantly increased their advertising spend this year, with Nielsen's AdDynamix figures pointing to a 13pc increase year on year.
Open a daily or Sunday newspaper or switch on a TV at peak times and you will more than likely find several advertising campaigns from the country's leading retailers, all vying for the attention of shoppers and most of them using price and value to drive footfall to their stores.
In fact, this has been one of the key drivers of growth for the two German discounters, Aldi and Lidl, which have used a combination of price, effective advertising and strategically located stores to grow their businesses in recent years.
Again, dipping into Nielsen's AdDynamix figures, it would appear that the two German discounters are setting the pace when it comes to advertising and they have continued to step up their moving annual total advertising spend over the past few years.
According to the Nielsen figures, this was up by 12pc and 23pc respectively and compares to 26pc for SuperValu, 2pc for Tesco and 3pc for Dunnes. Not surprisingly, the latter three retailers have also stepped up their investment in advertising as they try to fight back against the discounters who are slowly nibbling away at their market share.
But the deflationary pressures that are wreaking havoc on the bottom line of FMCG manufacturers are also attributable to the rise of private-label goods and the Irish consumer's fixation on value, a trend which gathered considerable momentum during the recession and has shown no signs of abating ever since.
With private label now accounting for as much as 54pc of all goods sold through Irish retailers, this is yet another reason why FMCG marketers should be concerned. And if it heads in the direction of 60-70pc, as it is in other markets, panic buttons will be pressed more forcefully than ever before. Across some categories, a race to the bottom could ensue.
But the flip side to all of this talk about deflation is that the cost of the average weekly shop for consumers is less than it was 12 months ago - and that can only be a good thing.
Sunday Indo Business