FMCG: Endless love

Packaged food business to drive growth of FMCG sector, as home and personal care category lags.

Even in these volatile market conditions, stocks of fast moving consumer goods are holding their own. Despite rising input costs and competitive intensity, the sector has emerged as a safe haven, while other defensives (like IT and banking) look crummy. Undoubtedly, valuations look rich but clearly, the consumption story is expected to play out well over the next few years. The growth numbers of India’s FMCG sector are a fascinating read of how consumption shifts are driving bottom-lines.

For starters, the sector has shown its resilience during the June quarter, indicating the strength of the underlying domestic consumption story. While other consumption-led sectors like auto and consumer durables have been hit by high input costs, low demand, rising interest rates and inflation, the FMCG companies have been able to hold their fort for the time being. The companies have raised prices due to persistent raw material pressures. ITC has raised cigarette prices by 10 per cent and HUL has increased prices in the soaps (Pears) and detergent bars segment (Rin) by seven per cent. In the foods segment, while Amul has increased the price of milk by four per cent, GSK Consumer and Nestlé have hiked the prices of their milk products, by three to four per cent. In contrast, auto and consumer durable companies are looking at production cuts on slowing demand.

However, the sub-plot within the FMCG sector’s growth story is more interesting. While the industry witnessed a steady compounded annual growth rate (CAGR) of 12 per cent in sales over the last 10 years, analysts believe the processed and packaged foods sector will drive future growth, as it accounts for 46 per cent of the FMCG industry. This segment witnessed 19 per cent annual sales growth between calendar year 2006 and 2010, compared to 14 per cent in the home and personal care segment (HPC) and 16 per cent growth in the overall FMCG industry. Mature HPC categories (top four categories: soap, shampoo, detergent and toothpaste) witnessed sales CAGR of 13 per cent during the same period.

The good news is that while the food business has low gross margins compared to HPC products, the advertising spends for the food business are lower. This makes this business equally profitable from a net margin point of view. The proof of this is evident from the adpspends. According to a report by Nomura, among the top 10 FMCG advertisers, spending by pure food companies such as Cadbury and Nestlé accounted for just 12 per cent of total spending in 2010. Amongst the top three FMCG advertisers, HUL, ITC and Reckitt Benckiser, the share of food advertising was seven per cent, 39 per cent and 0 per cent, respectively, in 2010.