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Optimistic Outlook For The FMCG Sector

Monday, August 06, 2012
Venugopal Nandlal Dhoot

Growth is likely to come from consumer ‘upgrading’ in the matured product categories

First of all let me share with you that “I am optimistic about outlook of FMCG sector in FY13, especially consumer durable and consumer electronic goods sector.

 The Indian FMCG sector is the fourth largest sector in the economy with a total market size in excess of US$ 13.1 billion. It has a strong MNC presence and is characterized by a well established distribution network, intense competition between the organized and unorganized segments and low operational cost.

Availability of key raw materials, cheaper labour costs and presence across the entire value chain gives India a competitive advantage. The FMCG market is set to treble to US$ 33.4 billion in 2015. Penetration level as well as per capita consumption in most product categories like jams, toothpaste, skin care, hair wash etc in India is low, indicating the untapped market potential. The burgeoning Indian population, particularly the middle class and the rural segments, presents an opportunity to makers of branded products to convert consumers to branded products. Growth is also likely to come from consumer 'upgrading' in the matured product categories. With 200 million people expected to shift to processed and packaged food, India needs around US$ 30 billion of investment in the food-processing industry.

Though fall of rupee against major currencies, new norms of standard-size packaging, increase in raw material costs due to upward spiraling interest rates and inflation together might dent the performance of the fast moving consumer goods (FMCG) sector, still there is silver lining of growth momentum.

According to analysis, a sharp depreciation in the value of rupee and new packaging norms are going to have a drastic effect on the FMCG industry which is likely to increase cost of regular products like biscuits, coffee, tea, toiletries and personal care items in FY13.

“Input cost inflation, persistent rise in raw material price, rising fuel costs, fluctuation in the currency, dipping industrial growth, slowing global economy together with an overall moderating consumer sentiment might lead to a slow volume growth of FMCG segment.

 “All of these factors might pinch the FMCG industry which will go for a fresh round of price hikes   in FY13. “The sector might take a hit of about 10 to 15 per cent in sales including the semi-urban and rural market as the burden might be shifted to the price-conscious end consumers or else companies will have to opt for down trading.”

“Based on emerging market scenario and overall macro-economic expectations the Reserve Bank of India (RBI) may go in for a reduction in interest rates to boost the sagging economy, improve demand momentum and investment climate. “With interest rates peaking off we expect RBI to reduce the cash reserve ratio (CRR) and the repo rate and FMCG will turn out to be the biggest beneficiary of the same.” FMCG companies are showing signs of consolidation and might not be able to sustain the strong volume and sales growth momentum in coming months.

The weakening rupee against the dollar and imported inflation are the primary reasons that might hamper the growth of FMCG in the FY13. Government notifications on revised norms for packaging of FMCG products will propel the companies to increase their prices due to high raw material costs eating into their already stressed profit margins.  Consumption pattern will moderate as price sensitive Indian consumers will tighten their budget and keep a close watch on their expenses and might even switch over to cheaper variants, regional or local brands to save money. Interest rates and inflation will abate gradually and the growth will continue despite certain hiccups in FY13.

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