An economic fork in the road

An economic fork in the road

I am a self-confessed economics nerd, especially in this line of work where there is such a direct and rapid translation of theory into everyday reality. The economic shock to the UK (and much of the world’s) system has only just begun, and the FMCG industry is at the coalface. Suffice to say this month I am consumed by economic press, forecasts and outlook scenarios, wondering what it means for the innovation agenda.

Even more so than during COVID, I have been amazed to see two types of founder: the founders for whom the shockwaves have hit, and those for whom they have not (the latter has more hair than the former).

So, faced with some brutal economic facts, I thought I would lay out, if and how, we are seeing them play out in the innovative brand world.

Inflation is at a 40 year high

With gas and electricity step changing in the last month it is expected to hover around 9.0% vs target 2.0%.

Clearly cost pressures come up in 99.9% of the conversations we are currently having with brands and our retail and investor partners. Brands are feeling the pinch in a major way, with direct impacts (COGs & LOGs) and indirect impacts (delists from 3PLs, manufacturers and retailers as a result of simplification initiatives).

Opex is also significantly increasing, with labour costs expected to rise further as brands overcompensate for their risk profile. This is eating into EBITDA significantly.

None of this has slowed down growth though – topline growth has been staggering this year to date with no immediate signs of slowing.

My advice:

  • Be human and lean into uncomfortable conversations
    However uncomfortable your buy-side or sell-side conversations may be, however much you might think your buyers are being unreasonable, or your manufacturers are messing you around, no one is enjoying this. Everyone is under pressure, stress and strain. Be human, collaborate and lean into the pressure. It will lead to more fruitful conversations all round.

  • Be obsessive about your P&L
    Focus on the biggest items first and unwaveringly remove fat. I do not mean your £100 software subscription, I mean the much less comfortable needle-movers. Do what you need to be profitable; watch cash like a hawk and get back into your scenario planning seat.

  • Do not say…
    “There is nothing more I can do”. It is rarely true.

Employment is at its lowest rate since 1974

For the first time since records began, there are now more vacancies than there are people unemployed. In reality, we are actually seeing a more active recruitment pool with our Recruitment Team helping more brands hire in the last few months than ever before.

However, the questions are more rigorous around risk and business stability. For the newer (and perceived riskier) brands, this means they need to demonstrate why they are not risky, or give the best candidates good reason to take the risk.

Founders of the £2m+ brands (Stage 3+) are increasingly hiring for MDs, CEOs, GMs and Director level support to see them through what will undoubtedly be challenging times ahead and founders have sizeably increased investment in development and team support.

My advice:

  • Be proactive with your recruitment efforts
    When it comes to timing, plan for the worst and hope for the best. We have created a must-read fact sheet to help you when you begin to think about recruiting.

  • Invest in retention
    It is a hell of a lot more cost-effective than recruitment. Here are 5 things that you should consider in your compensation packages to be a competitive employer.

  • Outsource where you can
    Take the weight off your centralised resources. Assess the pros and cons of outsourcing for your business – it really can be a viable model for the vast majority of activities in your business. For example, use this article to see if outsourcing your Supply Chain is right for you.

Fundraising activity is forecast to cool considerably 2022 YTG

We have seen a number of well known consumer VCs publically announce sitting on their hands, making raising capital harder than it has been historically. Ultimately, though the bar is much higher than it has been in consumer to date, good businesses will always find investment.

Our experience talking to our investor network is that valuations are likely to come down from what they have been historically, and investors will be looking at businesses with strong fundamentals (including profitability).

D2C led strategies are proving challenging with investor appetite into these concepts decreasing. Omni-channel is attractive with proof of concept needed across all channels – mainstream grocery retail is proving attractive once again. We suspect affordability / attractive price point will also be key as investors begin to feel the discretionary spend decline.

Brands are increasingly using investment brokers and consultants (like our very own YF Funding) to aid them through larger raises as the open market is more difficult to navigate.

My advice:

  • Operate your business on the assumption that you cannot raise another pound
    Not only will this extend your runway but it will also make you more attractive to prospective investors.

  • Prepare, prepare, prepare
    Fundraising is likely to be much more time-consuming this year so prepare early (think about fundraising even when you do not need the funds) and seek the support of an advisor who can connect you with suitable investors early in the fundraising process.

One final thought…

Finally, a reminder of an opinion that you have all heard once or twice: our culture of innovation, entrepreneurialism, newness and progress is the most sacred asset in this industry. It is what we are famous for globally; it is the source of progress from a health and environmental perspective; it is what puts more cash in our tills and value back on the shelves.

It is also the thing that most of us get up for in the morning and the meetings we all look forward to the most in our calendar. However turbulent the short term becomes, if we protect our sources of innovation, we can be confident the long term will be brighter.

So for non-brands reading this, let’s rally behind the best innovation because the upside has never been bigger.

Can we help you?

If you have further questions on how you can navigate these, or any other, economic challenges, we can help.

Our Supply Chain and Recruitment Team can support you in all sorts of ways – contact us at [email protected] for a no-obligation chat. 

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