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"Emphasize Strengths, Don't Fix Weaknesses" - Tim Ferris, author of The 4 Hour Workweek
The FMCG sector has had a quite volatile run over the past one year marred by sluggish growth. The root cause is rural demand that has been subdued for quite a long time now. Two consecutive years of drought have taken a heavy toll on purchasing power in rural areas. And FMCG companies have been feeling the heat as most of them garner a sizeable share of their sales from the rural India.
There's no point in complaining this if there's no way out of it. However, if these companies analyse their operations and prioritise better, there can be a way out of this rut.
The talk doing the rounds is that these companies can be better off by focusing on their unutilized strengths rather than pushing growth in unproductive areas. We came across an article in Livemint which states that makers of packaged consumer goods can improve by increasing their focus on the metros rather than chasing growth in rural India.
The reason, as the article opines, is that many metro counterparts still aren't penetrated to their fullest. Going by the data provided from market researcher Nielsen, there are lot of urban markets that are still underserved.
As per the data for FY16, packaged biscuits are available only in 75% of the stores in the top eight metros of India. The same for other metros is recorded at 68%. In the case of branded edible oil, the availability is only one in three stores in top eight metros. The same for smaller metros compares to one in four stores.
A metro in India is defined as a city with a population of at least one million. As per the Census 2011 data, there are 53 such cities in India, for that matter. And these cities account for about a third of the branded consumer packaged goods consumption.
This clearly shows that there remains a lot of scope to widen reach of packaged consumer goods in the urban areas. The common argument against this belief by FMCG companies is that metros are saturated. This may be true to some extent. However, as Nielsen India states, there are clear pockets of opportunities when you break metros into base metros and smaller metros.
So the moot point is that the distribution in the top cities should be an important growth driver for the packaged consumer goods. Companies operating in this space should challenge the status quo by directing their sails in the smaller metro cities, rather than just blaming rural distress for their anemic growth.
Some of the FMCG companies such as Dabur India, Marico, and Britannia Industries have started focusing on growth in the smaller metro cities.
Along with this, any uptick in the rural income followed by good monsoons can spur demand for consumer goods and improve the sales growth for FMCG companies. Further, implementation of the 7th Pay Commission is also likely to boost the disposable income in urban India and boost growth.
Hence, one can look out for fundamentally strong companies in this space and bet on them whenever available at beaten down valuations.
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