Five trends that will drive FMCG growth in 2013

India’s consumption story remains intact, though the pace of growth has slowed against previous years

Sapna Agarwal

Consumer spending reached an eight-year low in the September quarter of fiscal 2013. Photo: Pradeep Gaur/Mint

• Updated: Thu, Jan 31 2013. 01 20 AM IST

Mumbai: India, Asia’s third largest economy, saw urban consumers spend less in calendar year 2012 due to high inflation, muted salary hikes, and slowing economic growth that affected both real wages and sentiment.

Yet, the fast moving consumer goods index (the BSE FMCG index) was the third biggest gainer among sectoral indices on BSE, surging 47%, while ITC Ltd figured among the top 10 best-performing stocks, rising 43.64% in the period.

Compared with other sectors, the consumption story remains intact, though the pace of growth has slowed compared with previous years.

Consumer spending reached an eight-year low in the September quarter of fiscal 2013 (FY13). Private final consumption expenditure (PFCE), an official estimate of consumer spending, slowed to 3.68%, according to India Ratings, a part of the Fitch Group. That’s not an isolated number—in the last six quarters, four recorded the lowest PFCE growth rate seen in the last 34 quarters, India Ratings said in its January report.

“This time, the slowdown in consumption spending is visible in some categories in the higher SECs (socio-economic classifications) of urban India,” analysts Anand Mour and Gagan Borana said in an ICICI Securities Ltd December report.

The trends seen in 2012 are likely to accelerate in 2013. Growth will come from rural dwellers who are expected to see a rise in disposable incomes due to the direct cash transfer scheme, while urban consumers will continue to be affected by the macroeconomic environment, analysts said.

“Our analysis of the impact of government spending on consumption suggests that consumption at the bottom of the income pyramid is likely to stay strong,” said analysts Neelkanth Mishra and Ravi Shankar in a 7 January report titled India Market Strategy by Credit Suisse Securities (India) Pvt. Ltd. “The squeeze of the urban middle-class, on the other hand, is likely to continue.”

Muted salary increases will also add to the pressure on urban consumption, it said.

Besides that, food inflation remains persistent, forcing consumers to spend more. “Food inflation, which had declined to 6.6% in October, has re-entered the double-digit zone after four months,” said a January report by Crisil Ltd.

Yet, there are bright spots, with analysts expecting consumer companies to continue seeing growth from shoppers buying branded goods for the first time, and by sales, discounts and promotions. Experts expect five trends to dominate in 2013: rural and new consumer segments, sales and discounts, new launches and expansion, emerging segments and trade channels, and premiumization.

Rural and new consumer segments

The consumer packaged goods market growth will be aided by a rise in government final consumption expenditure (GFCE), as was witnessed two years before the general election in 2009, and the likely roll-out of policies such as the food security Bill and the direct cash transfer of subsidies to about 40% households in India, said analysts.

In the two years preceding the 2009 general election, the consumer packaged goods market grew in excess of 1.4 times the nominal GDP (gross domestic product) growth, while GFCE grew at over 18%, exceeding the nominal GDP growth during the period. Spending by the rural development ministry doubled in FY09 to Rs.56,900 crore owing to government spending.

“Already in the first half of fiscal 2013, GFCE has grown by 19%, compared to about 14% growth in the past 18 months,” said the ICICI Securities December report cited earlier.

Growth will also be driven by new segments such as urban India’s poorest households earning less than Rs.6,000 per month and low-income value seekers visiting modern trade outlets for the first time. These two segments will add around $3 billion (around Rs.16,000 crore today) to the consumer packaged goods sector by 2015, said a November report by market research firm Nielsen Co.

Sales, promotions and discounts

If we look at the just concluded festive season for a glimpse of what to expect in 2013, there will be an increase in the frequency of promotions and discounts. Retailers from food and groceries, electronics, home furnishings, and apparel and lifestyle are likely to increase the number of promotions and sales that they run in a bid to lure consumers shying away from buying.

“Sales in 2013 would be driven by discounts, a trend that was largely prevalent in 2012,” said Govind Shrikhande, managing director of Shoppers Stop Ltd, which runs India’s oldest department store retail chain.

“About 40% of the overall sales come from discounts. On an average, this will further increase by 4-5% this year as discounts increase,” said Dipak Agarwal, chief executive officer of DLF Brands Ltd, which retails apparel and footwear brands such as Mango and Boggi.

The year will see the advent of “value trading” as one of the biggest drivers of growth, said Ritesh Chandra, executive director and head (consumer group) at Avendus Capital Pvt. Ltd, adding that retailers and manufacturers will work together and give conjoint offers rather than mere discounts.

“We have to keep grocery shopping exciting for the consumer,” said Damodar Mall, director (food strategy) at Future Group , parent of India’s biggest listed retail company Pantaloon Retail (India) Ltd.

Sunil Kataria, executive vice-president (marketing and sales) at Godrej Consumer Products Ltd, the maker of Cinthol soaps and Hit insecticides, agreed with the above view. He added that cooling of commodity prices would aid a larger incidence of consumer promotions across categories.

Expansion and new launches

The year will see consumer companies increase their reach into the interiors of India. Firms will also launch more products and widen their portfolio as they get into new segments and categories, according to Abheek Singhi, leader of the consumer practice and India partner at Boston Consulting Group (BCG).

