Jul 11, 2007|
FMCG: Long way ahead
The past three years have been good for the Rs 700 bn Indian FMCG sector. The usual growth drivers like penetration, per capita consumption, population and household income have been strong. The share of FMCG items in the Indian consumer's wallet has increased gradually over the past few years. This willingness to spend, backed by the ability to spend, is likely to lead to higher growth in the FMCG sector going forward. The Indian FMCG industry grew by 22% in 2006.
As can be seen, of the total sales, food & personal care are the largest categories. Household care, hair care, baby care and OTC occupy a low share in the total FMCG sales. However, despite the strong growth, India is still way behind when compared to its global counterparts in the usage of FMCG products. Not only does India lag behind developed economies like USA but also economies like Brazil and Russia.
Source Dabur Presentation
|(US$ per year per capita)
|Per Capita Income
|Bath & shower products
The low per capita consumption indicates further significant growth potential. The robust economy is likely to aid further rise in incomes, increase in urbanisation, rise in aspirations of the middle class and rise in their share of overall consumption. This would be beneficial to FMCG companies as they would be able to drive the sales of their brands, increase the penetration of personal products and get consumers to spend on their brands.
The growth drivers...
Increasing per capita income: The strong economic growth of the Indian economy over the last 3 years has led to the per capita personal disposable incomes growing at a CAGR of 13% from US$ 467 in FY02 to US$ 672 in FY05, which in turn has led to the creation of consumption demand. Over the last decade, per capita incomes rose at a fast pace in the country's history due to higher GDP growth and falling birth rates. Changes in income levels and demographics have already led to changes in consumption and savings patterns of Indian households. The increase in income leads to higher consumption expenditure. It also leads to the change in the consumption pattern. With higher earnings, people move to better and higher end products. Consumers move from basic to luxury goods. Hence, demand for high end and premium products would grow, indicating better times for FMCG companies.
Growth in high income households: Growth in personal disposable incomes has led to Indian consumers climbing up the income ladder with increase in the midddle class and rich consumers. The middle class is expected to grow from 45% of total population in 2005 to 68% in 2025. Also, the share of the richer class to total consumption is expected to grow at a faster rate. This would create a significant demand for FMCG products and also result in higher demand for value-added products.
Modern Trade: Malls are a consumer's paradise and consumers are also increasingly demanding for the shopping experience to be enjoyable. Shopping malls, self-service stores are all emerging rapidly to fulfill this need for an enjoyable experience. Organised retail is likely to be a growth driver going forward. Organised retail is expected to help FMCG companies exploit the increasing inclination of the consumer to spend by driving the consumer towards high end products. The share of organised players in the US$ 350 bn retailing industry is expected to increase from the current 3% to 10% by 2010. We believe that the growth in organised retail will be beneficial to the FMCG industry as we expect organised retail to drive consumption.
Rural areas: With a population of 1 bn, India is a big market for FMCG companies. Around 70% of the total households in India reside in the rural areas. The total number of rural households is expected to rise from 135 m in 2002 to 153 m in 2010, which represents the largest potential market in the world. Incomes in rural India have improved dramatically over the years mainly due to the successive normal monsoons, increasing crop yields and a corresponding growth in farm income. The rural hinterland is more attractive for FMCG companies as compared to tier I and tier II cities as penetration levels are drastically lower for numerous products, unlike urban markets, which are highly saturated. At present, urban India accounts for 66% of total FMCG consumption, with rural India accounting for the remaining 34%. However, rural India accounts for more than 40% of the consumption in major FMCG categories such as personal care, fabric care and hot beverages.
To sum up...
With the presence of 12.2% of the world population in the villages of India, the Indian rural FMCG market provides a vast opportunity. Increased focus on farm sector will boost rural incomes, thereby providing a larger scope to the FMCG players. Also, the low per capita consumption for most of the products provides immense growth. Along with the increase in income levels and modern trade, FMCG companies have a long way forward.
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