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FMCG: Past, present and future! - Views on News from Equitymaster
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FMCG: Past, present and future!
Aug 29, 2005

The key to a great story is not who, when or what? But why? In this article, we shall try to analyse the reasons for the FMCG sector having gone through a roller coaster journey in the past, what is the present status and what lies ahead. Was it worth going through those heartburns, sleepless nights and of course, seeing your FMCG portfolio shrinking in value terms, as these were the very stocks that gave you promising returns and hardly disappointed you in the past. A peek into the pastÖ

Traditionally in India, companies like ITC, HLL, Colgate, Cadbury (now de-listed) and Nestle dominated the FMCG sector, with each one happy in their own segment, negligible competition and many barriers to entry in the form of high import duty. Thus, these companies were able to squeeze the customersí wallet by charging a high premium on their products. This made their stocks a must for a stable investment portfolio owing to their fat margins. Any B-school pass outís priority list for a job would be uncomplete without an FMCG company figuring amongst the top 5 as they were famous for offering fat pay packets for management trainees and working for any of these biggies was a matter of prestige.

However, the government spoilt the FMCG party in the LPG (liberalization, privatization and globalization) programme (early 1990s) as they opened the countryís doors to imports at a small duty for almost all FMCG products, resulting in the markets flourishing with foreign goods. As is known, Indians have a deep-rooted habit (or should we say Americaís cultural impact on the Indian psyche) of preferring foreign goods to Indian ones, which says it all.

All this resulted in FMCG companies re-working their strategies in order to woo customers by offering freebies, which in turn took its toll on their margins. Competitors started realizing that HLL is a giant, a giant too big to be missed by any David i.e. HLL being present across categories had to counter competition in almost every segment. This saw things change for all Indian FMCG companies and thus started the descent of their fortunes.

But, suddenly, things once again took a sort of a u-turn, as FMCG companies saw themselves getting back into a comfortable position during the mid-1990s. Many smaller companies started to emerge who started to pose a threat for the larger ones. But things remained largely smooth for both, as the larger ones werenít really competing with these new entrants. Thus, this period between the mid-1990s to the late 1990s saw a revival of sorts for Indian FMCG companies.

However, since the past 4 years barring FY05, Indian FMCG companies, both big and small, once again, started to face extreme pressure, as they started loosing share of the consumerís wallet. The reason being, there were cheap financing options available in the market, which gave rise to a consumer boom. But the buying this time was that of houses, cars, consumer durables, etc. And with loans under their belt now, consumers had committed their future earnings towards servicing of these loans. Thus it forced them to curtail their current spending and FMCG was the only area where they could compromise.

It might sound ridiculous as there is no direct co-relation between buying a house and spending on soap, but since FMCG, including food, accounted for almost 45% of an average consumerís spending, it was by far the largest chunk of expense and hence was the first one to face the consumers axe. Profitability went for a toss for FMCG companies as they started registering declining profits on a year on year basis. In the midst of all these tensions, P&G dropped a bomb by slashing prices of its detergents brands (Tide and Ariel) by as much as 50%. This resulted in other players following suite, which only worsened the situation for the Indian FMCG players.

The current scenarioÖ

The FMCG sector is back on track and is on the path to recovery. Growth is being witnessed in urban as well as rural areas. However, this time around, smaller companies have walked away with larger gains as they follow a simple strategy, give the retailer higher incentives than those given by larger brand owners thus encouraging the retail shop owner to push their products more. Further, almost all companies have set up units in tax havens like Himachal Pradesh, Uttaranchal and Assam, which offer them a 100% 10-year tax and 5-year excise benefit.

So what does their horoscope say?

Today, the FMCG sector is the fourth largest sector in the Indian economy with an estimated total market size of around Rs 450 bn. Further, the growth potential for all the FMCG companies is huge as the per capita consumption of almost all products in the country is amongst the lowest in the world. Further, if these companies can change consumerís mindset and offer new generation products, they would be able to generate higher growth. For example, Indian consumers used to wear non-branded clothes for years, but today, clothes of different brands are available and the same consumers are willing to pay almost 5 times more for branded quality clothes. Itís the quality and innovation of products, which is really driving many sectors. Thus, FMCG companies should use their imagination and respect the tastes of Indian consumers by offering quality products.

Thus in conclusion, in our view, testing times for the FMCG sector are over and rural penetration is the key, which is currently extremely low, as venturing into these markets is an expensive affair owing to infrastructure constraints, thus making distribution a barrier. Although companies like HLL and ITC have started Project Shakti and E-choupal, respectively but have not been able to tap the market totally. Owing to their vast potential for growth, companies like Reliance have also decided to jump onto the bandwagon and open retail chains. All of this development comes as no surprise. With 12.2% of the world population living in the villages of India, the Indian rural market is a market that no one can overlook.

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