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Thu, Jan 31 2013. 01 20 AM ST

Consumer spending reached an eight-year low in the
September quarter of fiscal 2013. Photo: Pradeep Gaur/Mint
Five trends that will drive FMCG growth in 2013
India`s consumption story remains intact, though the pace oI growth has slowed against previous years
Mumbai: ndia, 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 TC 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 ndia Ratings, a part of the Fitch Group. That's not an
isolated numberin the last six quarters, four recorded the lowest
PFCE growth rate seen in the last 34 quarters, ndia 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
ndia, analysts Anand Mour and Gagan Borana said in an CC 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
(ndia) 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.
RuraI 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 ndia, said analysts.
n 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 `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.
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Growth will also be driven by new segments such as urban ndia's poorest households earning less than `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 `16,000 crore today) to the
consumer packaged goods sector by 2015, said a November report by market research firm NieIsen Co.
8ales, promotions and discounts
f 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 ndia'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 AgarwaI, 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 CapitaI 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 MaII, director (food strategy) at Future Group , parent of
ndia's biggest listed retail company PantaIoon RetaiI (India) Ltd.
SuniI Kataria, executive vice-president (marketing and sales) at Godrej Consumer Products Ltd, the maker of CinthoI 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 Iaunches
The year will see consumer companies increase their reach into the interiors of ndia. 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 ndia partner at
Boston ConsuIting Group (BCG).
For instance, Procter and Gamble has a presence in 14 categories in ndia that include detergents such as Tide, ArieI and shampoos such as
Head & ShouIders. ts Cincinnati-based parent has products in 24 categories. n the coming years, the company plans to introduce its entire
portfolio, with the exception of toilet paper, in ndia, Shantanu KhosIa, managing director of P&G ndia, had said in a September interview.
Besides, consumer and retail companies are also expanding into new geographies and categories. Hindustan UniIever Ltd (HUL) recently
launched Dove hair oila segment hitherto dominated by companies such as Marico Ltd, known for Parachute hair oil, and Dabur ndia
Ltd that sells Vatika.
The ndia opportunity is also attracting global quick-service restaurant chains, besides apparel and footwear retailers. n December, the UK-
based casual dining chain PizzaExpress launched its first store in ndia. 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 TurtIe in men's wear, Khadim's in footwear and others will continue to invest to take their
brands pan-ndia after having established themselves in regional markets, said Santosh Verma, director (investment banking) at IDFC
CapitaI Ltd.
Emerging segments and trade channeIs
Growth will come from the fringescategories that are not among the mainstayssuch 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 CC Securities report cited earlier.
t 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, DeIoitte
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.
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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 and tier cities as metros get saturated, said an ndia 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 BahI, partner at KPMG ndia.
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 SaffoIa, 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 `200 crore market. The high growth has persuaded companies such as
HUL and NestI ndia Ltd to launch oats under their Knorr and Maggi brands,respectively, said a January 2013 report by EdeIweiss
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 CC 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 teaare rising, said Gaurav Gupta, senior director at DeIoitte 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 SuniI TaIdar,
director (sales and international business) at Cadbury India Ltd, which has seen success with pricier products such as Silk and BournviIIe,
and recently launched TobIerone from its parent's portfolio.
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