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Source: Alpha Workshop
Note: The information in this report is sourced from public materials and does not constitute investment advice. FMCG giants' supporters believe that the five-dimensional moat of "brand, capital, channels, products, and talent" built since the 19th century will never be crossed by latecomers. But today, we observe that the moats of FMCG giants are on the verge of collapse. Stock prices are a signal worth considering. Among the top ten FMCG giants, compared to five years ago: Anheuser-Busch InBev is down 23%, Kraft Heinz is down 47%, and Philip Morris is barely maintaining its rise with a "strong breath" at the beginning of the year. (Click for larger image) The above chart shows the stock performance of the top ten FMCG giants: Nestlé (PINK:NSRGY), Procter & Gamble (NYSE:PG), PepsiCo (NASDAQ:PEP), Unilever (NYSE:UN), Anheuser-Busch InBev (NYSE:BUD), Coca-Cola (NYSE:KO), Tyson Foods (NYSE:TSN), L'Oréal (PINK:LRLCY), Philip Morris (NYSE:PM), and Kraft Heinz (NASDAQ:KHC). Obviously, everyone underestimated the speed of the wheel of the internet age. The three core magic weapons of FMCG—"advertising, channels, and extended product lines"—are being rapidly exiled by the internet and the generation that grew up with it. At the same time, changes in performance will have a profound impact on valuation logic, and this trend is independent of human will. Even a newbie like Buffett stumbled on Kraft Heinz, which has fallen 64% from its February 2017 high, losing $18.8 billion. Old Buffett said, "Changes in consumer habits make companies like Kraft Heinz and Coca-Cola not as good as they used to be." I can't help but think that a generation's youth has passed, and their faces have changed beyond recognition. Although they still talk and laugh as before, it's not hard to see the changes time has brought to everyone—"Youth" 01 The Three FMCG Magic Weapons Twenty Years Ago Twenty years ago, the business model of FMCG was simple, relying mainly on three magic weapons: overwhelming advertising, seamless channel coverage, and infinitely extended product lines. 1. Overwhelming Advertising FMCG companies' heavy investment in advertising constantly educated and changed consumers. The latter imitated everything in the ads: using Pantene = becoming a silky beauty, using shaving foam = becoming a sexy uncle (which was still in demand back then), drinking Coca-Cola = entering the Olympics and winning glory for the country. Companies like Kraft Heinz and Coca-Cola educated consumers through frequent advertising bombardments, quickly trampling small consumer goods companies that lacked sufficient capital for advertising and marketing. This even accelerated the development of advertising agencies as an ancillary ecosystem. (Coca-Cola's era advertising) 2. Seamless Channel Coverage Penetration rate is one of the core KPIs for all FMCG companies: penetrate every region, every store, make your products ubiquitous, and ensure consumers can see them anytime. To increase penetration, refined operations are needed: details such as how many stores to distribute to, store share, shelf share, and whether there are exclusive sales agreements need to be considered. Doing these well also blocks competitors to some extent. In this industry, there is no such thing as "PPT consumer goods." You can claim to have a super product, but if you can't reach consumers, you are zero in the eyes of competitors—no threat at all. (Fanta, a Coca-Cola brand, on shelves in a rural North Korean store) 3. Infinitely Extended Product Lines After occupying consumers' minds through advertising and channels, FMCG giants use continuously extended product lines to create stickiness: Adding new flavors: Coca-Cola has classic, Zero, cherry, vanilla, etc.;
Adding similar products: Procter & Gamble's shampoos include Rejoice, Pantene, Head & Shoulders, etc.;
Updating packaging: super-large packages with more product at the same price, super-small packages for a refined life;
Changing brand logos to further highlight individuality and keep up with consumer preferences as much as possible. (Procter & Gamble's shampoo brands) FMCG giants even "counterfeit" new products. Again, because they have sufficient scale to amortize R&D costs across product lines, they prevent companies coveting the FMCG throne from making a move. 02 The Terminators of FMCG Giants All conditioned phenomena are like dreams, illusions, bubbles, and shadows. The seemingly unbreakable and invincible three magic weapons of FMCG have been dismantled in the internet age. The exponentially multiplying internet information infinitely disperses consumer attention. In the past, entertainment meant watching TV and seeing ads—yes, ads were longer than the programs. Now? The internet connects people and information, and people have more entertainment options: At 19:00, the golden time for ads, the elderly are square dancing;
