Economy

After GST and note-ban blows, FMCG companies see green shoots

Meenakshi Verma Ambwani New Delhi | Updated on January 27, 2018 Published on December 29, 2017

Potential market: Rural demand has been growing over the last 3-5 months, particularly in the heartland.

Bet on the govt’s strategy to provide stimulus to rural economy

After a tough year manoeuvring the changes following implementation of the Goods and Services Tax, the FMCG industry is hopeful of witnessing a revival in consumption trends, especially rural demand.

Analysts and industry players are also betting on the government’s strategy to focus sharply on providing stimulus to the rural economy in the upcoming year.

Vivek Gambhir, Managing Director and CEO, Godrej Consumer Products, said, “It was a tumultuous 2017 for the sector, punctuated with hope and optimism for a more promising 2018. The overhang of demonetisation and the initial challenges with implementing GST proved to be significant dampeners to growth. However, as the implementation of GST stabilised and as the government showed tremendous flexibility to reduce the rates of many additional items in mid-November, the situation has largely returned to normal.”

He added that while most channel partners have made adjustments to the realities of the changed environment, companies also tried to quickly pass on the benefits of GST to the consumer through price-cuts.

“We look forward to a recovery in overall economic growth in 2018. We expect the government to, in particular, pay greater attention to stimulating rural growth. The collective impact should lead to stronger consumer demand and better growth prospects for the FMCG sector,” Gambhir said, adding, “While both urban and rural growth should recover, we expect rural growth to outpace urban growth in 2018.”

Wholesale under pressure

Analysts say that the wholesale channel is still under pressure and is on course to slower recovery compared with other channels. Amit Kumat, MD & CEO, Prataap Snacks, agreed that the wholesale channel was most impacted due to the implementation of GST, but it is gradually recovering.

An HDFC Securities report said that the sector has posted the slowest revenue growth at 4 per cent CAGR in the last two years against 13 per cent CAGR in the last decade due to factors such as lower rural demand, demonetisation and GST.

“Most companies are witnessing green shoots in the rural markets, and expect that government’s focus on improving rural incomes will boost consumption demand,” the report added.

Harsha V Agarwal, Director, Emami, said the company is bullish on rural consumption and has invested significantly in strengthening distribution.

“Rural demand has been growing over the last three-five months, particularly in the heartland. We will continue to invest in the rural sector for both marketing and distribution to expand our reach.”

Analysts have been crediting Patanjali for the resurgence of demand for Ayurvedic, herbal and natural products, a trend which has seen further acceleration this year.

Several home-grown brands that made early bets in this segment, have stepped up investments in expanding their product range.

Also, MNCs have jumped on to the bandwagon with new launches.

Stating that “Ayurveda and natural” are the buzzwords for today, Agarwal said that Emami is witnessing a huge traction from consumers in this segment. “We foresee the next leg of growth to come from this sector,” he added.

New entrants

The past two-three years saw a slew of new entrants as well start-ups emerging in the sector catering to niche segments or hoping to create new categories. While some like Paperboat are tapping into the fast-growing trend of traditional and ethnic beverages, others such as Epigamia are hoping to scale up by betting on relatively new segments in the F & B segment.

Debashish Mukherjee, Partner & Head, Consumer and Retail Industries, India and South-East Asia at AT Kearney, said while it may take some time for these start-ups to make an impact at the national level, they are more likely to gain decent market shares in specific micro-segments.

“They are serving various micro-segments and consumption patterns based on taste, income or geography. While some of these concepts will be able to scale up and attract sustainable consumer demand, other concepts may face challenges in scaling up,” he added.

Abneesh Roy, Senior Vice-President - Institutional Equities, Edelweiss Securities, said, “Start-ups and new entrants are leveraging on the fast-growing e-commerce channels to reach consumers and overcome the challenges posed by physical distribution channels.”

However, establishing a brand and creating new segments require big advertising budgets, he said, adding: “We could therefore, see some larger companies and established players collaborating or buying-out some of these start-ups and new entrants in the future.”

Already companies are making investments in some of these new entrants. For instance, companies such as Marico and Emami this year, invested in start-ups in the male grooming segment.

At the same time, with increasing Internet users, established players are also expected to aggressively grow their digital advertising spends as well grow presence on e-commerce channels.

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Published on December 29, 2017
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