Insights
Elephants and mice :
A tale of two markets in 2022
As investors continue to ratchet up growth expectations in the coming years , the winning brands , big or small , will be those with a robust plan for growth .
BY ADRIAN JAMES
We are about to enter a market stage where there will be two distinct winners : The elephants and the mice .
The elephants are the first and second brands in their category . The mice represent the small new brands that the elephants can become afraid of at times . The last two years have brought the acceleration of many long-term consumer mega-trends : health and wellbeing , convenience , and digital adoption have all experienced five years ’ worth of growth in just two .
For our elephants and mice , how will 2022 play out ? During my conversations with a diverse range of leaders in the sector from marketing , transformation , and investment backgrounds , we agreed that there are three key factors influencing their performance : consumer mindset , playing both fast and slow , and managing scale .
1 . Two mindsets : trust and experimentation Nathan Birch , CEO of leading brand strategy firm Interbrand , reflected on a noticeable change in consumers ’ purchase behaviour when it came to brands during Covid-19 : “ What we have seen is , depending on the consumer and the category , one of two behaviours . In the first instance is a flight to trust , relying on the quality and consistency of the big , known brands . This could be partly because , during shortages , they were able to deliver and shore up supply chains , reinforcing the brand trust in consumers ’ time of need ,” he said .
“ The second was experimentation . Consumers bored in lockdown sought to try something new and different . This meant many small , new , and innovative brands saw significant adoption .” Birch ’ s observation touches on a growing trend : the winning brands are either the biggest or offering something unique – elephants and mice , with no middle ground .
2 . Two speeds : capital markets vs consumer markets Inspectors ’ growth expectations for listed companies are ever increasing and recently the growth rates of many portfolios within the major players have not been sufficient to meet these expectations . There is a demand for innovation . However , installing new , innovative brands takes investment , plus years to gain consumer trust and the scale necessary to make a material difference in portfolio performance . This results in a disconnect between investor expectations and the actual ability of the portfolio .
Rupert Pedler , a principal focused on consumer markets at global investment firm KKR , highlighted ongoing pressure from investors to ensure financial performance , and therefore valuation , is optimised through portfolio construction . High-profile activist investors have run prominent campaigns against large FMCG companies . High ongoing growth expectations have led to some businesses performing sum-of-the-parts analysis , questioning the performance of specific business units that sometimes trigger consideration of a separation or divestment .
“ In recent years , we have seen ‘ big food ’ divest portfolios where the current or expected future growth rate of a unit is lowering the overall performance , and where significant capital investment may be required to take the next step ,” he said . “ In some cases , this has established a series of smaller , but more focused , pureplay portfolios .”
Pedler cites the 2012 separation of Kraft and Mondelez and Unilever ’ s recent exit of its global tea business as relevant examples .
For our mice , both private equity and strategic investors look closely at which brands can make their new consumers sticky , looking for consolidation opportunities to establish new category portfolios . For example , Ayusha Amatya , a packaged food analyst at Euromonitor International , cites many requests to understand how more unique scale-up brands are performing and whether they have managed to demonstrate a degree of brand loyalty .
3 . Two scales : obsolete synergies and consolidation benefits
Simon Lowden , chief transformation officer at Arnott ’ s Group and former