The Fast-moving consumer goods (F.M.C.G) sector is the 4th largest sector in the Indian economy with Household and Personal Care accounting for 50 % of F.M.C.G sales in India.
Growing awareness, easier access and changing lifestyles have been the key growth drivers for the sector. The urban segment (accounts for a revenue share of around 55 %) is the largest contributor to the overall revenue generated by the F.M.C.G sector in India.
However, in the last few years, the F.M.C.G market has grown at a faster pace in rural India compared with urban India. Semi-urban and rural segments are growing at a rapid pace and F.M.C.G products account for 50 % of total rural spending.
Also, it should be noted that the F.M.C.G sector has been grown its sales during lock down
The retail market in India is estimated to reach US$ 1.1 trillion by 2020 from US$ 840 billion in 2017, with modern trade expected to grow at 20 % – 25 % per annum, which is likely to boost revenues of F.M.C.G companies. Revenues of F.M.C.G sector reached Rs 3.4 lakh crore (US$ 52.75 billion) in FY18 and are estimated to reach US$ 103.7 billion in 2020. The sector witnessed growth of 16.5 % in value terms between July-September 2018; supported by moderate inflation, increase in private consumption and rural income. Rise in rural consumption to drive the F.M.C.G market. It contributes around 36 % to the overall F.M.C.G spending. F.M.C.G urban segment witnessed growth rate of 8 % whereas rural segment grew at 5 % in quarter ended in September 2019. The revenue of F.M.C.G’s rural segment is forecasted to grow to 11-12% in 2020.
The government has allowed 100 % Foreign Direct Investment (FDI) in food processing and single-brand retail and 51 % in multi-brand retail. This would bolster employment and supply chains and provide high visibility for FMCG brands in organized retail markets, bolstering consumer spending and encouraging more product launches. The sector witnessed healthy FDI inflows of US$ 15.94 billion during April 2000-December 2019. Some of the recent developments in the FMCG sector are as follows:
- In November 2019, ITC Ltd acquired 33.42 per cent stake in Delectable Technologies, which is a vending machine start-up.
- India’s first kids cooking oil launched by Mother Sparsh in 2019.
- In June 2019, ITC launched dairy beverage range Sunfeast Wonderz Milk in four variants
- In November 2019, Santoor launched Santoor Deo pocket perfumes exclusively for West Bengal.
- Nestle plans to invest Rs 700 crore (US$ 100.16 million) to open a new plant in Sanand for Maggi.
- ITC to invest Rs 700 crore (US$ 100 million) in food park in Madhya Pradesh
- Patanjali will spend US$743.72 million in various food parks in Maharashtra, Madhya Pradesh, Assam, Andhra Pradesh, and Uttar Pradesh.
- Dabur is planning to invest Rs 250-300 crore (US$ 38.79-46.55 million) in FY19 for capacity expansion and is also planning to make acquisitions in the domestic market.
Some of the major initiatives taken by the government to promote the FMCG sector in India are as follows:
- The Government of India has approved 100 per cent Foreign Direct Investment (FDI) in the cash and carry segment and in single-brand retail along with 51 per cent FDI in multi-brand retail.
- The Government of India has drafted a new Consumer Protection Bill with special emphasis on setting up an extensive mechanism to ensure simple, speedy, accessible, affordable, and timely delivery of justice to consumers.
- The Goods and Services Tax (GST) is beneficial for the FMCG industry as many of the FMCG products such as Soap, Toothpaste and Hair oil now come under 18 per cent tax bracket against the previous 23-24 per cent rate. Also rates on food products and hygiene products have been reduced to 0-5 per cent and 12-18 percent, respectively.
- The GST is expected to transform logistics in the FMCG sector into a modern and efficient model as all major corporations are remodeling their operations into larger logistics and warehousing.
Rural consumption has increased, led by a combination of increasing incomes and higher aspiration levels; there is an increased demand for branded products in rural India. The rural FMCG market in India is expected to grow to US$ 220 billion by 2025 from US$ 23.6 billion
in FY18. In FY18, FMCG’s rural segment contributed an estimated 10 per cent of the total income and it is forecasted to contribute 15-16 per cent in FY 19. FMCG sector is forecasted to grow at 12-13 per cent between April-June 2019.
On the other hand, with the share of unorganized market in the FMCG sector falling, the organized sector growth is expected to rise with increased level of brand consciousness, also augmented by the growth in modern retail. Another major factor propelling the demand for food services in India is the growing youth population, primarily in the country’s urban regions. India has a large base of young consumers who form most of the workforce and, due to time constraints, barely get time for cooking.
