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Impact of Budget 2021 on the FMCG Sector
There is a lot of optimism surrounding the FMCG industry as it has almost reached the Pre-Covid levels already.
Photo Credit : Shutterstock
The Fast-Moving Consumer Goods (FMCG) sector is the fourth largest sector in the Indian economy with a market size of $110 Billion in 2020. This sector has a CAGR of 14% and is expected to reach a market size of $220 Billion by 2025. Urban segment contributes to about 55% of the revenue share while the rural segment contributes to 45% of the revenue share. Within the FMCG sector, Household and Personal care category accounts for 50% of the sales, Healthcare category contributes to 31% and Food & Beverages category contributes to 19% of the overall sales in this sector.
Household & Personal care category:
Companies like Hindustan Unilever Ltd. (HUL), Proctor & Gamble (P&G), L’Oréal and Colgate-Palmolive dominate this category. Overall, the segment is moving towards a higher price proposition, with premium segment growing at 6.3%, as compared to 1.1% for mass market. Daily care products are by and large purchased online because of product standardization while the Premium products are purchased offline in retail outlets. Increasingly evolving consumerism has shaped this segment and is expected to grow by 9%.
The rural segment contributes to less than 35% to the revenue share in this category while Metro and Tier-1 cities alone contribute to around 60% of revenues. However, growing internet penetration may drive the growth in this segment as it may help the growth of under-penetrated product categories like Deodorants, Facewash, Men’s fairness etc. Other factors like trend of growing consciousness about grooming (with 50% of rural population aged below 25 years) increased awareness, the rural lifestyle and habits mirroring urban aspirations and lifestyle has bought about a shift from homemade solutions to branded products.
With the rise of health-conscious mind-set among consumers dubbed as ‘wellness economy’, tech-savvy patients with increased digital usage, and people taking health into their own hands due to the COVID-19 crisis, the Consumer Healthcare industry is becoming more competitive than ever. This category is driven by a blend of pharma and FMCG competencies. The Pharma companies bring in their scientific approach towards innovation, while making sure products adhere to industry regulations, and a dedication to developing products concerned with overall health and wellbeing. On the other hand, FMCG is king when it comes to marketing, focusing on local specificities and building truly global & iconic brands, and delivering innovations based on consumer insights and trends.
In Rural markets, consumers generally prefer home-made solutions to health care needs. Therefore, sales of branded products have been stagnating. FMCG companies are focusing towards increasing the awareness of branded products in this segment as brand penetration is a function of awareness. Extensive R&D, technological and scientific innovations, Synergies between that of manufacturer’s R&D sources and Service Provider’s R&D sources, Regulatory policies towards ease of access to healthcare and most importantly- OTC sales will drive this segment.
Food & Beverage Category:
The Food & Beverages sector is one of the largest in the FMCG industry and contributes to approximately 30% of household spending in India. This segment has a CAGR of 16%. Rising income levels, increasing Urbanization, change in consumer preference towards healthy and organic foods drives the growth of this segment. The sector's growth is dependent on the ability to organise, invest and innovate to deliver high value products to the consumer.
Trends in household consumption expenditure indicate that the share of food in overall consumption has been declining over the last decade. Despite the decline in overall consumption share, per capita food consumption in real terms has been increasing, particularly in rural areas. On the Urban side, emerging categories such as Ready-To-Cook (RTC), Ready-to-Eat (RTE), and Ready-To-Drink (RTD) categories are shaping consumer preferences, especially those who have a busy lifestyle.
Impact of COVID-19 on FMCG:
COVID-19 has had a huge and significant impact on FMCG sector where it not only changed consumer behaviour, but also made all the FMCG companies re-invent their strategies for customer acquisition, retention and value propositions. The consumption basket has changed during this period and some of these changes are likely to be permanent. There was a surge in demand for products that enhanced personal hygiene (Personal care and consumer healthcare products) such as soaps, hand washes, sanitisers, disinfectants, wipes, masks, home cleaning products such as floor cleaners, kitchen cleaners, toilet cleaners etc.
As for the Foods segment, food staples and convenience foods such as instant noodles, biscuits, frozen foods, flour, cooking oils, instant mixes, and nutrition saw a surge in demand. However, there are few categories that had to take a back seat and did not do so well during this period-such as deodorants, fragrances, skincare and other cosmetics, gourmet foods, etc. which were considered as “non-essentials”.
In terms of the consumer behaviour, Consumers tried to avoid multiple trips to the retail outlets which resulted in increased spending per visit to their local kiranas or supermarkets. During this period, Larger SKUs were sold a lot more compared to smaller packs. COVID-19 also gave a significant boost to the E-commerce sector. Consumers switched from Shops, shopping malls and supermarkets to online portals for the purchase of products, ranging from basic commodities to branded goods. Big Basket, Amazon Pantry, Grofers, Flipkart, Dunzo etc. were the favourites among consumers. On the downside, lack of productivity during the lockdown resulted in the loss of jobs and pay cuts. Shutting down of shops and family-based businesses has made many people sway towards online retail to meet their financial requirements.
Impact of Budget 2021 on FMCG:
The FMCG sector was showing strong signs of recovery with COVID-induced disruptions easing out completely and therefore expectations from Budget 2021 was centred around inducing a surge in consumption and demand. The Rs. 40,000 crore initiative towards development of rural infrastructure and Rs. 10,000 crore initiative towards doubling of Micro-irrigation corpus would help in trigger a consumption boom and boost growth momentum.
These initiatives will help the FMCG companies to expand their rural coverage by increasing penetration and helping drive consumption.
According to Kantar World panel, revival of urban demand and a resilient rural economy saw India’s FMCG market expand 4.2% the last calendar year, twice the rate in 2019 despite manufacturing and distribution hurdles in late March and April. While there are signs of recovery on the urban side, the bottom of the pyramid urban consumer is still a little stressed because of job losses during the COVID-19 lockdown. This is expected to improve with the infrastructure development and job-creation initiatives. Discretionary product categories such as personal care, chocolates, liquor, coffee etc are expected to be further fuelled in Tier III cities and rural markets. For Food categories, consumers will be more brand conscious than price conscious. However, Price will continue to hold a sway almost all the other categories as consumers are trying to make ends meet.
A recent report by the Boston Consultancy Group (BCG) claimed that the impact of the pandemic will ‘negatively impact’ household consumption in 2021 as well. It also said that the overall consumption growth is likely to be delayed by 2 years. The BCG consumer income and expenditure model suggests that “total household consumption spending is likely to reach ₹290-300 trillion by 2030, similar to its initial Pre-Covid estimates for 2028”. The expectation by the FMCG companies that recovery in rural consumption will drive the industry might be more short-lived than expected while increasing contribution of tier 2 and 3 cities to consumption growth is likely to persist in the long-term. While COVID-19 pushed consumers to adopt E-commerce, the stickiness of this behaviour is expected to vary depending on the product categories.
In conclusion, there is a lot of optimism surrounding the FMCG industry as it has almost reached the Pre-Covid levels already. It is set on a growth trajectory at this point. However, companies need to realize that consumer behaviour has changed and therefore it is imperative for all players to revisit their sales & marketing strategies and keep a close eye on changing consumer needs.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.