"The better you do, the more is expected and this is proving so in the fast-moving consumer goods (FMCG) sector, where South African companies have historically delivered excellent shareholder returns," says Borchardt, following the completion of a detailed shareholder value analysis of the sector.
The Accenture analysis benchmarked the total return to shareholders of seven listed South African FMCG companies against their global peers and the JSE All Share index. It also analysed the premium that investors were placing on these companies in terms of future growth expectations.
"Based on share price, the South African FMCG companies were impressive performers," says Borchardt. The average annual return for global FMCG companies was 7% and 12% over a five-year and three-year period respectively. By contrast, South African FMCG companies delivered average annual returns of 33% and 37% over the two periods. This was also well above the average annual returns of 16% over five years and 24% over three years achieved on the JSE All Share index.
"South African FMCG companies have performed outstandingly, despite challenges such as increasing consumer expectations for innovation, challenges for profitable growth in the informal sector, and high supply chain costs, largely due to the poor state of the country's transport infrastructure," Borchardt says. "However, part of the reason for their excellent returns is buoyant market and economic conditions. The question is: can they sustain these returns in less favourable conditions, particularly given the high expectations of their investors?"
Commenting on market sentiments, Borchardt says Accenture's shareholder analysis revealed that investors had higher than average expectations of South African FMCG companies. Specifically, the market has placed a future growth premium on South African FMCG companies that is twice that of their global peers.
"These investor expectations have been built into current share prices and hence, if this growth is not met, a company's share price will drop," he says. "Meeting these expectations will maintain the share price, but a company must convince investors that it can exceed these already high growth expectations in order for the share price to rise."
To meet or exceed their shareholders' rising expectations, South African FMCG companies should focus on four key areas for improvement, identified by Accenture as part of its analysis of the sector, Borchardt says.
These recommendations are supported by Accenture's global research into the winning characteristics of high-performance companies. The qualities that set these organisations apart are:
In the South African FMCG sector specifically, the greatest opportunities for improvement lie in adopting stronger customer-centric principles, introducing innovative product lines, streamlining supply chain processes, and implementing shared services, Borchardt says.
Shared services involves the redesign and consolidation of business processes such as human resources, finance, and procurement into service units, resulting in improved operating efficiencies and cost savings.
Borchardt cites the experience of Sara Lee, a multi-national FMCG company. "By implementing a single financial shared services centre for its European operations, as well as an IT shared services centre, the company significantly reduced IT and direct manufacturing costs, and achieved substantial savings on total expenditure on direct and indirect materials."
In another international case study, Danone, a global dairy manufacturer, implemented leading practices in customer-centricity to achieve benefits such as sales growth of five million euros and an administrative head count reduction of 26%.
"Many organisations can appear to be high-performance companies in the short term but can quickly decline when business conditions turn against them," he says. "To be a true high performer, an organisation must thrive across discontinuities in business cycles, industry or economic disruptions and leadership changes."
He concludes that, by actively pursuing opportunities to improve their performance in a buoyant economy, FMCG companies could position themselves for sustained high performance, regardless of potential future economic downturns.
