Indian FMCG Sector Growth Drivers and Category Trends: 2008-09

The fourth largest sector in the Indian economy is all set for 16% growth during 2008-09, from a base of Rs. 85470 crores, as predicted by FICCI. Going forward, as anticipated by CRISIL, FMCG sector will touch around Rs. 140000 crores by 2015 (33.4B$).

This post will through some pointers for growth in FMCG Sector and update with the contemporary category trends.

Growth Drivers: FMCG Sector

1. Disposable Income: There is increase in disposable income, observed in both rural and urban consumers, which is giving opportunity to many rural consumers to shift from traditional unorganized unbranded products to branded FMCG products and urban fraternity to splurge on value added and lifestyle products. The increasing salaries, along with rising trend of perks in the corporate sector at regular intervals, have increased people’s spending power. As per some research, there is a high correlation between Disposable per capita and HPC per capita.
2. Organized Retail: The emergence of organized retail have lead to more variety with ease in browsing, opportunity to compare with different products in a category, one stop destination (entertainment, food and shopping) etc, which is playing an important role in bringing boom in the Indian FMCG market. Currently the modern trade is capturing 5% of the total retail space, which will increase to 10% and 25% in 2010 and 2025 respectively. Also, as the credit card and organized retail trend picks up, people won’t think much while buying and buy more.
3. Distribution Depth - Rural Penetration: There are 5500 towns and 6.38 Lacs villages with 2.5Mln and 5Mln outlets respectively. Due to saturation and cut throat competition in urban India, many FMCG companies are devising strategies for targeting rural consumers in a big way. Many FMCG companies are focusing on increasing their distribution network to penetrate with a step by step plan. This is the reason that FMCG urban market size has dropped from 50% to 29% in last 5 years. The FMCG market size for semi-urban and rural segment was 19% and 52% respectively for the year 2006-07. As per FICCI, the FMCG market size for urban, semi-urban and rural for year 2007-08 was expected to be 57%, 21% and 22%, which clearly shows that rural market is the growth engine for FMCG growth. Though the urban markets are growing too, the incremental addition in consumer’s households is much more in rural space as compared to urban markets. The planned development of roads, ports, railways and airports, will increase FMCG penetration in the long term. 180 million rural and semi-urban people’s attention has already been diverted towards FMCG products, according to latest estimates released by industry chamber, Assocham in 2008. The estimated number of households using FMCG products in rural India has grown from 131 million in 2004 to 140 million in 2007, according to market research company IMRB. Over 70% sale of FMCG products is made to middle class households and over 50% of middle class is in rural India.
4. Buying Pattern Shift: The crisis of declining FMCG markets during 2001-04 was driven by new avenues of expenditure for growing consumer income such as consumer durables, entertainment, mobiles, motorbikes etc. Now, as many consumers have already upgraded, their income is being directed towards pampering themselves.
5. Favorable Indian Economy & Demographics: 45% people in India are under 20 years of age. Per capita disposable income has increased from $550 to $600 in 2007 (9% increase). GDP is growing at a CAGR between 8 to 9%.In the next five years, affluent and aspirers as a total will supersede strivers and will be dominated by aspirers, as per NCAER.

FMCG Category Trends

1. Underpenetrated Growth Categories: Within the Indian FMCG industry, there are few categories that will grow more than 20% during 2008-2009, like shaving cream, skin/fairness cream, shampoos, skin care & cosmetics, tooth powder. Some other growth categories will be hair colour, skin care, anti-aging solution, deodorants and men’s products. Most of these categories are under penetrated and there is a huge scope for growth.
2. Penetrated Growth Categories: Even mainstream categories with high penetration levels such as washing detergents, soaps and hair oils have shown strong underlying volume growth, despite sharp inflation led price increases in FY08. This is partly related to the growth in organised retail (3-5% of turnover for most FMCG players) that gives more visibility to national brands with strong brand equity.
3. Anand Shah, an FMCG research analyst at Angel Broking, says most FMCG companies are responding to the new demand by concentrating on developing a big theme and building a portfolio around it. Nestle, for example, has identified 'health and wellness' as its focus area, while Dabur is positioning itself around ayurvedic (a traditional Indian system of healthcare), natural and herbal products. At the higher price end, companies are leveraging health and wellness trends by focusing on providing 'experiential' and 'higher order' benefits rather than purely functional ones.
4. Health Food Categories: FMCG majors are widening their health food portfolio to cash in on the rich, urban, health conscious Indian. Sugar free Chywanprash, organic spices and multi grain pastas and biscuits are few examples. Urban India is high on health and FMCG majors are cashing in on the opportunity. Processed foods particularly juices that are based on the health platform would see stronger growth. Also, with the Indian consumer becoming increasingly health conscious, the demand for juices has witnessed rapid growth.
5. Impact of inflation in 2008: Even if consumers don't switch to cheaper substitutes during inflation, they normally switch from higher SKUs to lower SKUs of the same product. This is the reason the companies have come up with smaller SKUs. In line with this trend, Henkel has withdrawn its 500gm pack washing powder which was priced at Rs.46 and has replaced it with a new 400gm pack that costs INR40. A couple of months back, Amul introduced 25gm packs of butter. Not surprisingly, this pack is fetching more sales than 100gm and 500gm packs.

In the first 10 months of 2007, there were 251 product launches, including 28 new brands, compared with 191 for the same period of 2006. Snacks and foodstuffs remain the category leaders, with recent launches of several health and beauty products, particularly in urban markets.