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FMCG INDUSTRY TO BE Rs.4000-6000 BILLION INDUSTRY BY 2020 The Indian FMCG industry is over INR 1300 billion in size. It touches the life of every Indian and therefore has perhaps the widest reach among all industries in India! The industry has tripled in size over the last 10 years, growing much faster than in past decades. The industry’s potential to grow further and faster is awesome, given the low penetration of most categories and rising consumer incomes. Given the inherently essential nature of the products, the sector is more or less immune to recessionary pressures. The last decade has seen the sector grow by 11 per cent annually. Robust GDP growth, opening up of rural markets, increased income in rural areas, growing urbanization along with evolving consumer lifestyles and buying behaviors have all been drivers of this growth. Over the next decade, all the above drivers are expected to continue to impact the industry favorably.

TRENDS ACROSS CONSUMERS, MARKETS, AND ENVIRONMENTS WHICH WILL SHAPE THE INDUSTRY BY 2020

Evolving categories

Government

Policies

Continuous Income growth

Rapid Globalization

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1. Continuous Income growth Continuous income growth coupled with an increased willingness to spend will push consumer up-trading and demand for higher priced, better quality products.

2. Rapid Globalization

While many leading foreign multinational companies (MNCs) have operated in the country for years, given liberal policies, the next decade will witness increased competition from Tier 2 and 3 global players.

3. Evolving Categories Many consumers with rising economic status will shift from basic ‘need’ to ‘want’ based products.

4. Enabling Policies Many government policies under consideration, if executed, can help create a more suitable operating environment. This will help boost both demand and supply. Demand will go up because of increase in income levels and spread of education and supply will be augmented by removal of process bottlenecks and boost in infrastructure investments.

GROWTH ACROSS FMCG PLAYERS Three well-identified sets of players operate within a highly developed and intensely competitive landscape of the Indian FMCG market. 1. Foreign players who are present through their subsidiaries such as Unilever, P&G, Nestle and PepsiCo. 2. Strong Indian players with established national presence such as Marico, Dabur and Godrej Consumer Products. 3. Regional or small domestic players, such as Ajanta, Anchor, CavinKare etc., who are present in a few regions of the country Apart from these, there are regional and small-scale FMCG players such as small tea producers and organic food producers, who mainly compete by offering low-priced products with similar looks or packaging compared to the bigger brands, to the ‘right consumers’ typically based in rural areas or in small towns. These players with lower corporate overheads and clear focus on specific consumer requirements have a competitive edge over larger FMCG players.

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Historical Growth in FMCG sector

0200400600800

100012001400

FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10

Growth

FMCG Growth Ladder

DEMAND DRIVERS

SUPPLY DRIVERS

TECHNOLOGY INVESTMENTS

REGULATIONS

MODERN TRADE

DEMAND DRIVERS

NEW

CONSUMERS

INCREASED

CONSUMPTION

UP-TRADING

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NEW CONSUMERS Population growth Increasing penetration (access to rural areas, more coverage

INCREASING CONSUMPTION

Increasing consumption in every occasion GDP, increased incomes, younger population driving the consumption

UP-TRADING

Using premium, sophisticated products Increasing income, women’s participation in workforce, lifestyle changes

powering above Young population (below age of 30 years) comprises 59 per cent population currently, and the composition is likely to remain similar over the next decade. This augurs well for the industry as the young have greater willingness to spend more.

SWOT ANALYSIS

STRENGTHS Presence of established distribution network in both urban and rural areas Low operational costs

WEAKNESSES

Lower scope of investing in technology and achieving economies of scale Low export levels

OPPORTUNITIES Untapped rural markets Rising income levels i.e increase in purchasing power of consumers Large domestic market- a population of over 1 billion Higher consumer goods spending

THREATS

Slowdown in rural demand High Inflation Removal of import restrictions resulting in replacement of domestic brands.

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MAJOR FMCG OUTPERFORMERS

LAST 1 MONTH Company Stock

Return (%) 1 Month Nifty Return (%)

Outperformed Nifty by (%):

United Breweries 32.89 -0.68 33.56 United Spirits 10.13 -0.68 10.81 Dabur 7.07 -0.68 7.75 ITC 1.72 -0.68 2.40 Source: www.cfstradecity.in

LAST 6 MONTHS Company Stock

Return (%) 1 Month Nifty Return (%)

Outperformed Nifty by (%):

United Breweries 128.45 13.67 114.78 Nestle 26.02 13.67 12.35 Nirma 24.44 13.67 10.77 GlaxoConsumerHealthcare 23.76 13.67 10.09 Source: www.cfstradecity.in

FUTURE OUTLOOK FMCG Players seem to be regaining their pricing power with Hindustan Unilever taking price increases of 5-8% in soaps and detergents, Dabur India hiking prices by 3-4% and Britannia industries 5-10% on select brands of biscuits over the past six months. A 20 percent increase in Corporate India’s wage bill, strong hiring plans and a good monsoon may put consumers in a mood to spend more lavishly on FMCGs in the coming year.

Demand rebound With food price inflation subsidizing from a peak, consumers are beginning to again experiment with “aspirational products” pushing up sales for skin care products, health supplements and processed food in the recent September quarter. The good monsoon and a rebound in the agricultural output increased rural demand for FMCG products such as Soaps and Shampoos. Players such as Dabur India note that rural sales of shampoos and toothpastes grew at higher rates than urban sales in the April-

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September period. Colgate, Palmolive, Hindustan Unilever and Dabur who derive half of their sales from Rural India will be the key beneficiaries of this.

Handsome wage hikes by corporate india The combined wage bill for the first six months of 2010-11 of the listed BSE 500 companies shot up 20%, thus, putting an additional 17000 crore in the hands of its workforce. This income buoyancy seems to be allowing FMCG companies to pass on rising input costs in the hands of consumers.

CONCLUSION The Indian FMCG sector is the fourth largest sector in the economy with a total market size in excess of $13.1 billion (Rs 58,950 crore). With India becoming the largest and most lucrative consumer destinations in the world, the economic and consumption power shift is veering towards India. In view of the slowdown in developed markets, it is imperative for global players to focus on growths in emerging markets and increased investment dosage in these markets. The Year 2011 is likely to be a positive year for the FMCG industry as whole. Despite rising commodity prices which will put a pressure on performance, the demand is expected to be robust especially from rural India which is seeing rising income levels and greater propensity to spend. The Indian fast-moving consumer goods (FMCG) sector is expected to grow 13% during 2010-11 on the back of strong economic growth, a good monsoon and subsequent rise in rural income. The sector grew 11.4% in the quarter ended June, but eased a bit to 11% during the September quarter due to high inflation and higher raw material prices, the Confederation of Indian Industry (CII) said in a report. The report also highlighted the emergence of strong regional players across categories such as food, laundry and soaps, further highlighting the risks of increased competition eating into the market share of established players. Faced with rising costs and competition, Indian FMCG companies are increasingly betting on expanding their geographical footprint with overseas acquisitions, expecting higher returns from international operations to offset lower growth in India. While Dabur India opened its account with two overseas acquisitions—Hobi Kozmetik group of Turkey and the US-based Namasti Laboratories—during the year, Godrej acquired Issue and Argencos in Latin America, Tura in Africa and Megasari in Indonesia. It is expected that many more Indian companies will spread their wings abroad seeking faster growth. CFS FINANCIAL SERVICES RESEARCH DESK