Wednesday, June 19, 2024

8 Trends Shaping India’s FMCG Industry

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The FMCG sector in India grapples with inflation, evolving consumer behaviors, and digital disruptions. The industry’s transformation is propelled by D2C brands, generative AI, and sustainability efforts, influencing consumer choices and advertising. E-commerce beckons both new and established players seeking acquisitions. Generative AI enhances efficiency and personalization, while demographic shifts underscore the importance of sustainability, convenience, and a focus on premium goods for an aging consumer base. Emphasizing sustainability is key to reinforcing brand reputation and readiness for the competitive challenges in the FMCG landscape.

The FMCG industry in India has been battling inflation to protect growth and margins in last few years, new trends are emerging on the horizon with the potential to shape the consumer products industry for years to come. FMCG companies need to prepare themselves for the road ahead.

The FMCG industry has been facing persistent inflation and shrinking demand in the recent years, promoting them to respond with price increases, shrinking pack sizes, cost cutting and digital enablement. While FMCG companies must deal with the immediate challenges, they must also be mindful of the long-term trends shaping the industry in a post-pandemic world.

On one side, consumers have formed new habits and preferences; on the other, the competition is only getting fiercer in the consumer products industry, with new players emerging and adopting aggressive strategies to destabilize the incumbents.

Our experts have identified seven majors trends shaping India’s FMCG industry and unpick why FMCG managers will need to address them. While we are only seeing the first signs today, these trends will become the new standard in years to come, and FMCG companies need to adapt quickly to gain the upper hand.

1. Generative AI ushers in

Generative AI is a subset of artificial intelligence that helps create new outputs, such as images, text, music, or code, based on the data and patterns the large language models (LLMs) are trained on. This new technology has taken the world by storm since ChatGPT was launched for public last year.

Generative AI can help FMCG brands in several ways like:

  • Improved efficiency: FMCG companies can use generative AI to create faster and more accurate content than human writers, saving time and resource.
  • Enhanced creativity: Generative AI uses large language models trained on vast amounts of data, making the technology highly effective in identifying trends, patterns, and insights, which can inspire new and innovative ideas.
  • Personalization and targeting: FMCG brands can now create highly personalized and targeted messages, ensuring effective targeting and improve consumer engagement Some of the leading FMCG companies utilizing generative AI technology include Unilever, and Nestle, implementing innovative strategies to enhance their products and service.

Unilever employs its own generative AI technology. This tool generates product descriptions for retailers’ websites and digital commerce platforms, streamlining content creation processes. On the other hand, Nestle uses generative AI to validate new product ideas and compile comprehensive market research reports. Their proprietary AI platform, fueled by a vast dataset on food consumption, provides insights into popular restaurant items and home cooking preferences, derived from billions of real-life moments.

While the use of Generative AI is still in its early stages in the Indian FMCG industry, it is only a matter of time before it becomes extensively integrated across all areas of their business.

2. New India is Digital India

While digitisation was an ongoing process before the Covid crisis, it has accelerated the process multifold: the internet user base has gone from 384 million in 2017 to 759 million in 2022 and is projected to rise to900 million in 2025. In addition, 53% of users access the internet via smartphones, along with a surge in social media usage (448 M in 2021, +21% from 2020)

More recently, the growth in online users has primarily happened in the rural market: 53%4 of internet users come from rural India, indicating that rural India continues to drive the growth of the internet in the country. However, online shopping remains “heavily dominated” by the urban market, meaning the rural market is still largely underexploited.

How search and social are digitally influencing customer decision

With the surge in internet users and smartphone penetration, further accelerated by the roll-out of 5G telecom services in the year 2023, customers now have more influence from online search results, ratings, reviews and influencers. Making it essential for companies to understand customer decision journey and offer them products and value propositions to meet their needs wherever they want- online or offline.

3. Shift to digital advertising

Digitization has also increased digital advertising, with digital now contributing 53%5 of total ad revenue compared to 24% in 2019. The average time spent on digital is now higher than on TV, with 105 minutes compared to TV’s 66 minutes . With the current momentum, media consumption will steadily shift towards digital media consumption.

