When the goods and services tax (GST) was rolled out in July 2017, one question was whether large fast moving consumer goods (FMCG) firms would gain at the expense of the unorganized sector. While it may take a few years before one can have a certain answer, managements of most large listed firms have so far not called out any significant changes on this front.

But an answer to this question could lie elsewhere. Small and regional companies are faring much better than the larger ones in recent quarters, according to retail sales data of the FMCG sector, provided by market researcher firm, the Nielsen Co. While the top 50 firms contributed to 60% of revenue in the 12 months ended September with a healthy 10.6% growth, the tail-end of 48,000 companies grew by a much higher 18.5%. What’s even more interesting is that this growth differential has risen in the past few quarters (see chart). The September quarter saw smaller companies growing at 38% versus 15% for the national firms.

This raises a question of whether it’s not the large national firms but the regional and local brands that are taking share away from the unorganized sector. While Nielsen has not commented on this aspect, it mentions that the presence of regional companies is chiefly in the packaged food categories. It also says that existing companies are growing their revenues. That supports the theory that they are taking share from those below them.

While regional companies appear to have adapted to the GST regime quickly, they may also have benefited from the spread of modern retail stores in smaller markets. Modern trade stores in metro locations increased by 18% in the September quarter over two years ago. But growth was higher elsewhere, with the smaller towns (population less than 100,000) seeing a 58% increase. Regional companies would have readily supplied to these stores, tapping into the higher growth in these store formats.

What implications does this trend have for listed firms, especially if it sustains in the long run? As of now, everybody is growing, so the impact is not much. But large firms will be keeping a close watch. The rapid growth in revenue of local and regional companies can throw up a few risks. Firstly, their growing size could make them more aggressive competitors in pockets. Stiff competition can pose a risk to national brands, especially if it is widespread in most markets. Secondly, e-commerce and modern trade will continue to expand in smaller markets, giving these companies a better distribution reach, despite not having scale benefits.

Lastly, when these companies reach a certain revenue mark, or growth hits a ceiling in their core markets, they could spread to adjacent regions and even go national. Capital may not be a hindrance, as the private market has shown its eagerness to fund such brands. This can then turn into a key risk for national firms. Of course, it also presents an opportunity for the national firms to grow through acquisitions.

Investors will do well to watch this developing trend, as it could pose a risk to valuations at some point.

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