Young people are gaming, watching short and long videos, live streaming, and on Weibo, with endless pastimes;
Women are browsing Taobao Live and chasing anime on Bilibili;
As for middle-aged men, they don't control the family finances, so we won't introduce them—let's just say they drink a little and go to bed. (Entertainment for young people) Invisibly, the time ads reach users is excessively diluted, and the overwhelming advertising offensive is dismantled. But this is just the beginning. Various powerful internet e-commerce platforms serve as entry points, and in terms of shopping experience, they completely beat offline stores. Think about it: you save time searching for products, avoid the time wasted by the mall's layout (buying water on the first floor, paying on the third), and avoid queuing at the cash register. On the other hand, e-commerce search engines as entry points have overturned the shelf arrangement of traditional supermarkets. E-commerce uses algorithms to recommend "suitable" products, which to some extent dominates consumer preferences, further making seamless channel distribution less important. If the above two points are just "uncomfortable" for FMCG giants, then the following point is a bit "miserable": the abundance of products provides almost unlimited choices, making consumers' personalized needs increasingly strong. Alibaba's philosophy of "making it easy to do business anywhere" has built a "long-tail" e-commerce platform, which aligns with the shift in consumption concepts from scarcity to surplus. Personalized needs have been completely ignited, and purchasing behavior has become extremely fragmented. This is the era of B2C, and also the era of S2B2C, but the future belongs to the era of C2B—producing according to consumer demand. (So-called personalization: you play with your smart speaker, I use my Mao King radio) The gradual fragmentation from information to channels to demand constitutes the dissolution of the original competitive advantages of FMCG giants: brands inevitably age over time. What a brand originally conveyed to consumers was stable emotions based on fixed behavioral habits. If behavioral habits change, then everything that once existed is terminated. 03 Irreparable Valuation From the perspective of discounted cash flow valuation, the main drivers of FMCG valuation models = sales growth * pricing growth. Demographics determine that the ceiling for FMCG sales is limited, after all, the number of consumers and consumption volume cannot grow indefinitely, especially since multinational FMCG giants have already covered the global market. Therefore, what determines the market value of FMCG giants is brand pricing power, and pricing power is facing severe challenges. The foundation of the original business model is unstable, which first leads to the loss of brand pricing power. Brands that were all the rage ten years ago: Apple had to adjust prices and promote after overpricing in Q4; this is not surprising, as the generation of Apple fans who believed in Jobs will eventually grow old;
The generation that loves Budweiser beer, aged between 18 and 38, is decreasing at a rate of 2% per year. Replacing them is the rise of new-style spirits and craft beer markets;
The Americans who once fought over the Coca-Cola formula and took to the streets to defend the classic are also decreasing each year. Sugary drinks are being demonized as a whole, and carbonated drinks are considered extremely unhealthy products. Thus, if a company's products are partially replaced by long-tail products in the internet age, and pricing power continues to weaken, then in discounted cash flow valuation, the assumption of business continuity must be very conservative: A company whose profits may decline within ten years versus one that continues to grow (or stays flat)—corresponding to the decline and maturity stages of a company's life cycle—has a world of difference in valuation systems. Facing declining pricing power, stagnant or even shrinking sales, and difficult-to-control costs, the future outlook for FMCG giants is more or less under pressure from unfavorable growth. That is why Kraft Heinz's management decided to cut dividends. However, the fund companies that originally bought these FMCG giants were attracted by their good and stable dividend history. Therefore, the huge divergence led investors to vote with their feet, and Kraft Heinz's $80 billion market value went up in smoke. Oda Nobunaga said, "Life is fifty years, like a dream. Is there anything that is born and does not perish?" The brilliance that Kraft Heinz and many FMCG giants once created, and the predicament they now face of fading youth, is exactly the reality every investor must face: the world stays young, but you have already grown old. -END-