There’s no way to truly cover off on the ins and outs of each of the world’s myriad economies in a single sentence, but generally speaking, global conditions for the fast-moving consumer goods (FMCG) industry remained positive in second-quarter 2018.
Some regions showed significant growth promise, while others showed a slight pullback from gains earlier in the year. With many markets experiencing notable increases in GDP growth, conditions were favorable for manufacturers and retailers. GDP growth, however, doesn’t always mean consumer spending will increase, particularly when inflation is rising.
In contrast to the growth in GDP across many markets, and perhaps reflective of inflationary concerns, consumer confidence around the globe dipped slightly in the second quarter, with the Confidence Board reporting a two-index-point drop in global confidence. That drop in consumer sentiment was reflected in a slight pullback in spending in certain markets, as skepticism about the future had some consumers feeling as though their free cash would be better served in savings rather than on discretionary purchases.
In some markets, growth is becoming harder to obtain, as is the case across the Western Europe’s largest economies, where GDP growth continued to slow in the second quarter. This meant that FMCG sales slowed for a second straight quarter, yet still posted 2.4% in dollar sales growth (down from 4.4% in Q1). GDP growth across Central and Eastern Europe was positive, but in many markets, such as Turkey, the Ukraine and Kazakhstan, inflation rates notably outpaced the economic strides.
We saw strong economic growth across Asia-Pacific as well, where GDP increased across all markets, evidence that U.S.-China trade tensions aren’t yet affecting the region’s economic scenario. As was the case in Central and Eastern Europe, however, the economic strength was countered by rising inflation (although not as notably). Interestingly, the countries with the highest GDP growth also have the most optimistic consumers. That said, however, 11 countries across Asia-Pacific experienced declines in consumer confidence, resulting in a three-index-point drop for the region overall.
In Latin America, where economic conditions have been unsteady in recent quarters, GDP grew nearly 2%, and researchers from BBVA Research project growth of 2.1% in 2019. While not as stable as other markets around the globe, the economic environment in much of Latin America is presently stable, flanked by moderate exchange rate depreciation, reduced political stress and lower inflationary pressure. These characteristics, however, currently elude Brazil, Argentina and Peru, where consumer optimism and general confidence levels are lower.
Regardless of region or market, consumers need to be at the forefront of all FMCG strategies. And that means manufacturers and retailers need to engage with and appease young, urbanized and digitally primed consumers.
Looking for regional- and country-specific insights? Our global Quarter by Numbers series has you covered. These quarterly reports combine macroeconomic data, consumption trends, spending patterns and market commentary to provide brands, manufacturers, businesses, marketers and retailers the insights they need to drive organizational growth.
Here, we look at overarching trends in select countries across our five regions.
HIGH CONFIDENCE AND A TAX HOLIDAY BODE WELL FOR THE MALAYSIAN FMCG MARKET
The second quarter of this year was a period of big change in Malaysia, notably because of a somewhat controversial general election in May, which brought an opposition party into power for the first time since the country gained its independence in 1957.
At the beginning of June, the new Pakatan Harapan (Alliance of Hope) government delivered on its campaign promise to abolish the goods and services tax, which will be replaced by a new sales and services tax on Sept. 1, 2018. This, in turn, effectively gave consumers a three-month holiday free of taxes. As a result of the government action, inflation dropped to a low 1.3% and food and housing prices fell as a result. Despite the consumer-friendly economic conditions, GDP, while still healthy, increased by 4.5% (lower than in previous quarters), likely due to fewer public investments. That said, however, consumer confidence, as reported by the second-quarter 2018 Conference Board® Global Consumer Confidence Survey, which is produced in collaboration with Nielsen, surged to an index level of 117, the highest it has been since the turn of the decade.
In addition to enjoying a quarter without taxes, Malaysian consumer spending during the Raya festival helped boost FMCG sales 7.1% for the quarter on a year-over-year basis. Food, along with health and wellness items, performed well, with both categories posting single-digit growth through the first half of the year. The beverage, grocery, household and personal care categories have also generated strong growth for manufacturers and retailers this year.
With lower prices for key consumables and consumers’ increasing demand for convenience, smaller-format stores continue to lead channel growth, largely taking share from hypermarkets, which is the only channel to see contraction over the past year.
Looking ahead, early indications suggest that the tax holiday will bolster FMCG spend. That said, however, Malaysian consumers may be reluctant to abruptly change their long-held spending patterns, which have been relatively static for the past few years.
Price, closely followed by quality, remain key drivers when it comes to Malaysian shopping decisions. As prices re-set in September, FMCG players will need to ensure that their promotional strategies are well advertised and executed in July and August to maximize volume sales ahead of the adjustment.
AMERICAN CONSUMERS ARE OPENING THEIR WALLETS FOR FRESH PRODUCTS
As with many markets, change has been prevalent across the U.S. in the first part of 2018. Despite being affected by an array of economic conditions in the second quarter, American consumers remain confident and they increased their FMCG spend by 0.7% on a year-over-year basis during the period. While less than 1%, the uptick represents an uptick of $1.3 billion in quarterly growth.
