Emerging markets remain a favourite haunt for consumer goods companies
In spite of the challenges they pose, emerging markets will remain a favourite hunting ground for foreign-owned consumer goods companies.
A recent report from the Nielsen Co. notes how emerging market growth has been two-times that of developed markets since 2016. In the third quarter of 2017, the packaged consumer goods sector grew by 1.4% in developed markets and by 4.7% in emerging markets.
Emerging markets had lost some of their appeal for foreign multinationals due to currency fluctuations, slowing economies and declining profitability. This was even as their home markets in the US and Europe were under strain, forcing them to focus more on profitable growth.
In India too, subsidiaries reoriented their approach and cut down on unprofitable and relatively small brands or variants, narrowed their market focus and rolled out cost-cutting programmes. That may partly explain why growth has been relatively flat in the past few years, even if it’s a multiple of that in developed markets. The conversation around emerging markets is now shifting back to growth.
Improving economic growth prospects in emerging markets further add to their attraction. The Organisation for Economic Co-operation and Development estimates that India’s gross domestic product growth will rise from 6.6% in 2017 to 7.5% in 2019, while Brazil’s is expected to step up from 1% to 2.4% in the same period and South Africa from 1.2% to 2.1%. However, Russia is expected to stay flat at 1.5% and China will also see slower growth.
A renewed focus by foreign companies on growth in emerging markets should see their subsidiaries in India also reorient their domestic strategies.
The past few years have anyway seen consumer goods companies’ growth slip a bit due to events such as demonetisation and the roll-out of the goods and services tax.
The December quarter results indicated that the impact of these events is largely over. With parent firms striking a more confident pose, on the back of a recovering domestic economy and improving consumer demand, the consumer goods sector is expected to do better in the coming years.
A recent Crisil Ltd report projected the fast-moving consumer goods sector’s growth at 11-12% in fiscal year 2019, on the back of an improving domestic consumption picture.
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