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Fast Moving Consumer Goods Sector Analysis Report 

[Key Points | Financial Year '16 | Prospects | Sector Do's and dont's]

  • As per the Boston Consulting Group (BCG), the Indian FMCG market is estimated at about US$ 185 billion or about Rs 12.6 trillion. It has grown annually at about 12% per annum from 2005-2015. The key segments within this sector are staples, packaged food, beverages, consumer health, and home & personal care. The staples segment has a share of about 69% of the total market, with it being fairly divided between its sub-segments namely pulses & cereals, edible oils & fats and dairy. The share of the branded players in these set of products is fairly low. However, when it comes to segments such as packaged foods, beverages, consumer health and home & personal care (all of which have a combined size of 30% of the market), the branded players have majority share. On an overall basis, the share of the branded segment stands at about a third.
  • The fastest growing segments in recent times include packaged foods, edible oils and home & personal care products.
  • A large population to be fed means that India has increased its farm productivity and production over the years. White revolution has resulted in abundance of milk and milk products. Armed with a huge agriculture sector, abundant livestock and cost competitiveness, India is fast emerging as the sourcing hub of processed food.
  • The organised space is no more as urban-centric as it used to be. While metropolitan and tier-I cities have been driving FMCG consumption over the past decade or so. It is the tier-II, tier-III and tier–IV cities that are expected to drive the sector growth over the next decade.
  • While consumer goods are largely retailed through two primary sales channels - general trade and modern trade, present times are quite interesting as new channels such as e-commerce have emerged quickly to become forces to reckon with; but this space is yet to provide a profitable and sustainable model as things stand today. General trade comprising of the ubiquitous kirana stores is the largest sales channel forming the majority of overall retail sales. However, growth of consumer goods retailed through the newer channels is now outpacing the growth of FMCG products in general trade. Factors such as a comfort, convenience, rising trust factor, modern store experience, access to a wide variety of categories & brands under a single roof and compelling value-for-money deals are attracting consumers to the newer channels in a big way.
  • 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. 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, there is a big question mark surrounding the timely execution of GST.

How to Research the Consumer Products Sector (Key Points)

  • Supply
  • Abundant supply through a distribution network of over 8 m stores across the country. Distribution networks are being strengthened in the rural areas.
  • Demand
  • With food and consumer products being items of frequent consumption, demand is less impacted by slowdown. Processed food and personal products are segments growing at a robust pace. Rising contribution of women to the working force and growing nuclear families led to higher demand for convenience foods, especially in urban areas. Tobacco demand being habit-forming is largely inelastic.
  • Barriers to entry
  • Huge investments in establishing brand identity and setting up distribution networks.
  • Bargaining power of suppliers
  • Suppliers being small and fragmented have limited bargaining power. Most tobacco companies have integrated backwards and have their own supply chains. Therefore, the bargaining power of suppliers is not high.
  • Bargaining power of buyers
  • Rising competition and the onslaught of the e-commerce boom does provide good bargain opportunities for customers. Tobacco consumption is more or less a habit, and thus the bargaining power of consumers is only to the extent of choice of the brand.
  • Competition
  • Domestic unorganized players pose competition. Domestic players also feel the competitive pressures from large well established MNCs. In case of tobacco, branded cigarettes, bidis and contraband compete with each other.

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Financial Year '16

  • In FY16/CY15, companies from the FMCG space reported muted numbers at best. Companies such as Colgate, GSK Consumer Healthcare saw profits impacted due to phase out of excise duty benefits. Marico saw steady growth in revenues while a bottom-line grew at a healthy clip. ITC had a rather forgetful year and reported flat revenues and profits. Nestle brought back Maggi noodles into the markets and regained over 50% of its market share within five months of relaunch. The revenues declined by 9% YoY. The companies witnessed a general slowdown in its volume sales for the year.

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Prospects

  • India's organised FMCG space is expected to grow at a pace of 14-15% YoY per annum for the next decade to the size of US$ 220 billion to 240 billion. Consumption is expected to be driven by factors such as increasing income, rising urbanisation, nuclearisation, as well as growing work force. As per BCG, incomes are likely to rise by 70% by 2025; more than a third of the population is likely to reside in urban parts of the country; reducing household sizes due to nuclearisation is likely to add about 10 million households by 2020; about a 100 million of youth are expected to join the work force by 2020.
  • Notwithstanding the present factors like demonetisation and indecision on GST, falling inflation and interest rate levels along with seventh pay commission hikes will continue to be positive for the sector over the long run. While traditionally, rural demand has outpaced urban demand, the same has not been the case in recent times as growth in both the markets has been similar. In fact, a good number of companies have begun refocusing on the urban markets.
  • While crude prices have been down, companies have been passing on costs to customers, and utilising the savings to focus on boosting volumes - in the form of aggressive advertising and promotion expenses - to keep the momentum going in an otherwise disinflationary environment. This trend looks to play out in the coming year as well.

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

Views on News

Marico: Earnings Hit by Lower Volumes and Firming Input Prices (Quarterly Results Update - Detailed)

Aug 9, 2017

While GST implementation brought down volumes and profitability in the short run, Marico remains optimistic in the long run.

P&G: Strong Core Growth (Quarterly Results Update - Detailed)

Dec 9, 2016

Procter & Gamble Hygiene and Health Care has announced the first quarter results of the financial year ended June 2017 (1QFY17). The company's sales rose by 12.5%YoY while net profit rose by 50.1% YoY during the quarter.

Nestle India: Sales Traction From New Products (Quarterly Results Update - Detailed)

Nov 30, 2016

Nestle India declared results for the quarter ended September 2016. Here is our analysis of the result.

GSK Consumer: Price Hike Hurts Volumes (Quarterly Results Update - Detailed)

Nov 30, 2016

GSK Consumer Healthcare declared results for the quarter ended September 2016. The revenues dropped by 1.3% during the quarter as compared to a year ago; while the profits declined by 16.6% YoY during the quarter.

Marico: Margin Expansion Drives Profit Growth (Quarterly Results Update - Detailed)

Nov 28, 2016

Marico has reported a flat topline while the bottomline has grown by 18% YoY during the quarter.

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