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Event update: Consumer Goods - CII FMCG Summit - Consumption theme intact; business models evolving

We present key takeaways from the CII FMCG Summit 2018, which hosts senior managements of several large FMCG majors.

Change in income pyramid provides huge opportunity: An analysis of Indian household incomes and a future projection of the same (source: upcoming Bain & Co report on ‘Future of Indian Consumer’) suggests that low-income households will reduce from 127m in 2018 to 57m by 2030. This 70m shift will be towards lower middle income (35m) high income (21m) and the balance towards upper middle income categories. This shift will primarily drive higher annual consumption spend from US$1.4trn in 2018 to US$5.7trn in 2030, translating into 12% CAGR over the period.

Penetration and premiumization remain key consumption drivers: Given the above macro trend, Bain & Co believes 55% of this consumption growth will still be driven by a larger number of people increasing their monetary spend, implying higher penetration and frequency of consumption. The growing affluence of semi urban India and the fact that developed rural and towns Tier 2 and beyond have similar awareness and aspiration levels, will translate into strong penetration-led growth. The report estimated that 26% of consumption growth would be premiumization led and 19% would be led by addition of new categories (buying new).

Buying Indian/being value conscious - a continued theme: From a consumer discretionary perspective, trends of buying ‘Indian’ are likely to be strong. For example, branded ethnic or fusion wear will see significantly higher growth than western wear for women. While western cuisine is most searched on Swiggy, Indian cuisine is most purchased. Further, from finding value and being value conscious will continue to be a consumption trend among Indians, irrespective of their income levels. These factors explain the growth in online retail and offline value retailers, and the growth is expected to continue.

E-commerce a major factor: FMCG companies have witnessed increase in e-commerce sales from 0.4% to 1.4% over the last 2 years. Nielsen estimates e-commerce to touch 10% of FMCG sales by 2030. Hence, brands having a strong online salience will have increased relevance, going forward.

Brands developing a social identity: Mr Paranjpe, Head of Food and Refreshments for Unilever emphasized the need for brands to be socially relevant and have an identity of their own from a sustainability perspective. He is of the view that in future, brands will need to stand for something to resonate with tomorrow’s consumer.

Recent growth and channel trends: Mr Prasun Basu, President South Asia for Nielsen, commented on overall FMCG growth trends. The FMCG segment grew at 2-3% globally with India seeing the fastest growth at 12-14% as a relevant emerging market over last two years. While larger players grew at a slower pace, smaller companies witnessed 19-20% growth with regional players outpacing and registering ~30% growth. Emergence of new food categories and access of information, which drives brand awareness are other key trends were topics that were touched upon. As highlighted by Bain & Co, mass end of the market continues to have immense opportunity. From a channel perspective, modern trade salience has recently picked up from 6-7% of FMCG sales to ~10% and is likely to keep increasing.  

Organized players to lead competitive advantage: Large organized players would continue to grow ahead of their respective segments even in traditional categories, given the competitive advantages on sourcing, distribution, advertising and manufacturing. They would also be best placed to navigate changes in the go to market models, further driving competitive advantage.

Niche brands have a large growth potential: Premium and niche brands hold huge potential to grow into US$10m brands in 2-4 years. This is due to the rising importance of modern trade and e-commerce channels, which currently comprise ~12% of FMCG sales but are likely to have a higher salience ahead.

Our View

While the income and aspiration levels of the Indian consumer will drive robust growth in consumption, current incumbents who can dynamically adapt to the changing environment as well as new players that can leverage distribution channels will be the winners of tomorrow. Key themes of premiumization and penetration remain intact. We believe given the strong growth of smaller and regional brands, the M&A environment in Indian FMCG will witness significant acceleration in the coming years.​