FMCG: The Heat Is On

As India Inc. deepens its reach into a new set of urban markets, it becomes crucial for companies to understand which under-saturated hotspots can drive future growth. However, FMCG companies have consistently had trade channels penetrating the nation’s hinterlands. The steady rise of modern trade channels and disposable incomes provide a strong platform for the industry, which is projected to grow 6-8 per cent annually till 2020.

While consumption has been sluggish in recent years, particularly in rural areas, a normal monsoon in 2017 is expected to increase demand. Meanwhile, the continuing strength of urban clusters has seen brands focus on new products in urban-centric categories, and as these consumers move up the economic ladder, there is a burgeoning demand for premium products. Given these consumption trends, and amid a fiercely competitive marketplace, it becomes imperative for companies to tap under-saturated markets.

Infrastructural development in smaller towns too have helped grow FMCG companies. For example, Anand, a district in Gujarat, which has a population of 2.4 million has six multiplexes, with job opportunities rising along with high disposable income which drives consumption. “We have a distributor in each taluka since the power generation has improved in villages, there are facilities to keep refrigerated products such as milk, ice-creams and other frozen items,” says R.S. Sodhi, MD at GCMMF (Amul).

With millions of consumers yet to be tapped in tier-2/3 markets, brands are expanding distribution networks and micro-targeting consumption pockets. As a result, while the industry experienced a slowdown in major metros in the past few years, less saturated untapped tier-2/3 cities showed faster growth. “Today, the share of our business from urban cities beyond the top eight metros has grown to 30 per cent, relative to 25 per cent from the top eight markets,” says Prashant Parameswaran, Director, Marketing Strategy and Insights, Coca-Cola India. “While organised retail has faced challenges beyond the top 15-20 cities, these are often related to mind sets, more than any logistical hurdle. As a result, amid growing competition from regional players, expansion into tier-2/3 cities is set to continue,” he further adds.

As consumers keep moving up the value chain and experimenting, alternative and higher-end categories will continue to drive growth. While consumption patterns are similar across metros and tier-2/3 markets, there is a stark gap on the supply side. The growing consumption power of urban India has led to two key trends in the industry — eating out and healthy foods. “These have driven growth for us in categories like branded basmati rice. Similarly, brown rice was unheard of 10 years ago, but as consumers became more health conscious, sales for this premium product rose ten-fold in just a few years,” says Vivek Chandra, CEO, LT Foods, which sells Daawat, Devaaya brands of basmati rice among others.

With a strong footprint of modern retail in metros, and new entrants typically focusing on these cities, tier-2/3 markets are under-saturated. With scope to expand, the share of shops covered by LT Foods’ distribution network in tier-2/3 cities rose 2-3 times over the past five years.

Given these trends, tier-2/3 markets’ share of our sales rose from 37 per cent to 40 per cent over a five-year period—with markets registering 3 per cent higher annual growth relative to metros.

Organised retail, which only contributes 10 per cent of the market, has faced issues with throughput, costly real estate and distribution for thousands of SKUs. This reality is not likely to change in the short to medium-term. However, there are opportunities to expand in smaller stores with monthly sales of Rs 5-10 lakh. But this requires a shift in mindset to move from the traditional focus on distribution costs to a focus on throughput and overall profit and loss.

Therefore, FMCG companies such as HUL, P&G, ITC, Dabur India, Emami among others have made a concerted effort over many decades to penetrate the fragmented and untapped rural market, which houses two-third of the total population. A major portion of their sales come from these markets.

“With GST, it will be a free movement of goods in these markets. Smaller markets is where the organic growth is. We are present in nearly 80 per cent of these untapped markets,” said Deoki Muchhal, MD, Cargill Foods India.