Consumer goods: Industry growth set to pick up in 20164 min read . Updated: 04 Jan 2016, 01:00 AM IST
The packaged consumer goods sector is estimated to have ended 2015 with a value of $47 billion and is expected to grow by 12% to $53 billion in 2016
2015 did not witness the anticipated revival of demand in the consumer goods sector in India. A weak monsoon led to a slowdown in rural demand, especially in the second quarter of 2015, which in turn impacted revenue growth of packaged consumer goods companies in India since they depend on the rural market for around 35% of their sales.
However, the overall consumer sentiment remains positive. India continued to be on top of researcher Nielsen’s global consumer confidence index in the third quarter of 2015, rising for the eighth straight quarter. Consumer demand in urban areas is slowly picking up, indicating a revival of the Indian economy.
The packaged consumer goods sector is estimated to end the year with a value of $47 billion and is expected to grow by 12% to $53 billion in 2016, driven by some key supply and demand trends that we can expect to see more of in 2016. One of the most anticipated changes for this industry is the introduction and implementation of the goods and services tax (GST).
With stakeholders increasing efforts to build a consensus around the GST bill in Parliament, it is likely it would be passed soon.
The implementation of GST is expected to provide a level playing field to all firms in the sector in India, with easier movement of goods across states and enhanced operational efficiencies, rather than tax considerations, determining the location and movement of goods. It will fundamentally change the way packaged consumer goods businesses have been operating, and result in significant changes, especially in warehousing, transport and logistics. As a result of the provisions of the GST bill, companies in the sector are expected to gain from lower logistics costs, and save up to 1.5% of sales in warehousing costs. These benefits are expected to be passed on to the consumer.
GST is expected to result in easier movement of goods and lower operation costs, an outcome that can help smaller packaged consumer goods companies expand their footprint based on business costs instead of focusing solely on taxation. Some of these start-ups are already growing at up to 150% a year, and have created new categories, such as traditional beverages, organic ice creams, value-for-money organic foods and herbal personal-care products.
In 2016, as these companies expand their footprint and operations, they can provide strong competition to the industry leaders.
Regulatory and compliance costs, especially for food-based companies, are expected to increase this year as a consequence of the rulings of the Food Safety and Standards Authority of India.
With product recalls expected to be mandated, pressure to maintain product quality and comply with safety norms is expected to increase for food-based companies.
2016 is expected to have a normal monsoon, which is a key factor governing the demand of packaged consumer goods, especially for rural markets. A below-average monsoon in 2015 due to a strong El Niño resulted in a significant decline in rural demand, especially in the packaged consumer goods sector. It is estimated that rural consumption in the second quarter of fiscal 2016 declined to one-third of the corresponding period in the previous fiscal year.
However, there is an expectation that rural consumption will recover by the beginning of 2016-17. As a result, packaged consumer goods companies are expected to renew their focus on rural markets.
The outlook for fuel prices for 2016 is positive, with crude oil prices expected to fall below $50 per barrel. The relatively lower fuel prices are expected to have a positive impact on the prices of commodities, as well as reduce manufacturing and logistics costs for packaged consumer goods companies, the benefits of which would eventually be passed on to the consumer.
The implementation of the Seventh Pay Commission’s recommendations is also expected to increase consumer demand. It is estimated that the consumption boost to the economy could be as high as $9 billion.
The premium and luxury packaged consumer goods segment is expected to benefit from the revival in consumer demand. Categories such as premium and luxury chocolates, fine wines and premium liquor, designer footwear and apparel are increasing their penetration into smaller cities in India, despite the lack of quality retail space.
A weakening Chinese economy and the growing demand for these products in India is expected to result in additional international premium and luxury brands entering the Indian market in 2016. Domestic companies are expected to respond by launching their own product lines.
Despite uncertainties in the global economy, the Indian packaged consumer goods sector is expected to return to the growth trajectory in 2016. Consumers in India can expect to see stable prices and new product and category offerings. For packaged consumer goods companies, the year is expected to bring in a much simpler tax regime, as well as a strong growth in consumer demand, but also increased competition from new entrants.
Rajat Wahi is partner and head, retail and consumer markets, KPMG India