In this blog post, Anandh Sundar, a Senior Manager (Finance) at Cello Pens Pvt. Ltd and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, talks about the upcoming trends in the FMCG sector.

FMCG  Sector

FMCG stands for ‘Fast Moving Consumer Goods’. These can be either branded or commoditized (like glycol, sugar, pulses).

Abroad, this sector is referred to as ‘consumer packaged goods’ but this excludes the ‘loose packing’ commodities sold in India such as edible oil, candy and pulses. So, for Indian context, we stick with the term ‘FMCG’. While many companies may claim to be FMCG, the signs of market dominators are those with –

1. Long-term pricing power (ability to increase prices-eg ITC),
2. Brand recall (eg-Pidilite, Asian Paints, Marico),
3. Negative working capital (eg-HUL-due to customer advances),
4. Lower ticket size (this distinguishes them from consumer durables like bikes, laptops, phones).

The FMCG industry has been the mainstay of Indian capital and talent markets, producing several multi-bagger stocks like Asian Paints, Unilever India, Marico, Bajaj Consumer, and also being the CEO factory of India with many CEOs in sunrise sectors like telecom, healthcare, retail coming from the FMCG industry.

Recent times, however, have seen this allure dim with FMCG stocks downgraded by equity research analysts on volume growth concerns and disruption fears[i] and FMCG no longer being the dream employers of recent graduates in India[ii] and globally as well.

However, for a sector which has endured multiple recessions, wars, sanctions and disruptions, the question is whether these are passing fads or the indication of something more lasting?

In his article[iii], on how FMCG competitive advantages are becoming obsolete, Frederic Fernandez of A.T Kearney explains that the key competitive advantages of FMCG companies in attracting key talent, building and scaling up brands, manufacturing and distribution of assets, unique R&D and financial firepower to outspend new entrants, are now easily replicable.

He cites the example of Dollar Shave and how it grabbed #2 position in the North America Shavers Market. The example closer home, which most Indians are familiar with, is Patanjali.

• It has leveraged faith and wellness, driven by its iconic face Baba Ramdev, to attract key talent from top tier FMCG companies, to obtain loyal distributors, leverage the traditional Indian recipes/methods instead of the long drawn FMCG innovation process, get visibility via word of mouth advertising, and leverage religious goodwill to build manufacturing asset base in Uttaranchal with herbal plantations, while remaining asset light for non-core products which are made in contract factories.
• In 5years, it has grown revenues 10x to ~Rs 5000 crores by 2015-16[iv] and now plans to double revenues in 2016-17, and again grow revenues 10x to Rs 50,000 crores by 2020-21[v].

Note that unlike e-commerce companies which have grown ‘Gross Merchandise value’ and net revenues by burning cash, Patanjali has reached till now by maintaining net profit margins in the 10%-15% range. This shows financial innovation and prudence. And to put the 50,000 crores revenue target in perspective, this would far exceed Hindustan Unilever’s present revenue of ~Rs 32,000 crores.

There is no shortage of challengers in emerging markets, and to their credit, Indian companies and MNCs have warded off better-funded players or acquired them in time. So, why should one lend credence to consultants and analysts who need to make dramatic forecasts to justify their existence?

A CII-BCG report on ‘Re-imagining FMCG in India’[vi] suggests that companies should rethink their consumer offer, Route to market, people and talent capabilities and digital consumer engagement approach, to address the predicted fundamental shifts towards premiumization, e-commerce, Tier 2/3 area driven growth etc.

However, while the report does a good job of extrapolating present trends to raise an alarm signal to the audience (which may drive them into BCGs arms for impact study etc), the business environment is dramatically changing which may drive these assumptions invalid.

Trends that Evolved Since April 2016

• Cashless Economy’s Negative Impact on Non-Urban Consumption- So far, with agricultural income being tax-free and government subsidies now being better targeted, rural India got a lot of disposable income to spend. And, with it being a largely cash driven economy, conspicuous consumption by rural India Vide Royal Enfield, high-end FMCG items, luxury cars, ostentatious marriages, was not really tracked.
  With the demonetization now driving transactions with digital payment trail, it remains to be seen whether the shift to premium products will get paused. As consumer’s spending ability is constrained by the digital trail of cash. And yes, a Rs 500/kg biscuit or a Rs 1000/kg namkeen is a premium product in my view.

•  E-commerce Penetration Aided by GST and Demonetization- Unlike the USA where Amazon’s growth was funneled by tax arbitrage[vii] by sellers not collecting tax, the Indian scenario was more compliant in comparison, with online sellers registering with tax invoices, issuing bills and making payments.

• Offline vendors often would lower prices by doing cash sales, and this slowed the e-commerce route where COD (Cash on Delivery) was an option but, not unaccounted sales. With GST now simplifying logistics and making it difficult for tax evasion, compliant operations in the organized sector such as e-commerce operators, stand to gain. And the growth of e-commerce platforms shifts power back to the retailers/customers, as also eventually encourage the growth of store brands like that of Bigbasket and Amazon.

