The FMCG industry’s future prospects look bright

The Personal Touch

The FMCG industry's future prospects look bright

considering rising household incomes and the spread of modern retail 

THE FMCG sector seems to have finally joined India Inc's growth party by posting surprising double-digit growth in sales in the past couple of years. With annual revenues of Rs 72,000 crore, it is the one of the largest sectors in the Indian economy. The industry's future prospects look bright, considering rising household incomes and the spread of modern retail. However, the per capita income level in India is still very low compared to the developed world. Besides, the penetration level of many products is also relatively low and several categories remain fairly unbranded. All these factors provide a huge untapped potential for the industry.
    In contrast to other manufacturing sectors, FMCG is relatively less capital-intensive, but demands immense skills and expenditure on branding and distribution. Most companies in the sector create value through product differentiation, package innovation, differential pricing and highlighting the functional aspect of foods. While inflation restricts the industry's growth, many companies in the sector thrive under inflationary pressures. Most companies pass on the cost inflation to consumers, via a judicious blend of price hikes, packaged size reduction and change in product mix. Few consumers react by down-trading to lowerpriced products, but most hang on to their preferred brands if price hikes are moderate.
    The top five FMCG companies constitute nearly 70% of the total revenues generated by this sector. Multinational FMCG companies like Hindustan Unilever, ITC, Nestle, Procter & Gamble and GlaxoSmithKline Consumer Healthcare traditionally comprise the first category of FMCG companies. They tend to spend nearly 10% of their revenues on an average on advertising and promoting their products, which is the highest ad spend figure in the industry. Justifying their high product pricing, these companies largely tend to capture value by addressing a felt need.
    Another category is non-traditional FMCG companies, which is dominated by homegrown companies like Asian Paints, Dabur, Tata Tea, Marico and United Spirits. These companies have grown to become market leaders in their respective segments, giving strong competition to MNC brands. Their average ad expenditure is much lower than that of the MNC biggies. The third tier includes small, but strong regional players operating on a smaller scale. They are mostly price warriors, who expand by eating into the market share of national players. But the biggest worry for national players is the emergence of private labels, i.e. the in-house brands of retail companies. As retailers don't have to incur marketing costs on these in-house brands, they are cheaper than their branded counterparts.
    FMCG companies can also be segregated according to the product categories in which they exist. Various products have different demand drivers; hence, the growth of companies tends to be different. For instance, paints makers witness growth during a housing boom. But the same may not be the case with soap manufacturers, which may witness some down-trading by consumers. With the market in a bearish phase, the FMCG sector has found flavour among investors. The sector's defensiveness is demonstrated by the stability in returns generated even during times of slow economic growth. While the Sensex is down by 29% since the beginning of this year, the ET FMCG index comprising the top 20 stocks in the sector, has fallen only by 12.5%.
    For investors eyeing the FMCG space, large domestic companies offer attractive growth prospects. These companies are outperforming their MNC peers and small Indian companies in the sector. But the MNC pack — specifically GlaxoSmithKline Consumer Healthcare, Nestle and HUL — has fared better in terms of profit margins. While the FMCG sector's revenue growth has been positive since the past three quarters, profits are showing a downward trend. Nevertheless, the FMCG growth story is here to stay. Although double-digit revenue growth is likely to continue, margins may come under pressure as the industry is finding it difficult to pass on cost inflation without impacting consumer demand. Moreover, the scenario has become more challenging for FMCG companies, given the emergence of modern retail and regional brands. The growth in media industry has also led to innovative advertising, which has changed the rules of the game.
    kiran.kabtta@timesgroup.com