Fast Moving Consumer Goods (FMCG) markets have been through a category polarization process for years, increasing the distance between premium and value extremes. Several factors are driving this trend — better pricing transparency, changes in buying patterns, increased access to product information and so on. But perhaps the most influential factor has been the increasing wealth inequality being experienced in many consumer markets around the world.

Many of these factors — wealth inequality in particular — have been exacerbated by the recent pandemic and subsequent inflationary pressures. History suggests this has often been the case: similar trends emerged after the 2008 financial crisis, for example.

Yet regardless of the reasons, the implications of this market polarization for consumer goods companies are real. We expect to see significantly increased levels of divestment and acquisition within the industry over the next few years as a result.

A KPMG Global report entitled ‘Market polarization: The implications for FMCG companies’ explores how leading consumer goods companies are reevaluating their portfolios. It identifies the sectors and subsectors most likely to see heightened divestment and acquisition activity.

The disappearance of the middle class

Globalization may have lifted tens of millions out of poverty. Yet it has done little to slow the rising inequality between the top 10 percent of earners and the bottom 50 percent. 

Even before the global pandemic, inequality was rising sharply in some markets. Since the mid-1990s – when comparable data started being collected – the gap between the low- and high-income classes has widened, with wealth becoming increasingly concentrated.

Unfortunately, previous experiences show how inequality tends to spike in times of crisis. During the Global Financial Crisis of 2008, sharp job losses and high inflation rates led consumers to seek out lower prices, fueling the growth of what’s known as the ‘mass market’. More recently, the COVID-19 pandemic created an even deeper shock to inequality levels. The post-pandemic period has only made matters worse.

The disappearance of the mass market

As this gap in income equality widens, markets are seeing the emergence of new customer segments with significantly different purchasing behaviors that gravitate around two polarized segments: ‘Premium’ and ‘Value’. 

For FMCG companies, the main challenge lies in the fact that these segments have significantly different business and operating models. While Premium brands usually require sophisticated distribution channels and complex marketing strategies, Value products are mainly driven by cost discipline and economies of scale. 

How to grow in a polarized environment

Premium products generally deliver higher margins when compared to their value equivalents. At the same time, the value segment often enjoys a much larger addressable market. A quick look at a ‘basket’ containing different food items clearly shows how premium products deliver higher margins when compared to their value equivalents. Products classified as ‘organic’, for example, tend to deliver higher growth rates than non-organic.

This dichotomy has led many consumer goods leaders to strive to create product portfolios that contain some combination of both premium and value segments. The premium segment represents an opportunity to penetrate fast-growing markets with higher levels of profitability, and value products are key to increasing the existing customer base and enabling economies of scale.

Investors want to go premium

The KPMG analysis suggests that companies with higher shares of premium products among their product portfolios performed better in the capital markets. Indeed, between 2018 and 2022, those ‘premium-oriented’ FMCG companies saw their share prices rise by an average of 89 percent, while those more focused on value products enjoyed an average rise of 4 percent for the same period.

Taking a closer look at the financial data, what investors really seem to be looking for are sustainable growth rates of more than 3 percent per annum and EBIT margins above 15 percent. Miss those targets and – based on the historical data – investors will punish you. 

Divestments, acquisitions and portfolio management

In this environment, FMCG players will likely try to reevaluate and actively manage their product portfolios to ensure the right mix of premium and value to drive growth and deliver investors´ expected returns. We can expect the years to come to bring increased activity in the deal space, with many companies divesting their non-strategic and underperforming assets while looking to acquire attractive brands in promising, fast-growing segments.

Next steps: Maximizing investor value in a polarized world

Our team of consumer and retail professionals has worked on both buy and sell sides of the table. We’ve helped FMCG companies reshape their product portfolios through divestitures and acquisitions, and we’ve helped investors make savvy deals that create new value and unlock growth opportunities.

The excerpt was taken from the KPMG Thought Leadership publication:

© 2024 R.G. Manabat & Co., a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

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This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity. The views and opinions expressed herein are those of the author and do not necessarily represent KPMG International or KPMG in the Philippines.