Online portals are expected to play a key role for companies trying to enter the hinterlands. The Internet has contributed in a big way, facilitating a cheaper and more convenient means to increase a company’s reach. It is estimated that 40 per cent of all FMCG consumption in India will be online by 2020. The online FMCG market is forecasted to reach US$ 45 billion in 2020 from US$ 20 billion in 2017.
It is estimated that India will gain US$ 15 billion a year by implementing the Goods and Services Tax. GST and demonetization are expected to drive demand, both in the rural and urban areas, and economic growth in a structured manner in the long term and improve performance of companies within the sector.
Top 3 stocks
- ITC Limited (Established: 1910) Current Price: 195.90
|Market Cap (Rs Cr.)239,821.43||Price/Book: 4.29|
|P/E: 16.19||Industry P/E: 19.81|
|Book Value (Rs): 45.52||Dividend (%): 575.00|
ITC Limited is an Indian conglomerate involved in the various diversified business. ITC has 6 different verticals of businesses, FMCG, Hotel, Paperboards, Speciality papers and packaging: IT and agribusiness. ITC’s cigarette business contributes a major
proportion of its FMCG revenue. ITC’s gross revenue crossed the mark of Rs. 50000 crores in 2016.
- Portfolio of Business: ITC has 6 strong and diverse businesses under its name which boasts its total revenue and allows ITC to innovate and explore other business opportunities.
- Strong Brands in various businesses: ITC is a strong house of brands with most of its products leading the segments in which they operate. ITC owns some of the most popular cigarette brands like gold flake and Classic. It also owns Sunfeast, which is amongst the top selling biscuits in India. Similarly, Aashirvaad, Yippee! Engage, John Players and Bingo are also amongst the market leader in their respective categories. ITC’s hotel and property businesses are also doing well.
- With a portfolio like this, ITC has become one of the most powerful conglomerates in India and is admired all over the world.
- Effective Social Business Initiatives: ITC has developed a triple-bottom-line strategy through which concentrates on developing the nation’s economic, social, and environmental capital. ITC has brought in initiatives like E-Choupal, Choupal Pradarshan Khet (CPK) which benefits the people at the grass root level, i.e. farmers. These initiatives have also helped ITC to improve its corporate image from a traditional tobacco manufacturer.
- Inter and Intra-divisional Synergy: ITC has successfully utilized the strengths of existing business to foray into a newer products or categories. ITC leveraged the strong distribution system of cigarette brands to create a channel for its FMCG products. Furthermore, ITC leveraged the knowledge of food and bakery items from its hotel business to enter Packaged Food category.
- High Proportion of revenues from Tobacco products: ITC has been continuously making efforts to divert the FMCG business from over dependence on tobacco products and have been successful in doing so to an extent. But tobacco products remain to be the major source of the revenue contributing more than 60% of the total revenue from FMCG businesses.
- Association with Tobacco Products affects the image: ITC has made a lot of efforts to improve its corporate image but the fact that ITC has many tobacco products in its portfolio impacts its corporate image.
- An increase in Tax on Tobacco affects revenue: Due to the increase in taxation on tobacco products, the prices and hence revenues get affected.
- Strategic Acquisitions: ITC should continue making the strategic acquisition like they have done in the past by acquiring Savlon from Johnson & Johnson and B Natural from Balan natural Foods. Keeping in mind that the product fits into the existing distribution network, ITC can look to increase its portfolio of products and expand its Non-Tobacco FMCG business and thereby strengthening the base of revenue.
- Growth in Purchasing power and improving lifestyle: ITC should tap on the increasing purchasing power and improving the lifestyle of customers in India. This could help in increasing revenue for all its businesses.
- Growing Personal Hygiene as well as Food processing Industry in India: ITC should utilise its distribution channel in Personal Hygiene and Food Processing Industry to capitalise on the growth in the categories and hence increase revenue.
- Tap opportunities created in the Rural Market: The growing rural market in India and other emerging nations create huge opportunities to improve the bottom-line of the company.
- Intensifying Competition in FMCG businesses: ITC faces intense competition in its FMCG business from large MNCs like HUL and P&G and Indian FMCGs like Patanjali and Dabur. This limits the market share for ITC.
- Strict Regulations and Increasing Taxation in Cigarette Business: The Tobacco and Cigarette Industry in India continue to be targeted by strict government regulations and taxation system. This possesses a threat to the highly profitable Cigarette business of ITC.
- Increasing awareness on health: There has been an increase in the health consciousness which has resulted in the decrease in demand for tobacco products in India. Also, anti-smoking campaigns throughout the country affect the sales of cigarettes.
We recommend ITC for the next 5-year investment horizon.
