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Business News/ Money / Increase in buying power to push demand for consumer care goods
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Increase in buying power to push demand for consumer care goods

Increase in buying power to push demand for consumer care goods

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India’s $25 billion FMCG (fast-moving consumer goods, or consumer care and household products) market is on the threshold of major growth acceleration. Rising income levels in urban and rural India and benefits from increasing affordability, favourable demographics, low penetration, increased availability and distribution expansion will increase growth in the coming years.

India has the world’s 12th-largest consumer market (aggregate consumer spending of $370 billion in 2005), on a par with Brazil, despite having a population that is six times larger.

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India’s consumer market is relatively small because a large section of the population (40-45%) still belongs to the deprived class. We estimate per capita nominal gross domestic product will grow at a compounded annual growth rate (CAGR) of 12.2% over FY10-14 to reach $1,666 in 2014. The increase will help enhance the purchasing power of the consumers and reduce the number of people living below the poverty line.

This trend is expected to change the shape of India’s income pyramid, which could have far-reaching implications on consumer demand, according to the McKinsey Global Institute (MGI). The number of households in the deprived category is expected to fall to 74 million in 2015 from 101 million in 2005. The number of households in this category has already declined by 24 million in the past 10 years.

The number of households in the seekers category (with an income of Rs2-5 lakh per year) will increase five times over 2005-15 and seekers and aspirers will constitute two-thirds of India’s households. We believe this section will fuel a major increase in demand for consumer goods.

Some of the key likely contributors for this acceleration may be expected decline in dependency ratio from the current 60% to less than 54% by 2015 and to 48% by 2025, as much as 62% of the population being in the high consumption age group of 14-59 years, the impact of media exposure and communication due to the rising number of televisions and cellphones, and lower savings focus due to increased security and visibility of future income.

A large number of consumers are likely to use branded FMCG products for the first time, increasing the demand for mass market FMCG products, mostly among the rural poor and urban lower class. Many consumers are likely to indulge in choice-driven consumption, which will increase demand for premium and super premium products in urban India. The middle and upper middle class will be the chief contributors to this.

MGI India consumer demand model estimates that there will be 111 million fewer rural households in the deprived category by 2015. This is expected to increase demand for basic food staples considerably, boosting demand for poultry, dairy products and packaged food.

Increased demand for value for money products in personal care and household products will require product modifications to improve affordability. According to MGI, urban households with incomes exceeding Rs5 lakh a year will increase to 5.8 million by 2015 and to 36.5 million by 2025 from 1.8 million in 2005. This is expected to boost demand for premium FMCG products.

ITC Ltd features among our top picks from the sector. We believe its faster conversion from other forms of tobacco to cigarettes will enable sustained 14% profit before interest and tax CAGR in cigarettes. Nestle India Ltd will gain most from the likely growth in the processed foods segment. A monopoly in noodles and baby food, it will beat the average growth for the sector. Finally, United Spirit Ltd’s ability to straddle the portfolio across price points will enable it to grow ahead of the market.

Graphics by Yogesh Kumar / Mint

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Published: 17 Dec 2009, 09:54 PM IST
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