Challenges for chocolate FMCG in Russia 2012-15. MARS Company.

Challenges of Finance in FMCG for the next 3 years. Mars company.Mikhail Subbotin

1. FMCG chocolate market 2012-15

2. Key challenges for a confectionery FMCG player

3. The role of Finance in FMCG

4. Action plan

FMCG chocolate market in RussiaCAGR 2012 2015

Volumegrowth, %

5-7% 3-5%

Pricegrowth, %

3-5% 4-5%

• By 2015, prices will be rising faster than earnings.

• This is due to an expected increase in cocoa beans prices.

• => To sustain current profitability, we will need to exceed market dynamics in terms of sales, costs or both.

Source: KPMG

1. Market 2. Challenges 3. Role of Finance

4. Action plan

FMCG chocolate market in Russia

• Major consumer markets in Russia lag substantially behind the European level in terms of per-capita consumption

• => We have potential for further growth!

Source: KPMG


4. Action plan

FMCG chocolate market in Russia

• Apart from price dynamics, the development of non-chocolate snack alternatives (biscuits, wafers, candies) is slowing down the chocolate market.

Source: KPMG


4. Action plan

Product segments

• Snacking segments (chocolate bars and tablets) are expected to remain the most popular product categories in Russia.

• The development of chocolate snacks and non-chocolate alternatives means 2 major trends:

convenience and seeking varietySource: KPMG


4. Action plan

“Convenience”• Convenience means consumers are shifting from a “treat-

oriented” approach to a “snack-oriented” approach.

• => Although the average purchase size is declining, Snickers is somewhat an exception to the rule. The penetration index* of “Snickers Super” is 4% and of standard “Snickers” – just 3%.

• Incidentally, Mars is leading in the choco bar segment while the main rivals – Nestle and Cadbury – are left far behind.

* Meaning product was purchased at least once during review periodSource: ROMIR


4. Action plan

“Seeking variety”Ω omega shoppers. Consumers who

shop on habitual auto-pilot modeΔ delta shoppers. Open to new information, word of mouth, advertising, engaging in scrutiny mode shopping

Source: Nielsen


4. Action plan

Chocolate price

An opportunity:• A slower-than-

inflation chocolate price growth means that chocolate has a chance of gaining a larger share of the consumer basket,

BUT:• This doesn’t change

the fact that we will need to deal with an expected decrease in volumes growth rate through new products and cost management

Source: KPMG


4. Action plan

FMCG confectioneryRussia Confectionery Consumption (Mio kg) by Category, 2011–16

Russia Confectionery Market Value (RUB m) by Category, 2011–16

Although small in market share, in terms of both value and volume growth rates, gum will be the leading segment.

=> Wrigley acquisition will probably become a growth driver.Source: Canadean


4. Action plan

Trade channels development

Among the fastest-growing distribution channels are large Discounters, Hypermarkets and Cash & Carry stores.This means a leaner, more consolidated supply chain, but creates a basis for competition with private labels.

Source: GFK


4. Action plan

Market & price segmentation

Price segment share, % 2009 2010 2011

Low (<150 Roubles/kg) 6,3 6,6 7,2

Middle (150-290 Roubles/kg) 68,3 70, 1 74,3

High (290-390 Roubles/kg) 9,9 8,8 6,2

Premium (390-600 Roubles/kg) 10,9 10,8 9,7

Luxury (>600 Roubles/kg) 4,6 3,7 2,6

Although Mars is currently the leading ‘standalone’ manufacturer of confectionery in Russia, current trends indicate that competition is getting fiercer in the lower price segments.

This situation gives a relative advantage to domestic manufacturers and requires thorough cost-analysis and possibly new product solutions.

Source: acvi.ru, sibac.info


4. Action plan

Key challenges for a confectionery FMCG player for the next 3 years• A slowing down market with a decreasing average

purchase size while most ‘bite-size’ solutions not gaining much popularity

• A picky consumer, expecting value-for-money and seeking snack alternatives with an emphasis on healthy products

• Growing competition within the low and middle price segments as a result of overall price growth

• More hypermarkets and discounters means further pressure to lower prices. Also, we may face competition with private labels

• Attracting and retaining professional executives in a narrowing HR market


4. Action plan

The role of Finance in FMCG

Setting short-term goals

Setting long-term goals

Implementing


4. Action plan

What should we monitor?External sources:• macroeconomics (GDP, currency rates, land, fuel, raw

materials, packaging, income, employment etc.)• market dynamics (value, volume, types of product,

consumer, distribution channel)• competitors (product performance, ad budgets)• our own suppliers and distributors (on-time delivery with

minimal waste)

Internal sources:• our sales (across various products)• our costs (materials, labor, logistics, marketing,

advertising)• our profitability• our assets (both current and fixed)


4. Action plan

What should we control?• Our profitability margins (total and across business segments

and individual products) – to see how each business sector and product performs

• Revenue dynamics in relation to market dynamics – to benchmark our performance against competitors

• Our costs, both direct and indirect, and their dynamics in relation to revenue – to see what factors are driving up the costs, thus decreasing profits

• Our investments, the assets we own/purchase and their yield (ROI, ROA)

• Working capital turnover ratio -> max. A MUST in FMCG.

• The amount of FCF available to further finance our activities


4. Action plan

What should we plan?• Realistic KPIs based on all the indicators that we control

and our previous performance

• Select our best performers and optimize product assortment so as to maximize profits (for the foreseeable future, our best performers value- and volume-wise will be choco bars & tablets, but gum indicates the strongest growth)

• The financials of new product launches

• New ad & promotion campaigns, having thoroughly studied their effectiveness and competitors’ experience

• Expand our supplier & distributor network so as to maximize financial and operational independence


4. Action plan

Challenges for chocolate FMCG in Russia 2012-15. MARS Company.

Business

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