- Hindustan Unilever Limited (HUL) (Established: 1933)
Current Price: Rs. 2,151.35
|Market Cap (Rs Cr.): 506,198.81||Price/Book: 62.89|
|P/E: 75.11||Industry P/E: 66.96|
|Book Value (Rs): 34.26||Dividend (%): 2500.00|
- Brand visibility – From soap to mineral water, HUL is shaping the life of 1.3 billion people daily. Being in consumer good market with its 20 consumer categories such as soap, tea, detergents, shampoo etc. & each having large assortments, helped HUL in occupying the large shelf space of Grocery /departmental stores which itself explains the acceptance/demand of their products in the market.
- Market leader in consumer goods: According to Nielsen data 2 out of three Indian consumers use HUL products. HUL used selective targeting strategy to emerge as a market leader in the Indian market.
- Innovative FMCG Company: Hindustan Unilever Research centre (HURC),Mumbai & Unilever Research India, Bangalore ,both research facilities were bought together in a single site in Bangalore in 2006.Employees in this facility continuously working & developing
innovations in products & manufacturing processes which is helping the HUL to set it as front- runner in the consumer goods market.
- Extensive & integrated distribution system: HUL’s brands are now household name which is only possible due to its 4-tier distribution system namely
- a) Direct Coverage through common stockist within a town of population under 50000 people.
- b) Indirect coverage: Villages closer to larger urban markets have been targeted.
- c) Streamline: Leveraging the rural wholesale market to reach markets inaccessible by road.
- d) Project SHATKI AMMA: It targeted the very small villages (2000 population) & tapped into pre-existing women’s SHG (self-help groups). Markets have been segmented based on their accessibility & business potential.
- High Brand awareness: By signing popular celebrities for the advertisements of their products HUL has created positive word of mouth over the ages which helped them in social acceptance of their products intelligently targeted & meant for different income groups.
- Product line: It offers product categories namely oral care, personal care, household surface, fabric care and pet nutrition etc. having deep assortments across the product categories.
- Financial position: Having more than 80 years of experience in the consumer goods market & backed by Unilever who owns 67% controlling share in HUL, it is financially strong.
- Market share: Through high penetration in the market, HUL had managed to hold their high market share in different product categories.
- Share of Wallet: Whether one buys surf /wheel /Rin detergent it will go to HUL’s pockets. HUL strategy to offer different products for different income groups (selective targeting) has been successful in having share of wallet of a consumer.
- Decreasing Market share: Competitors focusing on a product & eating up HUL’s share, like Ghadi & Nirma detergent eating up HUL’s wheel detergent market share.
- Large number of brands in different product categories: Sometimes having broad brand portfolio can lead to confused positioning. Price positioning in some categories allows for low price competition like AMUL captured Kwality’s market share.
- Expanding market: By penetrating more in the rural markets through its project Shakti AMMA and transition of unorganized business to organized one will lead to further expansion of the consumer goods market.
- Awareness in usage rate of consumer goods: People getting more aware and conscious about the usage may be through advertising /word of mouth /doctor prescription, is resulting in increase in usage rate of these products.
- Increasing Income levels: Due to stable political scenario, improved literacy rate & controlled inflation, disposable income of the people is increasing thereby resulting into upsurge in demand & changing their lifestyle.
- Competition in the market: With increasing number of local & national players it is becoming very hard for the companies to differentiate themselves from others. There is also threat from counterfeit products destroying its brand image in the market.
- Price of commodities: Increasing price of commodities will result in further increase in the price. Further increase in price will result in decrease in sales, margins & brand switching.
- Buyers power: With highly diversified consumer goods market where there are lots of brands claiming different sorts of benefits, it’s very difficult for consumers to stick to a particular brand & hence results into brand switching where consumer got power to select a brand based on several factors like availability, reference group recommendation, preference & price.
We recommend HUL for the next 5-year investment horizon.
Current Price: Rs. 16,707.50
|Market Cap (Rs Cr.): 161,014.25||Price/Book: 83.33|
|P/E: 79.15||Industry P/E: 60.08|
|Book Value (Rs): 200.41||Dividend (%): 3420.00|
- Reputed brand name – Nestle is the most renowned brand in the world. It has developed a respected reputation in the food and beverages sector offering high-quality products for everyday use across the globe.
- Globally recognized brand – Through its effective advertising and branding strategies, it has created significant awareness and developed a successful brand image around the world. According to the Fortune Global 500, Nestle is among the world’s largest corporations and is ranked at 69th position in 2018 list.
- Highly diversified company – Nestle sells its products in 189 countries Instead of relying on a few markets, it has captured the sizeable market in a lot of developed and developing
countries to earn most of its revenue. Its leading markets include the US, China, France, and Brazil. In 2017, It generated CHF 26.7 billion from the US market alone.