Digital advertising is growing at 14.75% CAGR to reach Rs. 35,809 crores by 20237 , representing 38% of the total advertising spend in India almost equal to that of TV at 40%. FMCG industry is the biggest contributor to the digital media industry at 42% share of the total digital spend. The market is further assessed to grow at a CAGR of 30.3% during 2024-2032.

For FMCG products, which are primarily convenience-based, customers often spend minimal time comparing different brands. Utilizing social media marketing proves advantageous for marketers in influencing customers’ purchase decisions within a shorter time frame. The compact nature of advertisements on social media, in contrast to traditional media, facilitates quicker and more direct consumer engagement, aligning well with the swift decision-making process characteristic of FMCG purchases.

4. Rise of digital commerce 

Digital commerce has become an integral part of the customer’s decision journey as the consumers formed a habit of buying online during the COVID lockdowns.

Digital commerce will further grow with increase in digital shoppers to 500 million by 2030, up from 312 million in 2022. According to a new study conducted by YouGov and ACI Worldwide digital payments continue to be the payment method of choice. The  study shows that over all 41% of consumers choose digital payments as their preferred payment method, ahead of cash (26%) and debit and credit card payments (23%) while this number increases to 50% in the 25-34 age group.

The rise of D2C brands:  The traditional model of the FMCG industry in India required developing new brands, categories and products based on in-depth consumer research and taking them to market through a fragmented and unorganised distribution network. However, growth in digital technologies millennial consumers’ changed behaviour and a start-up culture have led to a new type of FMCG company- Direct to Consumer or D2C.

There has been tremendous growth of D2C FMCG brands in India, with the number of companies more than doubling in 2 years until 2020. The number is further projected to grow to 200,000 by 2025, a growth trend further reinforced post-pandemic. D2C brands have reached INR100 crore revenue in 3-4 years compared to 18+ years taken by the traditional players.

The D2C brands have become both a challenge and an opportunity for traditional FMCG companies. While the rapid growth of D2C brands fueled through new digital capabilities poses a challenge to the existing brands, it also opens up opportunities to acquire these brands, boosting the capabilities of  traditional brands, as reflected in the number of acquisitions made in this space

For example, Marico has built a portfolio of three D2C brands which are now INR 500 Crore business. On the other hand, the D2C brands are now looking to grow beyond their online presence going in direct competition with the traditional FMCG companies.

5. Industry structure gets shaped by new and existing players

The FMCG industry is going through a structural change with the entry of the new type of players and consolidation by the incumbent players. In particular, three types of players are emerging: Mavericks – companies with a completely non-traditional background, scalers those to spread their wings beyond their private labels and acquirers, looking to consolidate their position further.

These new D2C players have rapidly scaled as they capitalise on new consumer behaviour to reach them directly through digital marketing. In the process, they have also built a strong brand connect with their core consumer base to help retain existing customers while making moves to attract new ones.

Lets look at some of these emerging players:

  • Mavericks: On the sidelines until a decade, Patanjali has seen a meteoric rise since then. The company’s Food and FMCG business revenue jumped nearly four-fold to ₹6,218.08 crore in the 2022-23 fiscal, from ₹1,683.24 crore in the previous year. The company has grown with a different business model compared to the traditional FMCG brands on the back of natural products. As it prepares for the next stage of growth through listing multiple companies, the industry will witness a new type of competition to deal with.
  • Scalers: Reliance also announced its plans to enter the FMCG market earlier this year, focusing on small packs grocery segments, with diversification plans coming gradually. Reliance’s entry into the FMCG market will be through M&A, with plans on acquiring multiple FMCG brands to accompany its developing modern trade stores; these possible acquisitions include F&B brands Garden Namkeens, Lahori Zeera and Bindu Beverages.
  • Acquirers: As new firms continue to reshape the market, existing FMCG players have merged with or acquired other brands to enter new markets or to increase their portfolios in areas where they are already present. For example, Nestle India bought Purina Care India, and Emami bought 30% of pet care startup Canis Lupus Services India.

