Indian Consumer Products Industry Report - Fast Moving Consumer Goods - Equitymaster

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Fast Moving Consumer Goods Sector Analysis Report 

[Key Points | Financial Year '17 | Prospects | Sector Do's and dont's]

  • The Fast-Moving Consumer Goods (FMCG) sector is the fourth largest sector in India.
  • 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 over the last decade. 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 70% 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. Tier II and Tier III are witnessing a fast growth in the modern trade segment.
  • According to a BCG report, India’s consumer spending could go up to US$ 3.6 trillion by 2020 and India’s contribution to global consumption is expected to more than double to 5.8% by 2020. 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) from 1 July 2017 is seen to be positive for the sector. Over time, the implementation of a single tax regime is expected to benefit the FMCG sector immensely by reducing the overall incidence of taxation. GST has already reduced the cascading effect by replacing a multitude of indirect taxes. Moreover, FMCG companies are now able optimize logistics and distribution costs in the GST era. The resulting cost savings by the companies is seen to be passed on to the final consumer thereby boosting demand.

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 '17

  • FY17/CY16, was a mixed bag for FMCG companies in India. Twin headwinds in the form of cash crunch due to demonetisation in November 2016 and the hiccups faced in GST implementation saw margins of FMCG companies come under pressure.
  • However, post the GST implementation, things are looking up for the FMCG players as they have passed on the cost benefits from the tax savings to consumers, spurring demand. The big brands have definitely made a comeback post the roll out of GST.
  • Despite a slump at the beginning of the year, consumer products manufacturers ITC, Godrej Consumer Products Limited (GCPL) and HUL reported healthy net sales in FY17.
  • Aggregate financial performance of the leading 10 FMCG companies over the past 8 quarters displays that the industry has grown at an average 16-21% in the past 2 years.
  • On the policy front, the government gave Investment approval of up to 100% foreign equity in single brand retail and 51% in multi-brand retail.

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  • 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-US$ 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 slump caused due to macro factors like demonetisation and hiccups in the GST implementation - 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.
  • Going forward, GST will be beneficial for the FMCG industry as many important raw materials required in the food processing industry will be exempted from GST. Moreover, major FMCG products will have lower GST rates compared to their current tax rates.
  • With the rise in disposable incomes, mid and high-income consumers in urban areas have shifted their purchase trend from essential to premium products. This could spell an opportunity for established FMCG firms to build on their existing brands and add value in return for higher margins.
  • 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. It is unlikely that trend will play out in the coming year. With crude prices on an uptrend, companies could face pricing pressures, and would have to be careful in taking price hikes to match the rising oil prices in the coming year.

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Jan 23, 2019 10:17 AM