For instance, Procter and Gamble has a presence in 14 categories in India that include detergents such as Tide, Ariel and shampoos such as Head & Shoulders. Its Cincinnati-based parent has products in 24 categories. In the coming years, the company plans to introduce its entire portfolio, with the exception of toilet paper, in India, Shantanu Khosla, managing director of P&G India, had said in a September interview.

Besides, consumer and retail companies are also expanding into new geographies and categories. Hindustan Unilever Ltd (HUL) recently launched Dove hair oil—a segment hitherto dominated by companies such as Marico Ltd, known for Parachute hair oil, and Dabur India Ltd that sells Vatika.

The India opportunity is also attracting global quick-service restaurant chains, besides apparel and footwear retailers. In December, the UK-based casual dining chain PizzaExpress launched its first store in India. Earlier this month, the US-based Krispy Kreme opened its first store in Bangalore. DLF recently signed a joint venture with the US-based fashion brand Forever21 and will launch its first store in April this year.

Even regional brands across categories such as Turtle in men’s wear, Khadim’s in footwear and others will continue to invest to take their brands pan-India after having established themselves in regional markets, said Santosh Verma, director (investment banking) at IDFC Capital Ltd.

Emerging segments and trade channels

Growth will come from the fringes—categories that are not among the mainstays—such as oats, conditioners, liquid fabric conditioners, and liquid soaps and face wash compared with staple soaps and deodorants.

Five categories that have witnessed the highest growth in their contribution between calendar year 1999 and calendar year 2010 are biscuits, refined edible oils, salted and savoury snacks, mosquito repellents and skin creams. “We note that these categories witnessed increase in penetration, consumer shift from loose to packaged products or unbranded to branded products,” said the ICICI Securities report cited earlier.

It identified the five categories that witnessed the maximum drop in their contribution as toilet soaps, packaged tea, detergent cakes and bars, toothpaste and confectionery (toffee and hard boiled candy).

Channels including modern trade (comprising hypermarkets and supermarkets) account for 5-7% of the overall retail market and are expected to double to 10-12% in the next three years, according to a Mint estimate based on forecasts from BCG, Ernst and Young Pvt. Ltd, Deloitte Haskins and Sells, KPMG Advisory Services Pvt. Ltd, Technopak Advisors Pvt. Ltd and Booz and Co.

Modern trade growth will come with new consumers accessing such stores for the first time, existing consumers buying more and retailers opening new outlets.

Shoppers Stop opened 13 new stores in FY12. The retailer targets to have 75 stores by the end of FY15. Pantaloon Retail added 41 stores and Trent Ltd, the retail arm of the Tata group that runs the Westside department store chain and Star Bazaar hypermarket chain, opened seven stores in the year.

“Retailers will continue to open new stores in tier II and tier III cities as metros get saturated,” said an India Ratings January report.

Likewise, e-commerce, which accounts for close to 1% of the overall retail market, will also drive growth. “E-commerce, which, till a few years back, was predominantly a medium for information, has graduated to being a medium for buying.

The e-commerce market in 2012 has grown 45-50%. This is an important trend and can have significant impact on the way consumers buy and organized retail evolves in the country,” said Mohit Bahl, partner at KPMG India.

The fundamentals of an online ecosystem are already in place, said Harminder Sahni, managing director at consultancy Wazir Advisors, adding that growth in 2013 will come from the availability of many more categories online. “Online will move upwards in terms of price range as well as customer segments in terms of higher age and higher income,” said Sahni.

With changing lifestyles, consumers’ focus on health and wellness will also see emerging categories such as nutraceuticals, health food and health services doing well. Sales of olive oil, for instance, exceed that of Saffola, a premium cooking oil from Marico, at grocery retail chain Big Bazaar.

Oats, which didn’t exist as a category until three years ago, are now a Rs.200 crore market. The high growth has persuaded companies such as HUL and Nestlé India Ltd to launch oats under their Knorr and Maggi brands, respectively, said a January 2013 report by Edelweiss Securities Ltd.

Premiumization

Despite the slowdown, consumers are willing to buy premium goods, unlike previous slowdowns that saw consumers down trade or buy cheaper products. “Researches indicate consumers are willing to adopt a new premium category, even at a higher price, in the space of convenience, health and wellness,” said the ICICI Securities report cited above.

The sale of products perceived as being healthier— wheat cornflakes and muesli, baked and non-fried potato chips and snacks, and diet beverages, 100% juices and organic or green tea—are rising, said Gaurav Gupta, senior director at Deloitte Touche Tohmatsu India Pvt. Ltd. He added that the sale of organic products was also rising.

To be sure, in the last two years, consumers are increasingly opting for more and more premium products. “This has led companies like HUL, P&G, Kraft/Cadbury to launch more and more premium products at higher price points as there is an increasing demand amongst consumers for such products,” said the Edelweiss report.

“The growth of the premium segment is being driven by income levels improving and more choices available today,” said Sunil Taldar, director (sales and international business) at Cadbury India Ltd, which has seen success with pricier products such as Silk and Bournville, and recently launched Toblerone from its parent’s portfolio.