An Overview of India’s FMCG Sector

This blog is proving with the insights on the "Fast Moving Consumer Goods" with respect to the previous as well as current market scenario.

What are FMCGs

FMCG is an abbreviation for fast-moving consumer goods, these products are part of our everyday life as we see and use them regularly such as; beverages, cleaning products, clothes, consumer electronics, OTC medications etc. these goods are purchased and consumed rapidly because of high requirement and low price. The jeans you bought from Levi’s store, the coke you drank at the supermarket or the hand sanitizer you rubbed before eating your meal, you get the idea right! These all are part of fast-moving consumer goods.

Indian Economy at a Glance

In the last few years, India has been the fastest-growing trillion-dollar economy growing around 7 per cent by real GDP growth rate. It was because of changing business environment, increased international trade and income and spending level of Indian consumers have increased. Last year we already saw a decline with the growth rate of 4.2 % due to the rising unemployment rate, shattered banking books, NBFC crisis and the hangover of demonetisation and GST. The growth rate already expected to decline from 4.2 to around 3%, but then the world hit by corona virus pandemic.

The fifth-largest economy in the world saw a downturn of 23.9% in Q1 induced by the Covid-19 pandemic that forced people to stay in-home quarantine. As a result of that; sectors like manufacturing, construction and services plunged by 39.3%, 50.3% and 20.6% respectively, On the brighter side agriculture sector grew by 3.4 % because of good monsoon and FMCG which saw a growth of 6.3% because of panic buys during lock-down one and availability of essential goods in later stages of the lock-down.

Prologue to Indian FMCG market

According to “India Brand Equity Foundation” The FMCG is the fourth largest sector in India which is estimated to reach $ 1.1 trillion soon. The Indian FMCG market grew very fast in last few years because of increase in disposable income, change in consumption habits, lifestyle changes towards modern and busy schedule and government policies like 100 % foreign direct investment. The FMCG market has three major categories; household & personal care like cosmetics, hair care, skincare and household cleaner which contributes to 50%, Healthcare which includes over the counter medication at 31% and, food and beverage sector include bakery, snacks, tea, coffee at 19%.

Growth and the Demographics

Growing youth population especially millennials', rising income levels and easy access to these products have been the core drivers for growth in FMCG sector apart from that demand from rural India is increasing and companies can feed that with the strong distribution network. Urban and Rural India accounts for 55% and 45% of the consumption respectively. More self-care products, household goods and consumer electronics are in demand as preferences are changing with time.

The Emergence of E-commerce in India

The arrival of E-commerce companies like Flipkart, Amazon, Myntra has changed the business scenario in India and consumer electronics products like mobile phone have been at the heart of it. Smartphone companies like Xiaomi, Realme, and One Plus have adopted the online channel model to save on distribution cost. But all of this has been set off by increasing smartphone users, low-cost of 4G data and services like Unified Payment Interface, which is supported by the Digital India initiative taken by the government. One significant aspect of that is people are becoming more aware as they do internet research and compare price before making any buying decision. The online market can grow from $39 billion in 2017 to $200 billion in the year 2026.

Major Players in the FMCG market

Though there are many companies which fall under the FMCG sector, we have taken the top seven companies based on their market capitalisation to and will further try to analyse them to observe the trends in the FMCG sector.

Hindustan Unilever Ltd - It is the largest FMCG company in India, and it is a subsidiary of Unilever. They claim that 9 out of 10 household uses their products, the company is into home care, personal care, food and refreshment with brands like Surf Excel, Bru, Closeup, Lux etc.

ITC Ltd - Though its business is diversified; in the field like Information Technology, Hotels, Agri-Business etc. some of their FMCG products are very well known like Bingo, Yippee, Savlon, Vivel, Cigarette etc.

Nestle India Ltd - It is a subsidiary company of NESTLE S.A. they are into Beverages, chocolates, Dairy, Food etc. some of the well-known products are Nescafe, Kitkat, Maggie, Munch etc.

Dabur India Ltd - Inspired by Ayurveda, Dabur claim to be the world’s largest ayurvedic and natural health care company they also serve the personal care market. Some of the known brands by Dabur are: - Dabur Red toothpaste, Dabur Chyawanprash, Odomos etc.

Britannia Industries Ltd -  Britannia have their operations in the foods market, and their products include Biscuits, Bread, Rusk etc. some of the household names are Good day, Tiger, Marie Gold etc.

Godrej Consumer Products Ltd.- Godrej operates in households and personal care products like Goodnight, Cinthol, Protek, HIT etc.

Marico Ltd - Marico limited operates in beauty and wellness category specifically in Haircare, edible oil, male grooming etc. Their products include parachute, Hercules, Black Chic etc.

Let us consider these companies to check the profitability, efficiency and returns with the help of some ratios to understand how FMCG industry have evolved in last few years. But before that let us look at the most recent performance of the Industry.

