Consumer goods sector may be slowing
Consumer packaged goods, retail segments have been limited by structural bottlenecks, says Ficci-KPMG report
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Mumbai: India’s consumer packaged goods and retail sectors may not be able to sustain the high growth path solely on consumption-led demand in the wake of structural bottlenecks, said a report prepared by industry lobby Ficci and advisory firm KPMG released on Monday.
The report notes that the sectors may already be decelerating.
In fiscal 2015, the overall consumer goods market growth slowed to 7.5% (in value terms) from 10.6% in the previous fiscal year. The decline was recorded in food, personal care, home care and over-the-counter goods across India, said the report Sell Smart: Moving Towards a Smarter Consumer Market.
The report states that the consumer packaged goods and retail sectors have been unable to take full advantage of India’s potential due to structural issues.
The key issues plaguing these sectors include the paucity of proper infrastructure and a complex policy and regulatory framework, besides counterfeits and pass-offs, said the report.
The consumer packaged goods sector was estimated to be valued at Rs.3.2 trillion in 2014 and is projected to grow at a compound annual growth rate of about 11.5% to Rs.6.1 trillion in 2019. However, it is possible for the sector to see higher growth and add Rs.2.1 trillion beyond the consumption-driven growth projection if firms follow a “SMART” growth policy, said the report. The strategy entails following sustainable growth practices, Make in India, making sure of the authenticity of products, being a responsible business and using technology and innovation for growth.
The retail sector is projected to touch Rs.70 trillion by 2020 from Rs.40 trillion in 2014. However, SMART-driven growth could translate to an additional Rs.9.4 trillion for the sector over this period, the report added.
Wholesale and retail trade in India has grown at 8.6% between 1990-2013. Despite this growth, the share of organized retail in India has not increased significantly, the report said, pointing to poor infrastructure, competition from unorganized retail and multiple regulations at the central, state and local government levels as barriers to entry for new firms. These issues also impede existing firms’ growth prospects.
For instance, it takes an average of three years to set up a retail store, starting from when a location is identified, said Krish Iyer, chief executive officer (CEO) of Wal-Mart India, at the Ficci conference. He said it could be cut by 6-12 months if firms are allowed to self regulate and self certify. “There are 14 areas of compliance required for setting up a retail store,” Iyer said, adding that his firm employs 35 people in compliance functions across its 31 stores in India.
Still, the penetration of modern retail is expected to reach 18%, from the current 9.8%, in the next five years, driven by the increasing appeal of modern retail among shoppers as well as changes in shopper expectations and behaviour, said the report.
To be sure, the economic backdrop has also impacted growth in these sectors, particularly the consumer packaged goods sector, which has taken a hit due to weak rural demand.
“Rural used to grow at 1.5-1.6x urban. Now, rural growth has come down and both urban and rural are growing at the same rate,” said Sanjeev Mehta, CEO, Hindustan Unilever Ltd, India’s largest consumer packaged goods firm by sales, at its earnings press conference in July.
To beat the slowdown, companies are expanding their footprint, launching new products and entering new categories.
In the past year, ITC Ltd has acquired Savlon, from Johnson and Johnson, and Bengaluru-based Balan Foods’ B Natural brand, besides entering new segments in existing categories like premium cookies, jelly-based confectioneries and chewing gum in an effort to tide over the slowdown, said Sanjiv Puri, president of the consumer packaged goods businesses at ITC, on the sidelines of the conference.
“Companies are already doing a lot and showing growth in spite of all the odds,” said Rajat Wahi, partner and head (consumer markets), KPMG India, while explaining that it is important for government and industry stakeholders to collaboratively address the challenges being faced by the sectors.
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