The FMCG cost optimisation playbook

Sluggish economic growth in some of the world’s major economies had a significant impact on material costs. This situation has led to a phenomenon known as shrinkflation, where Fast Moving Consumer Goods (FMCG) companies adopt strategies to mitigate rising production costs by reducing the size or quantity of their products.  

FMCGs, particularly those that do not sell directly to end-users, typically have multiple distribution channels, including supermarkets, wholesalers, and retailers. In the current operating environment as they try to protect margins through shrinkflation, their margins may become even tighter as intermediaries usually take a cut of the purchase price.  

Four key levers to combat margin erosion  

Margin erosion can be caused by a number of factors, including the pricing strategies of existing or new competitors seeking to gain a greater market share. In addition, the competitive landscape is intensified when products are displayed alongside competitors on store shelves. In such scenarios, FMCG companies can turn to four key levers:  

• Cost optimisation: Streamline costs in the manufacturing and distribution processes.  
• Distribution optimisation: Significant spending occurs during the distribution of products from factory gates to store shelves. Optimising this aspect can lead to cost reductions.  
• Price maximisation: This involves clever pricing strategies, high marketing spend, strategic product placement, and in-store promotions.  
• Volume maximisation: Sales volume can be increased through high product availability and attractive discounts such as “2-for-1” offers.  

By using these four levers, FMCG companies can better address the challenges of shrinking profit margins and fierce competition in the marketplace. This article examines three aspects of the cost optimisation lever only.  

Achieving cost optimisation  

Identifying cost saving measures at each stage can contribute to overall profitability. Three primary cost optimisation measures are outlined here: 

1. Procurement 

Assessing the pain points of procurement is necessary to learn how to improve. When starting a procurement analysis, consider these two aspects:  

• Reduce unit costs: This applies to both commodity and bespoke products and can be achieved through partnerships and extended agreements with preferred suppliers.  
• Reduce the absolute amount purchased: This can be achieved by improving control over forecasting and inventory levels throughout the supply chain.  

When conducting a procurement analysis, FMCG companies will often spot the following gaps:  

• A lack of or poor adherence to, a competitive quoting process. Sometimes, companies choose to deal with familiar contacts because they believe it is easier.  
• Irregular price reviews long-term contracts, allowing suppliers to pass on unjustified inflationary increases that are not justified by the market.  
• Incomplete or outdated supplier lists, leading to repeated engagements with the same, limited group of suppliers, while neglecting potential newcomers.