• Aggregator Driven Model in Food- Food makes up ~42% of FMCG, and disruptions here often scale elsewhere. Be it sites like BigBasket, niche sites like snackible.com or pilots of Amazon Grocery, many are trying to disrupt the traditional FMCG mass focused supply chain with their niche products and innovative delivery mechanism.

By deepening the relationship with the customers, these intermediaries hope to eventually become the consumer-facing brand.

• The Death of Traditional Advertising: The success of TVF (the Viral Fever) and new screens/modes like Netflix, Hotstar, Jio movies, endanger the blockbuster/events driven advertising which has been the mainstay of FMCG advertising. Even Nestle relaunched its noodles via Snapdeal, a tribute to the reach of E-commerce.

• While E-commerce advertising is more targeted, imagine serving an ad custom made to you. It needs to be more impactful and compelling, else the customer would just skip it after the mandatory 2-3 seconds, something which is not possible on TV.
• On the plus side, however, digitization of cable TV has helped capture new audiences digitally with competition of KYC so, this will offset the

• Regulatory Framework: As Nestle found out with the recall of Maggi noodles, the Indian regulators are late to react but when they respond with the heavy arm of FSSAI Act, even the mighty MNCs are helpless. In the pre-FSSAI era, Cadbury managed to do voluntary recalls but, in this case, Nestle was compelled to destroy stock and even pay cement companies to do so.

While Maggie appears to have now regained its lost market share, the sector will not forget this lesson in a hurry, and would hopefully remain more compliant.

Further Read: 5 major FDIs in the Food processing industry.

As the USA baseball legend Yogi Berra is reported to have said – ‘It is difficult to predict the future’. That said, I will stick my neck out to give some views on how FMCG sectoral trends would evolve in the times to come-

•  Return to Indian/Ethnic Styles: Be it Paperboat’s entry into Indian beverages, Chedda foods making banana/tapioca chips, Balaji Wafers winning the extruded snacks market, those who have grabbed share from incumbents have been ethnic-focused players as opposed to say a Mainland China, Kellogs or Dominos who have seen slower volume growth. So one can expect the prospective new entrants to have an Indian focus too.
• Focus on Health+Taste: Like some company said ‘Health Bhi taste Bhi’, the company who discovers the holy grail of making tasty yet healthy food, would become a multi-bagger.
• Cooperatives continue to Dominate: Amul’s market share in the milk/processed foods sector has withstood repeated assaults from local and national players. On a smaller scale, Lijjat papad is trying to make inroads into papad.
• Farm to Fork SMEs Prosper after APMC Curtailment: Presently, middlemen mint money from farmers and consumers in the APMCs, while adding negligible value. The APMC reforms permitting direct sale by farmers to customers would allow farmer’s income to rise without stoking inflation. This would also reduce raw material costs of those companies who procure presently from APMCs.
• Food Parks Become the New SEZs/IT Parks: The IT parks captivated policymakers imagination from 2001-2010, SEZs from 2010-15, and now Food parks from 2015-2020. This is further aided by affordable solar power, which is an income source for the farmer and allows for otherwise expensive operations like drying and cold storage. With the new Food parks policy allowing smaller entrepreneurs to benefit from the resources open to their bigger brethren, we can expect a flurry of smaller players in the years to come

Who will benefit from the FMCG growth in the years to come? Will it be a Patanjali, or will the existing Indian players/MNCs continue to dominate and fight for market share. Only time will tell. But one thing is for sure, the market would be unrecognizable from what it is today given the extent of automation, consumer preferences change and regulatory environment being in flux.

What do you think about the Indian FMCG sector and the upcoming trends? Comment Below. And Share.

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:  

https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA

 

References –

[i]http://economictimes.indiatimes.com/markets/stocks/news/fmcg-stocks-like-dabur-nestle-colgate-palmolive-run-the-risk-of-earnings-downgrade/articleshow/51351778.cms
[ii]http://articles.economictimes.indiatimes.com/2016-04-05/news/72070542_1_fmcg-sector-amazon-india-preferred-sector
[iii]https://www.linkedin.com/pulse/fmcg-ceos-6-reasons-why-your-once-unique-companys-less-fernandez?articleId=6168814473646739456
[iv]http://www.business-standard.com/article/companies/baba-ramdev-s-patanjali-aims-to-double-its-revenue-to-rs-10-000-cr-in-2016-17-116042700061_1.html
[v]https://www.thequint.com/india/2016/08/13/exclusive-baba-ramdev-targets-50000-cr-turnover-in-mega-patanjali-growth-plans
[vi]http://image-src.bcg.com/BCG_COM/Re-imagining-FMCG-in-India-Dec-2015_tcm21-28741.pdf
[vii]https://www.bloomberg.com/news/articles/2014-04-22/amazon-sales-take-a-hit-in-states-with-online-tax