Consumer packaged goods sector looks at revival
After the worst volume growth since 2005, experts hope rising consumer confidence will fuel spending
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Mumbai: The tide is turning after several years, and consumer packaged goods (CPG) manufacturers are ready to set sail.
Industry executives and experts in the sector—which posted the decade’s worst volume growth in 2014—are hoping that rising consumer confidence will fuel spending amid low inflation. However, they concede that the impressive rates of earlier years will take a while.
“The year started on a disappointing note. The economic turmoil had a fairly substantial impact on the fast moving consumer goods (FMCG) sector with the growth rate for the first half of the fiscal year hitting a decade-low,” says Vivek Gambhir, managing director, Godrej Consumer products Ltd (GCPL), maker of Cinthol soaps and Good Knight mosquito repellents, while referring to a slowdown in both volume and value growth.
To be sure, weak growth and high inflation have forced consumers to cut back on soaps, detergents and shampoos in the last three years. Volume growth, which represents the quantity of goods purchased, fell for the first time in the September quarter of 2013. The trend accelerated in 2014.
In terms of value, the CPG sector is estimated to grow at 7% in 2014—lower than 12% in 2013, and almost one-third of the 2009 peak of 22%, according to data from a November report by Nielsen, a global information and insights company. The last time the sector grew at 7% was in 2005.
However, experts say 2014 could be ending on a hopeful note.
“There is hope now that the new year will be better as the macroeconomic factors have improved,” says Pinaki Mishra, partner (retail and consumer practice) at consultancy firm EY.
Indian consumers topped Nielsen’s global Consumer Confidence Index in the June quarter, after five quarters of losing the top spot to Indonesia and slipping to the third place. Better sentiment is expected to trigger more buying in the early part of 2015.
“The FMCG index usually reflects the consumer confidence index with a two-quarter lag. We will see consumption going up,” says Piyush Mathur, president (India), The Nielsen Co. For the first time since the slowdown started, October saw value growth at 10%, higher than the 6% seen a year-ago, Mathur pointed out. “By January, the trend will be more evident as we complete the six-months’ lag,” he said.
Urban demand is likely to power the revival in its early stage, said executives, explaining erratic monsoons, smaller increase in minimum support prices and weaker rural wage growth have held back rural growth. Moreover, they say rural India depends on a revival in urban businesses, which comes with a lag. “We will see a revival in rural with a lag effect of 3-6 months; urban demand pick-up has just started in the last month,” said Mayank Shah, deputy marketing manager at Parle Products Pvt. Ltd.
Urban consumers account for $25 billion out of the $37 billion CPG market, a Nielsen report said in September.
As they expect growth in the year ahead, marketing departments at the CPG firms are buzzing. Among their focus areas: chemist networks, digital channels.
“The chemist channel has been an outperformer for the FMCG market. For the year ended June 2014, FMCG value growth in chemist shops was 12% versus growth ranges of 7-9% for the other store types,” said Nielsen report in September.
Meanwhile, online shopping has opened up a new channel. “Up to 41% of online FMCG consumers access the Internet as part of their pre-purchase ritual. This has huge implications for marketers as influencing online consumers for either offline or online purchases will gain more importance with each passing year,” Nielsen’s September report added.
“In the new year, we will see the focus move to food and groceries in the e-commerce space as well as offline...66% of the total consumer spending is on food and groceries,” said Arvind Singhal, chairman, Technopak Advisors Pvt. Ltd, a retail consultancy firm.
“E-commerce is growing at 300% per annum for us and now accounts for 1.5% of our sales, up from 0.75% at the beginning of the year,” said Satyaki Ghosh, director, consumer products at L’Oreal India Pvt. Ltd.
The companies are also looking at increasing their digital presence. “The big thing is the emergence of social media,” says Sameer Satpathy, executive vice-president and business head, consumer product business at Marico Ltd, maker of Saffola and Parachute oils. The trend, he says, is about blended campaigns where all mediums work together. At Marico’s Saffola fitfoodie.in, the effort is to promote a lifestyle, going beyond mere content.
Falling energy prices are expected to help as well.
Brent crude dropped to $63.01 per barrel on Thursday the lowest in close to five-and-a-half years. Since mid-June, Brent crude has declined by nearly 50%. Retail inflation as measured by the consumer price index has also eased to 4.38% in November compared with 5.52% a month ago. Vegetable prices fell 6.97%.
“It was one of the worst years with growth rate being the lowest in the past decade. But it is ending on a positive note. The growth rate is picking up and costs are coming down,” says C.K. Ranganathan, managing director, CavinKare Pvt. Ltd, maker of Chik and Nyle shampoos. “We can’t ask for anything better,” he added.
Sure enough, CPG market growth is expected to increase to 10-11% in 2015 and further accelerate to 12-13% for the year 2016, said Nielsen in its November report.