An Overview of FMCG Industry in India

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Overview:
According to Investopedia: “Fast-moving consumer goods are products that sell quickly at relatively low cost. These goods are also called consumer packaged goods.” In other words, the FMCG Industry consists of Goods which have relatively low shelf life, lower price and are consumed and purchased frequently. FMCG Industry Globally is estimated to be a $10,020 Billion Industry (According to PR Newswire). The Industry is predicted to reach $15,361.8 Billions by the year 2025 with a CAGR of 5.4%. FMCG Industry in India is a $ 52.75 Billion Industry. The industry grew from a $31.6 Billion Industry in 2011 to a $52.75 Billion Industry in 2017-18 (As per Emami Ltd. Annual Report 2019). The growth of the top 15 FMCG companies such as HUL, ITC, Nestle and Marico etc. grew at a CAGR of 13.6% in the last 7 quarters. The industry is divided into 3 segments namely Food and Beverages, Healthcare and Household and Personal Care. They have a market share of 19%, 31% and 50% respectively. FMCG industry is considered a defensive industry logic being people cannot postpone the Consumption of Goods like in the case of Durables.

Overall, Urban Sector accounts for 55% of the market and Rural Sector accounts for the remaining 45%. The growth in the rural market in the past has been greater than that of the urban market to the tune of 1.5X. The Rural Market is expected to grow at 15-16% whereas for the Urban Market the same is 8%. The market is very fragmented with over 90% of the sales coming from the General Trade and the rest from Modern Trade. E-commerce is one of the emerging segments but it caters to a very small share of the market.

Growth Drivers
A lot of factors have contributed to the growth in this industry. Such as:

1. Population Growth: A surge in the population both in terms of number and quality i.e. the average income has been one of the growth drivers. 
   
2. The advent of GST has forced the industry as a whole to become more organised, which have furthered the sales of big companies.
   
3. The advent of E-commerce has also provided last-mile connectivity to a lot of companies which was simply not present before.
   
4. Lower Penetration Level; According to HUL investor presentation 2018, the per capita FMCG consumption in India is just USD 29, which is half of Indonesia, 1/4th of China and 1/5th of Philippines. This lower penetration level is the measure of the untapped market, which shall derive the growth in the future as it had done in the past.
   

Emerging Challenges:
The Millennial Effect: It is the change in the consumption habits of the populace which is observed due to a shift in the spending population from Boomers to Millennials. According to a study by Accenture, the consumer of the future generation is becoming more price-sensitive, less brand loyal and more experience-oriented. In the same study, it was proved that millennials are more likely to switch between physical and online store. What this essentially applies is that the consumer wants to buy premium product i.e. the experience, but he/she is willing to switch to another product if it's available at a cheaper price. The same is witnessed in the Indian Context by a report by HDFC Bank Investment Advisory Group, the share of the premium product increased by 5% and those of mid product by 1% and that of lower strata product fell by 6%. From the company’s perspective, this essentially means that they have to now think of selling experience in the General Trade (which accounts for over 90% of the retail).

High Logistics Cost in India: One more challenge faced by the FMCG industry is the high logistics cost in India in comparison to other countries. India has a cost of around 13-14% of the sales whereas it is around 8% for the developed countries. Goods and Service Tax was a step in the right direction, because of GST there was a direct impact on how these companies managed their warehouses. Earlier, they used to have small warehouses in almost every major state to minimize the exposure to the Cross-Border Tax. But after the advent of GST, these taxes were abolished and an origin-based taxation system was introduced. As a result, they were able to use few large warehouses instead of various small warehouses and attain the benefit of economies of scale. But still, we are far from the optimal level of logistics cost.

E-Commerce A boon or Bane?: One of the key parameters of success for an FMCG company is the strength of the distribution network. With the advent of E-commerce, the same distribution network is now made available to a new entrant which might have taken Crores of Rupees before. This has made the industry more competitive. Although, there are various other positive externalities such as:

1. The same network is also available to the established player, who can test their products on these networks without incurring a huge cost.
   
2. The General Trade retail is very fragmented in India, with the players like Udaan and Amazon trying to consolidate these networks. The selling and distribution cost will be further lowered providing more margins to the companies.
   

But again, these vendors are launching their private labels to milk the network that they have which can be a cause of concern. For example, Future First Group recently announced a plan to launch its Detergent.

Trends to watch out
Male grooming has been one of the emerging segments in the industry given the increasing stress on personal hygiene combined with the increase in disposable income. One more segment in a market which is already the next battlefield for growth for the industry i.e. the Rural Market to watch is the Household and Personal Care. The reason? With the increased government initiatives such as Swatch Bharat Abhiyan and Beti Bachao Beti Padhao Andolan, there has been an increasing awareness about the positive externalities of maintaining good personal hygiene as well as keeping the surrounding clean. Given this increased awareness, the populace is more likely to seek out products that augment the same. 

As the new generation is getting more health conscious there has been an increasing demand for healthy products be it Baked Snacks (Mondelez the snacking giant recently showed their interest to enter this vertical be it organically or inorganically) to healthier alternative to Carbonated Drinks.

Conclusion
There are various hurdles that are still needed to be tackled but Government is on its way to address them bit by bit. They have already taken a vow to bring down the logistics cost to sub 10% level. Various Companies such as Udaan, Amazon, Metro Cash and Carry and other E-Commerce Player are already pushing the whole framework towards formalization. On the other hand, FMCG Giants are doing their best to determine where the taste of future generations and lies and are trying to manufacture product that caters to those emerging needs. But in the recent times, the consumer spending has fallen for the first time in 40 years in India. The same can be seen via fall in sales of the FMCG giants in the Rural and Tier 1&2 cities. The time frame for which the recession may last is an issue for another blog, but one thing is clear. The FMCG industry still has a lot of potential in India and growth will come from the untapped market.

References: Cision PR NewsWire, Emami Annual Report, HDFC Bank Investment Advisory Group Sector Update, Sector Report by Accenture Strategy, HUL Investor Presentation, Investopedia, IBEF Report, EconomicTimes and Live Mint.