As with many markets around the globe, inflation is becoming a discussion item for the U.S. FMCG and retail sectors. In the second quarter, inflation was at 2.7%, flat with GDP growth, but up from 1.9% in second-quarter 2017.
In this inflationary cycle, consumers are clearly telling FMCG players that price won’t always deter purchase behavior. We can see this clearly in the fresh food category. Notably, inflation is rising, yet consumers are turning to premium fresh products—a trend that’s benefitting premier fresh grocery stores. And new buyers in this specialty fresh channel have driven the 4.9% year-over-year growth that we saw in the second quarter.
If this premium fresh trend continues, it represents a terrific opportunity to expand high-margin fresh sales (and other higher-margin products) to encourage repetition and adoption among new shoppers. There may also be an opportunity to push value products as a way to encourage increased spending on higher margin categories like fresh. That said, consumers aren’t willing to trade up across the board. Understanding where this expandability exists, and also where consumers are trading down to compensate, requires adoption of a total store, total food view of FMCG.
A HOT SUMMER FUELS FMCG SPENDING IN THE U.K.
Although the U.K. economy got off to a slow start this year, with a slowdown in GDP growth as a result of 12 months of price inflation, the U.K. economy remains strong. While slightly depressed from mid-2017, GDP stood at 1.3% in the second quarter, up from 1.2% in the previous quarter.
FMCG spending remained positive in the quarter and even accelerated later in the period as the region was hit by an unusually hot summer. FMCG value growth came in at just under 2%, down from 3.0% in the prior quarter. Despite the quarter-over-quarter dip, second-quarter 2018 value growth was notably higher than it was in the prior year period.
Notably, the uncertainty surrounding Brexit and the continued rise of energy and fuel costs have not yet deterred consumers’ retail spending. But that doesn’t mean British consumers are spending without concern for the future. To the contrary, consumers in the U.K. remain confident but cautious. They’re willing to be economical, but they’re not willing to compromise. Interestingly, many are safeguarding their grocery funding altogether in order to have flexibility to spend on discretionary purchases, such as out of home consumption, clothing and entertainment.
While there is still pressure on consumer wallets, we continue to see shoppers spend freely on indulgences, celebrations and events. The momentum we’ve seen in the first half of the year should continue in the second half, and we anticipate that FMCG growth to improve and sit close to 3%, with volume growth remaining positive for the remainder of the year.
FMCG CONDITIONS IN COLOMBIA ARE ON SOLID FOOTING
Unlike many markets around the world, Colombia experienced its lowest inflation rate since 2015 in the second quarter. This, coupled with the highest consumer confidence across Latin America and GDP growth of 2.5%, has consumers feeling positive about their personal finances, job prospects and spending money on things they want or need.
While these conditions bode well for a gradual recovery of the FMCG industry in the coming months, consumers remain focused on saving money for household expenses, buying less expensive grocery brands and eating out less. We see evidence of these behaviors across channel spending, as consumers are making larger purchases at less-expensive outlets, such as discounters and cash and carry (C&C) retailers. While these behaviors are typical across the region, some consumers are willing to pay a premium for items that offer extra value be it convenience, health, better flavor, functionality.
This behavior is evident in channel shares where large purchase trips are done in cheaper retail formats (e.g., discounters, C&C) and budgets are closely monitored in small trips with affordable products in Traditional Trade. However, there are still consumers who are open to purchasing premium products or willing to pay extra if the product or service offers something extra that they value—be it convenience, health, better flavor, or functionality.
As such, the opportunity for FMCG players, as in other markets, lies in understanding the key needs or solutions that consumers are willing to spend on.
KENYA’S ECONOMIC GROWTH STRENGTHENED IN Q2
Sub-Saharan Africa’s (SSA’s) economy picked up the pace in the first quarter of 2018*, with regional GDP increasing by 3% year-over-year, surpassing the 2.8% prediction by Focus Economics. However, at mid year, the full-year forecast for the SSA economy was revised down, with GDP for the region expected to grow at 3.4%.
Kenya’s economy is experiencing renewed period of confidence and strong GDP growth. Notably, a recent African Development Bank report projected GDP growth of 5.6% this year and 6.2% in 2019. Kenya’s economy is also more diversified than its regional peers, which has supported its growth over the past decade and given the country the ability to weather the most recent economic storms far more effectively.
In light of improved agricultural forecasts, declining inflation levels and a more stable political environment, consumers in Kenya are more optimistic about their futures. As a result, the consumer confidence index for Kenya increased two index points to 104 in the second quarter of 2018. The private sector has continued to bolster the economy, even though the pace of acceleration was moderate in the second quarter.
In addition to the optimism, consumers are shopping more, as grocery baskets increased in the second quarter, evidence that Kenyans are opening their wallets. The FMCG sector is rebounding, and sales improved in the recent period. Household and personal care categories led the growth. In terms of pricing, food and non-alcoholic beverages saw the greatest declines, while health care items saw the greatest increases.
Kenya is on the road to recovery; however, manufacturers and retailers need to take note of the shifting needs of the consumers and provide value for money offerings to sustain continued spend.
Source:Nielsen
