Fast Moving Consumer Goods Sector Analysis Report 

• The consumer products industry had been witnessing robust growth in the past few years backed by strong economic growth and rising rural income. Factors such as rapid urbanization, evolving consumer lifestyles and emergence of modern trade were driving its growth.
• The industry is still urban-centric with majority of the goods being consumed by urban India. Metropolitan cities and small towns (population of 1-10 lakh) have been driving FMCG consumption in urban India since 2002. In fact, middle India, comprising of small towns, has been growing the fastest across rural and urban segments. As per Nielsen, the FMCG market size of middle India is set to expand rapidly over the next two decades. Rural India, where 70% of the population resides, presents the biggest market potential for the industry. Backed by low unit packs and aggressive distribution reach, rural market size is expected to expand in the future.
• Consumer goods are retailed through two primary sales channels - General Trade and Modern Trade. General trade comprising of the ubiquitous kirana stores is the largest sales channel forming 95% of overall retail sales. However, growth of consumer goods retailed through modern trade channel is outpacing the growth of FMCG products in general trade. Factors such as a comfortable and modern store experience, access to a wide variety of categories and brands under a single roof and compelling value-for-money deals are attracting consumers to organised retail in a big way. But modern trade is still an urban phenomenon in India. Product categories such as packaged rice, liquid toilet soaps, floor cleaners, breakfast cereals, air fresheners and mosquito repellent equipment have a higher penetration in modern trade channel. Modern trade is expected to gain greater importance with opening up of foreign direct investment in multi-brand retail.
• The implementation of the Goods and Services Tax (GST) is expected to benefit the sector immensely by reducing the overall incidence of taxation. GST aims to reduce the cascading effect by replacing a multitude of indirect taxes such as central excise, service tax, VAT and inter-state sales tax with a single GST rate. Moreover, FMCG companies will be able to optimize logistics and distribution costs in the GST era. The resulting cost savings by the companies can be passed on to the final consumer thereby boosting demand. However, the implementation of GST has currently been put on the backburner by the government.

• Supply
• Abundant supply through a distribution network of over 8 m stores across the country. Distribution networks are being beefed up to penetrate the rural areas.
• Demand
• Being items of daily consumption, demand is least impacted by economic slowdown.
• Barriers to entry
• Huge investments in setting up distribution networks and promoting brands and competition from established companies.
• Bargaining power of suppliers
• Inputs being mostly agri-commodities, the suppliers are numerous and lack scale to wield bargaining power. Companies like ITC that are integrated backwards have lower dependence on suppliers.
• Bargaining power of buyers
• Customer does not have bargaining power in case of branded products but intense competition within the FMCG companies results in value for money deals for consumers (e.g. buy one, get one free concept).
• Competition
• Competition is faced from domestic unorganized players and established MNCs. Price wars are a common phenomenon. Private labels offered by retailers at a discount to mainframe brands act as competition to undifferentiated and weak brands.

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• In 2013, the FMCG industry was hit by slowdown in offtake. The overall growth of the industry halved to 9.4% during the year on the back of a mere one percent volume growth (Source: Nielsen). The industry had clocked a 9% growth in offtake in 2012. The slowdown in offtake during 2013 was more pronounced in non-food discretionary items such as personal care products.
• Most of the FMCG companies have reported double-digit growth in FY14. However, FMCG behemoth Hindustan Unilever clocked an 8.7% topline growth due to slower growth in the Home and Personal care segment. Even Marico’s sales grew by a measly 1% as the company demerged its Kaya skincare business during the year. Procter & Gamble posted the fastest growth of 22% backed by double-digit in both feminine hygiene and healthcare businesses. Dabur was able to register 15% revenue growth on double-digit volume growth. The growth was aided by widened distribution network particularly due to Project Double.
• A number of FMCG companies like HUL, Dabur and Procter & Gamble Hygiene & Healthcare benefitted from easing commodity prices and posted increased profitability. Even Marico recorded high profit margin due to savings in staff costs, ad-spends and other expenses after de-merger of the skincare business. However, higher ad-spends and other operating expenses clipped margins of Colgate and Godrej Consumer Products during the year.

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• The election of a pro-reform government at the centre by a huge mandate has led to improvement in the overall sentiments in the economy. However, rural India is not likely to witness a boost in demand as the there has been no major increase in NREGA allocation in Union Budget 2014 and monsoons have been below normal. Demand revival in urban India will spur the next wave of growth for FMCG companies. As per a survey by IMRB and Kantar Worldpanel, value added variants of consumer products are witnessing faster growth than the mass end variants. Demand drivers such as increasing working population, higher monthly expenditure and growing access to modern trade and e-commerce will drive the growth of value-added and premium consumer products.
• On the input cost front, the import duty on crude-based derivatives used in soaps and detergents has been slashed in Union Budget 2014. Even crude prices have fallen below $100 a barrel which will benefit the industry through savings in raw material and packaging costs.

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Related Links for Consumer Products Sector
Quarterly Results | Sector Quote | Over The Years