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FMCG: Outlook 2008 - Views on News from Equitymaster

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FMCG: Outlook 2008

Jan 9, 2008

We believe that in a scenario of a buoyant economy and multiple growth triggers being in place, the FMCG sector should sustain robust growth momentum. We expect new product developments, better health and happier taste buds in the FMCG sector. Momentum to sustain: With India rising, the outlook of Indians is changing too. They are willing to experiment and try out new products. Capturing insights into their needs and synthesising these into strategies and final product formats presents a new opportunity for FMCG players. Having witnessed robust growth over the last couple of years, we believe the growth would continue being strong. Up gradation from unbranded to branded goods (packaged grocery, household cleaning products), demand of nascent categories (breakfast cereals, hair colours) and health and hygiene products (chyavanprash) would be the growth drivers.

Going rural: As per Asschom, FMCG will be witnessing more than 50% of its growth in the rural and semi-urban segments by 2010. Currently, nearly 34% of the offtake of FMCG companies come form rural areas. As seen in the previous article , like last year, even in 2008, the rural areas would provide a huge potential. Companies like HUL, ITC and Colgate have already established good distribution networks in these regions. Other companies would start catering to these regions in near future.

Health and wellness: With the growth prospects of the economy and sector in place, though most of the categories will continue their growth, processed foods and the Personal Care segment is likely be the fastest growing segments.

  • Foods: Food forms the largest component of the total consumption expenditure in India accounting for as much as 51%. This is highest compared to 9.7% for an average American person and 15% for both Japanese and British. Though with rising income, the share would go down, but would increase in absolute terms. Further, the companies are widening their health food portfolio to target the rich, health conscious urbans. Dabur, HUL and ITC have made investments in this segment.

  • Personal Care Products: Consumer spending India on personal care products is very less. Further, the penetration levels are low too. With growing urbanisation and higher disposable incomes, consumers are now spending higher on personal care products. Higher growth is seen in premium range of such products. While rural areas will drive the growth of mass consumption products, urban consumers will be targeted for the premium segments.

Value growth: Along with volume growth we expect the value growth to be strong too. The companies would take selective hikes in price to meet the inflationary pressure. Also the consumers would upgrade from mass brands to premium brands, which would be a key driver in the value growth.

Retail formats- boom or bane: India is witnessing a retailing revolution in recent times. While some retail chains are of large retail formats enabling huge volumes, some are focused on affordability and thereby squeezing the margins. The Indian stock market is dominated by more than 12 m small 'mom and pop' retail outlets. However only 4% is in the organised sector, thereby reducing the reach. With FDI expected to be allowed, the share from the retail formats by the FMCG players is expected to increase.

Cut- throat competition: FMCG companies continue to face intense competition. Players from unorganised and organized sectors continue to grab each other's market shares. Highly scattered market and poor transport infrastructure limits the ability of MNCs and national players to reach out to remote rural areas and small towns. Low brand awareness enables local players to market their spurious look-alike brands. Also with entry of existing players in new segments like ITC's entry in personal care products, Dabur's plans to venture into health beverages would add to the already aggressive environment resulting in high pressure on margins.

Commodity prices- a key risk: A worsening of the commodity price environment is a key risk. In 2007, most of the companies had faced pressure on its input prices. Crude, palm oil, wheat and packaging costs were on a rise. Though most of the companies had taken judicious price increases, however, a sustained inflationary environment could hurt growth or margins or both.

Margin expansion to slow: While we expect the revenue growth to be strong, the overall margin expansion would slow down in the coming year. Though the price hike effected by the companies will partly camouflage inflationary pressures, we expect margin expansion to slow down. With increasing competition, the companies have to spend higher amounts on the promotion, distribution and advertising of the products. Further, the savings on account of tax holidays would decline going forward leading to pressure on margins.

Going forward
With the economy on a high growth flight, robust consumerism, greater rural penetration and rapidly growing organised retail, we remain bullish over the growth traction in the FMCG space. While rural regions would drive consumption due to higher penetration, organised retailing in urban markets would help increase value growth led by demand of premium products. The shift from unorganized to organized and from unbranded to branded will add further impetus to growth in this segment. India's immense population of one billion-plus people offers tremendous market potential. But its many languages, size and poor infrastructure can make it a difficult place to operate. The companies will have to align its strategies as per the changing environment, attitudes and preferences of the customers to be successful.


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