The implementation of the Seventh Pay Commission’s recommendations is also expected to increase consumer demand
The year 2015 did not witness the anticipated revival of demand in the consumer goods sector in India. A weak monsoon led to a slowdown in rural demand especially in the second quarter of 2015, which in turn impacted the top-line growth of Fast Moving Consumer Goods (FMCG) companies in India as they depend on the rural market for around 35 per cent of their sales.
However, the overall consumer sentiment remains positive. India continues to be on top of Nielsen’s global consumer confidence index in the third quarter of CY15, rising for the eighth straight quarter. Consumer demand in urban areas is slowly picking up, indicating a revival of the Indian economy.
The FMCG sector is estimated to end the year with a value of $47 billion and is expected to grow by 12 per cent to $53 billion in 2016, driven by some key supply-side and demand-side trends that we can expect to see more of in the coming year.
According to KPMG, one of the most anticipated changes for this industry is the introduction and implementation of the Goods and Services Tax (GST) regime. “With stakeholders increasing efforts to build a consensus around the GST Bill, it is likely that it would be passed soon. The official date for the GST rollout is scheduled for 01 April 2016,” says Rajat Wahi, Partner and Head of Consumer Markets, KPMG in India.
The implementation of GST is expected to provide a level playing field to all players in the FMCG sector in India — with easier movement of goods across states and enhanced operational efficiencies, rather than tax considerations determining the location and movement of goods. This would fundamentally change the way FMCG businesses have been operating, and result in significant changes especially in warehousing, transport and logistics. As a result of the provisions of the GST Bill, companies in the FMCG sector are expected to gain from lower logistics costs, and save up to 1.5 per cent of sales in warehousing costs. These benefits are expected to accrue and be passed-on to the consumer gradually as other taxes are phased out and companies restructure their operations.
GST is expected to result in easier movement of goods and lower operation costs, an outcome that can help smaller FMCG companies—such as start-ups in the food, beverages and natural products segments—expand their footprint based on business costs instead of focussing solely on taxation. Some of these start-ups are already growing at up to 150 per cent per annum, and have created new categories, such as traditional beverages, organic ice-creams, value-for-money organic foods and herbal personal care products. In 2016, as these companies expand their footprint and operations, they can provide strong competition to the industry leaders.
On the regulation front, regulatory and compliance costs, especially for food-based FMCG companies are expected to increase this year, as a consequence of the FSSAI rulings. With product recalls expected to be mandated, pressure to maintain product quality and comply with safety norms is expected to increase for food-based FMCG companies.
The coming year is expected to have a normal monsoon, which is a key factor governing the demand of FMCG products, especially for rural markets. A below-average monsoon in 2015 due to El Nino resulted in a significant decline in rural demand, especially in the FMCG sector. It is estimated that rural consumption in the second quarter of 2016 declined to one-third of the corresponding period in FY15. However, there is an expectation that rural consumption will recover by the beginning of FY17. As a result, FMCG companies are expected to renew their focus on rural markets after the slump experienced this year.
According to KPMG, the outlook for fuel prices for 2016 is positive, with crude oil prices expected to fall below $50 per barrel. The relatively-lower fuel prices are expected to have a positive impact on the prices of commodities, as well as reduce manufacturing and logistics costs for FMCG companies, the benefits of which would eventually be passed-on to the consumer. “On the demand side, lower fuel prices are expected to help bring inflation down further and increase private spending,” says Wahi.
The implementation of the Seventh Pay Commission’s recommendations is also expected to increase consumer demand. It is estimated that the consumption boost to the economy could be as high as $9 billion, and would have a positive impact on sales for the sector.
The premium and luxury FMCG segment is expected to benefit from the revival in consumer demand. Categories such as premium and luxury chocolates, fine wines and premium liquor, designer footwear and apparel are increasing their penetration into tier-2 and smaller cities in India, despite the lack of quality retail space. A weakening Chinese economy and the growing demand for these products in India is expected to result in additional international premium and luxury FMCG brands entering the Indian market in 2016. Domestic FMCG companies are expected to respond by launching their own product lines in this segment, as was seen in the ice-cream segment earlier this year.
Despite uncertainties in the global economy, the Indian FMCG sector is expected to return to the growth trajectory in 2016. “Consumers in India can expect to see stable prices and new product and category offerings. For FMCG companies, the coming year is expected to bring in a much simpler tax regime, as well as a strong growth in consumer demand, but also increased competition from new entrants that have successfully differentiated themselves,” says Wahi