5 Factors That Create the Greatest Business Risk for FMCG Organizations

Fast-moving consumer goods (FMCG) have their own risk profile, which can be quite different from other businesses. As recent supply chain issues have shown, even the everyday consumables we take for granted, can be subject to the changes of geopolitics, climate, or the consequences of a global pandemic.

As Arabian Business recently reported, some FMCG suppliers are still struggling with the rising cost of materials, combined with global inflation post-pandemic. However, even outside of unusual events like COVID-19, FMCG operations require specialist insurance coverage.

1: Assets and Property

From manufacturing equipment and production lines to logistics fleets and packaging, there are a host of business-critical elements to insure in FMCG. Should a manufacturing plant suffer a power outage, flood, or fire, this will inevitably affect production and supply, potentially damaging revenue.

Assets can also be defined in terms of inventory, intellectual property, and brand integrity. Fraud and theft are common risks in FMCG, beyond the GCC markets. The Middle East shows less tendencies to write crime cover, given the prevailing low rates of crime recorded in the region.

Particularly, when large volumes of goods are stored in preparation for transportation, this creates risk, as does the transportation . It’s vital that companies fully cover the cost of goods lost in maritime, rail or air transportation disasters.

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2: Liability

The food and drink area of the FMCG sector can be especially susceptible to liability risk. If goods aren’t properly refrigerated, if there are hygiene issues in a manufacturing plant, or even if goods have been badly packaged or handled in transit, these errors can invite lawsuits.

While many such problems can be traced back to logistics providers or suppliers, the result is the same – a brand may suffer reputational risk, especially if health or hygiene concerns are publicized, or there’s a requirement for a product recall – an expensive activity with significant deductibles, but also a rare sight in the Middle East. In 2020 alone, the UAE Ministry of Economy recorded 100 product recalls -- not a huge number, perhaps, but significant for each FMCG business affected.

Another key area for liability insurance relates to workers injured or killed in industrial accidents. Whether or not the business is found wanting in terms of its health and safety procedures, such occurrences often attract press attention and reputational risk pertains, in addition to damages awarded or legal costs incurred. A strong risk management philosophy which holds a strong health & safety culture at its helm should be established in order to eliminate and mitigate the risk of similar eventualities.

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3: Trade Credit Risk

With FMCG largely dependent upon the supplier model, credit line extensions in a time of supply line attenuation, paved way to shortcomings in timely fulfilment creating a significant risk factor. Credit risk assessments must be run before signing supply contracts, but even the best-written risk assessment can’t foresee everything.

The slowdown in global economies following the 2020-21 pandemic had knock-on effects on production and distribution. Meanwhile, the war in Ukraine temporarily halted grain supplies from one of the planet’s largest providers, with negotiation required to reopen supply lines. Such large-scale problems tend to have longtails. As a result, many third-party suppliers and retailers went out of business in 2021 and 2022.

With retail outlets forced to close for months on end, liquidity became problematic, forcing lines of credit to pursue alternate risk transfer methods, with extensions being one of them. However, such emergency fiscal measures couldn’t prevent many companies from going into administration including NMC Healthcare, which has only recently escaped from its credit doldrums. Meanwhile, retailers such as Maison Clad had to restructure their business model during lockdowns, moving more of their sales online, in order to survive.

When companies are owed large sums of money from retailers who may be at risk, this extends the risk to their own cash flow. Unpaid or late paid invoices can further contribute to credit risk. These factors can be challenging to monitor or predict, so they require adequate cover.

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4: Marine Cargo / Stock Throughput Insurance

As we have already seen, supply chain issues can create significant risks to revenue. The throughput of stock creates a risk for companies that import or export substantial amounts of materials or goods. The FMCG sector is particularly vulnerable, especially when goods such as fruit and vegetables, dairy and other refrigerated products are highly time critical.

Marine cargo insurance covers maritime disasters caused by weather or third-party failure. Reuters recently reported statements by shipping magnate Sultan Ahmed bin Sulayem of DP World, speaking at Dubai’s Expo 2020, where he admitted that the knock-on effects of these shortages might take many months to clear. “The problem is complicated because you have a backlog of cargo,” Sultan Ahmed admitted.

While FMCG companies wait for the world’s shipping routes to return to some semblance of normality, timely and forecasted risk assessments, risk identification practices, and the establishment of potential risk transfer mechanisms are proven to be effective to ensure minimal impact on the way of doing business.

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5: Cyber Liability

Loss from cyber-attacks, including ransomware attacks, data theft and service shutdowns, are worth covering against, in a world ever more reliant upon e-commerce. It was reported that the UAE suffered over 400 commercial cyber-attacks per week in the fourth quarter of 2021, an increase of 70% compared to 2020. Loss of revenue due to these events and the steps that must be taken to counter them is well worth covering.

These aren’t the only risks affecting an FMCG organization, but they are the established factors which businesses ?most commonly seek to protect themselves against.