Although the FMCG industry and our economy were already in decline at the end of last year, we saw a sudden drop due to the Covid-19 pandemic and consequential lock-down. This graph might reflect a decrease but, as compared to other industries the FMCG sector performed well because the essential goods were allowed for distribution and most of the goods in FMCG are required for humans to survive.

Operating Profit margin

Companies thrive on volumes and operate on very low-profit margins in FMCG industry as goods are typically priced very low but, significantly low margins can have severe impacts on a company’s financial health. Operating profit margin can differ based on company policy and type of product they are selling, for example, a biscuit will have a lower margin than a consumer electronics.

We take operating profit (earnings before interest and taxes) divided by the total revenue from the operation, it gives you the idea about how much profit you are generating for every unit sold in percentage.

Analysis - We can observe that Britannia is operating at the lowest margin of around 15 % as their product portfolio includes Biscuits, Bread etc. and these products are priced very low as profits are driven by volumes mostly. Conversely, we can see that ITC is having the highest profit margins that are because of their diversified business and their FMCG products include Cigarettes which have very high revenues. Other than that Nestle, Dabur, HUL, Godrej are all touching the 20% mark because they all the focused on Personal and household care products. In general, we see an overall increase in profit margins by the companies that shows the growth in the Industry.

Accounts receivables Ratio

Another factor in the FMCG industry is credit sales, as these companies rely on local distributors to reach the end consumers. It is a by-default requirement to sell these products on credit as that would also help to increase the sales, but those credit needs to be received on time to churn the cycle and manage the liquidity of the company. To measure how effectively a company can collect money from distributors, we use the accounts receivables ratio. A high Ratio reflects good efficiency in collection and vice versa. You can also check the days it takes to collect the receivables by dividing the AR ratio by 365.

This ratio not only narrates the liquidity of the company but also brings light to credit policy in general. Let us take some companies and try to comprehend their liquidity and credit policy.

Analysis - We can see a clear winner as Nestlé’s AR ratio is the highest in the industry, meaning that they have very high liquidity and do not compromise on their collections to boots the sales, on-an-average they take 3-4 days to collect dues. On the other side, Dabur and Godrej have a low ratio that depicts their aggressive credit sales strategy but, it is also a sign of bad receivables management as it takes around 40 days to collect their money.

We can observe an overall decrease in the AR ratio meaning that companies are forced to sell on credit to fight competition. In general, distributors prefer those companies which allow higher timeline for collection, as they sell on credit to maintain a healthy relationship with their clients and have higher sales.

Inventory Turnover Ratio

Efficient inventory management is a challenge in the FMCG industry as the goods are consumed quickly and require a continuous supply. The companies cannot produce in excess and store their inventory as it involves a high storage cost also unsold stocks are prone to price fluctuation. So it is required to procure, produce and sell in the right quantity and at the right time.

This ratio tells that how many time a company have manufactured sell and replaced their inventories a high Ratio depicts efficient management, acceptable sales and optimum inventory holding and vice versa.

Analysis - In this assessment, HUL have the best inventory turnover ratio in the industry this means that they are able to replace their stock very quickly, the company takes only 14-15 days to sell and replace all the stocks, which help to reduce storage cost and depicts the good distribution and higher sales. Britannia’s inventory management is also decent but other companies have a low ratio reflecting poor inventory management, it takes more than 50 days to roll and replace their inventories which carries a higher storage cost.

Return on Assets (%)

For an FMCG company, inventories fill the big chunk of the assets and are the core part of the business that is why ROA is a suitable metric to measure the returns in the FMCG sector. A higher ratio reflects good utilisation of the assets to generate returns, and a lower ratio tells that the company is not using its assets properly. It is a type of profitability/Return metric that measures a company’s return in comparison to its assets.

Analysis - We can observe an overall increase in the returns and earlier we saw an increase in operating profit margin, these two ratios indicate that we are getting more returns on assets without reducing them and the profitability is increasing over the years. HUL, ITC, Nestle, Britannia and Marico are above 20% mark and, Dabur and Marico hover around 15%, we can see that Godrej have the lowest ROA but had decent operating margins that means they are not managing their assets well.

Closing Thoughts

The overall efficiency in terms of inventory and receivable management has dropped from the year 2016. on the contrary, we have seen an increase in profit margins and returns which reflects that companies have shifted their focus from volume to price. HUL is a suitable example of that as we can see a decline in efficiency and an improvement in profitability.

In the most recent scenario, we have seen s decline in FMCG sector due to Covid-19 and experts suggest a flat growth in the short run. But, if we look at a long-term scenario, India will be the most populated country in the world before 2030, and most of us will be young working population. So, if we combine this with increasing disposable income and changing lifestyle, we will see robust growth in the sector. Along with that continuous improvement in the supply chain will improve rural penetration as rising consumption levels will help the industry to grow.