- World’s most valuable brand – According to 2018 Forbes Global, Nestle is among the top as the world’s most valuable company in regards to highest revenue, profits, assets, and market value.
- Extensive product portfolio – Nestle owns more than 2000 brands globally and renovated over 8000 products for nutrition and health considerations, according to its Annual Review 2017. It is one of the worlds’ biggest companies with the broadest product portfolio.
- Well-established relationships and popular brands– Nestle has some of the world’s most recognized brands under its name such as Nescafe, Kit Kat, Gerber, Milo, and Maggi. Besides, it has well-established relationships with other trusted and powerful brands like Colgate Palmolive, Coca Cola, General Mills, and L’Oréal.
- Efficient R&D system – Nestle has the world’s largest food and nutrition research organization with 21 R&D centres. Its research and development capability are one of its key competitive advantages. There are more than 5000 employees involved in R&D operations. It spent nearly 1.72 billion Swiss Franc on R&D in 2017.
- Environmental sustainability practices – Nestle puts substantial efforts in environmental sustainability practices and take innovative initiatives in improving its quality of products. It optimizes advanced solutions to reduce waste, water usage, non-renewable energy use, and packaging material usage. In 2017, 253 of Nestle factories reached zero waste production. To communicate sustainability benefits with its customers and keeping the environment clean, Nestle launched a free mobile app that helps people to recycle waste packaging material correctly.
- Large distribution system – Nestle owns an extensive and diversified distribution system that is not only penetrated in urban areas but also rural regions. It has adapted local distribution methods and decentralized approach to run the business efficiently in respective countries. Nestle has strong relationships with suppliers, retailers, vendors, and distributors.
- Price fluctuations by retail giants – Nestlé’s grocery sales are achieved majorly through huge retail giants like Walmart, Tesco, and Kroger. Any reduction or increase in prices by these retailers can affect Nestlé’s sales.
- Span of control and organizational structure –Nestlé is organized in a matrix structure. That means many brands are under the same umbrella group which makes it somewhat challenging to manage the large Administrating such many individual brands can often result in discord and conflict of interest.
- Water controversy – Recently, Nestle was accused of illegally pumping millions of litres of water in 6 nations where residents are deprived of drinking water.
- Social criticisms –Nestle has become a target of media attention many times. The claim to privatize water, misleading labelling, and a lawsuit for chocolate making using child and slave labour are some of the examples that have to weaken its market reputation.
- Maggi Noodles controversy – In 2017, Nestle failed to clear a laboratory test in India. This created a publicity hype as people boycotted Nestle, leading to the loss of 80% of market share in the country. Nestle claimed ‘No added MSG’ in the Noodles packets. However, 1000 times more lead was found in the product after testing.
- Venturing small food start-ups – Nestle has a fantastic opportunity to grow the number of small food start-ups under its popular brand name. Nestle can also collaborate with the new start-ups to promote its brand name.
- Online shopping – Nestle has a remarkable opportunity to boost its e-commerce sites and online shopping platform. A very few CPGs are offering online services to make the shopping experience more comfortable and pleasant. Although Nestle has its online stores in a few countries, expanding its online services to more areas will prove a rewarding decision for the company.
- Market penetration for breakfast cereals – Nestlé’s cereals and oats market have shown fast growth in recent years. Thus, penetrating this market more would be highly lucrative for the company.
- Expanding ready-to-drink tea and coffee market – The demand for tea and coffee is continuously on the rise, rendering a profitable opportunity for Nestle to groom this market more.
- Partnerships – Strategic alliances with other food and beverage giants are also a great opportunity for the company to increase its revenues and profits.
- Authentic labelling – Nestle has already been criticized for giving misleading nutritional information on its labels. So, there is an opportunity to improve its practices by giving trustworthy information and accurately labelling its products.
- Illegal rainforest destruction controversy – In 2017, Nestle was alleged of involvement in the destruction of Sumatra’s last tract of rainforest. It faced severe criticisms from NGOs and environmentalists in this regard.
- Water scarcity –Nestlé’s production is highly dependent on water usage. Accessing the clean water through less costly sources has become difficult for the company due to many reasons. These include increasing population, climate change, growing demand for food and water, increasing pollution, water wastage, and overexploitation of resources.
- Rising competition – Many CPG companies like Mondelez and Unilever offer similar food and beverage products. It is hard for Nestle to compete in such a situation where
the substitute products are easily accessible.
- Government regulations and prices – Government regulations can affect the business operations of Nestle. Additionally, the increasing prices of commodities force the company to increase the prices of its products. It will lead to sales reduction as consumers can switch to other brands which are available at low costs.
We recommend Nestle for the next 5-year investment horizon.