Flashback for FMCG suggest better times

Rural push big catalyst for growth; companies to add around 20% to thier rural distribution annually

Fast-moving consumer goods (FMCG) industry is in a much better position to deal with the current slowdown the country is witnessing than more than a decade back. 

 

FMCG companies have stronger revenue levers today than they had in the early 2000s. Most companies have used the strong growth phase of FY08-13 to strengthen long-term drivers like distribution and innovation along with a bigger emphasis on rural presence.

 

“The period of 2000-04 was by far the worst period for FMCG growth in India in the past three decades. The period saw FMCG industry growth slip to low single-digits; the trend was similar for the large listed FMCG companies of that time—HUL, Nestle, ITC, GSK and Colgate,” said Arnab Mitra and Akshay Saxena of Credit Suisse in their report. But this period also saw some strong margin expansion for some companies. 

 

The overall FMCG industry slowdown was aggravated by HUL’s sharp slowdown.  Revenues for Colgate, Nestle and GSK Consumer saw a CAGR of 6% as against HUL’s CAGR of zero% in that period. ITC’s cigarette revenue growth during the period did better at 7.5%. HUL executed its power brand strategy starting in 2000. The company reduced the number of focus brands from about 130 brands to around 40, as part of its portfolio rationalisation effort, said the report.

 

The slowdown of 2000-04 was also a learning lesson for these companies, and hence many are doing much better today. Since 2010, FMCG companies embarked on specific distribution expansion plans for rural India, enthused by the strong growth since 2008. 

 

HUL was ahead of the curve and undertook a major expansion which tripled its rural distribution in 2010. Overall direct reach for HUL went from 1.2 millon outlets to about 2million outlets. Since then GCPL, Marico, Dabur, Emami and GSK Consumer have undertaken specific rural distribution expansion projects.

 

“We expect these companies to add around 20% to their rural distribution each year over the next four years, which would double rural direct reach. Also these companies will keep benefiting from the expansion done in the past one to two years. This pace of addition would be much higher than the expansion in the early 2000s when most companies were much smaller in scale to attempt such large expansion programs, and rural demand was itself under stress,” said the report.

 

Add to this many companies in the FMCG sector have significantly upped the ante on innovation over the past one to two years. GCPL, ITC, Emami have products in ramp-up mode and are also likely to launch more products in the next one to two years. HUL and Marico are also maintaining new launch activity. Ad spends for most companies are at an all-time high.

 

The biggest catalyst for this growth is the rural penetration. The consumption slowdown of 2000-04 was driven by a sharp deceleration in growth in agri incomes and low income segment wages. Rural wage growth has also remained strong in nominal terms, through the growth has come off recently. In the early 2000s, nominal wage growth for labour was low single-digits, while now it is around 15% despite the moderation in growth recently. FMCG companies are also picking up much higher growth in rural than urban in the just gone by quarter.