5. E-commerce is the new shopping mall

Three years ago, amid the  pandemic, consumer behavior and preferred channels shifted  significantly. E-commerce emerged not as a passing trend but a permanent fi xture within the FMCG landscape post-COVID.

The Indian e-commerce market is expected to surpass modern trade by the financial year 2025. Forecasts suggest significant growth, with expectations for the e-commerce market to surge from $29 billion in FY20 to $100-105 billion by FY25 in comparison to modern trade’s $50-billion size that may increase to $85-90 billion during the same period

This evolution isn’t just about e-commerce overtaking modern trade; it’s also about the transformation of general trade channels, as kiranas in urban areas are likely to adopt more modern store-like appearances, embracing digital payments and direct ordering from FMCG brands.

Significantly, direct ordering and e-commerce platforms have fueled substantial sales growth for FMCG companies, such as Hindustan Unilever and Tata Consumer, where digital sales accounted for a substantial portion of their revenue.

Additionally, collaborations with various digital platforms offer increased coverage for deliveries, convenient options, and access to products that might be challenging to find offline, intensifying the appeal of FMCG businesses in the digital realm.

Finally, the social commerce channel will see robust growth in the coming years, recording a CAGR of 62.4% during 2022-2028: as the number of internet and social media user surges. Social media will likely become a vital shopping platform as they allow for more customized offers and target-specific ads, thanks to the high volume of user data collected by social media apps.

6. Millennials and Gen-Z become the main actors  

As Gen Z and Millenials account for a growing part of the population (estimated to comprise 50% of India’s population by 2030), their consumption habits and preferences are becoming mainstream. Among them is a liking for quick deliveries and convenience, an increasing digital savviness and a desire for healthier products.

The requirement for quick deliveries is especially true for the convenience of having the product delivered at home or available at your doorstep; after having experienced these new channels during the pandemic, the consumers are more likely to use them than post-pandemic. Especially for groceries, 42 per cent of shoppers across all age groups, say that delivery and fulfilment are the most important service attributes.

Millennials and Gen Z are far more challenging to reach through old-fashioned marketing campaigns.  84% of Millennials don’t trust traditional advertising; they are far more sensitive to experiences than hard sells. Gen-Z consumers are far more sensitive to money-saving opportunities (as they are less confident about the future and tend to check their bank balance more frequently) and socially and environmentally engaged companies

61% of Gen Zs believe brands are better positioned than governments to solve social problems. They also prefer buying Indian products: 92% of Indians have reported purchasing local products over imported ones.

More consumers will compare different options before buying, thanks to the increased online information. They will also be more attentive to the information displayed on the packaging (“knowing before buying” behaviour). In B2C, 81% of customers research online before buying non-routine items, while in B2B, 92% of purchasing decisions commence with an online digital search.

7. Health will remain a concern in the FMCG Market

 In F&B, dietary preferences will shift towards organic/vegan products, driving sales of health & nutrition-focus brands.

Consumers will prefer branded products as they are perceived to be associated with better quality, safety and health benefits. Forty four per cent of consumers are willing to pay a premium for grocery products that have sustainable packaging. This is more pronounced amongst Gen Z (64 per cent) and millennials (54 per cent) than older generations like boomers (30 per cent).

Consumers to get older and wealthier:By the year 2050, India will have a notably larger mid-age population. They will likely have more purchasing power (being a family and not single households) and will buy according to their lifecycle stages: couples typically buy more durable goods, parents buy children or family-related products, and their expenses in-home care/ personal care increase towards family-sized packs; finally, when children leave the nest, the revenue of the parents stabilize, and they can spend more on luxury/health related items.

Furthermore, the wealth pyramid will change considerably in the coming years, thanks to India’s GDP growth. The growth will primarily be concentrated in the top and middle-income consumers, with the number of lower-income consumers decreasing rapidly. As a result, economy products will give way to mass-premium, while the luxury market will gradually increase Half of this new wealth will be spent on buying better or new products, while the other half will be spent on buying more of the existing products.

As consumers enter a higher income class, they spend 2-2.5x more on essential categories (F&B, apparel, personal care, transport and housing). Wealthier consumers also spend a higher proportion of their income on discretionary products; for the FMCG market, it will mean higher spending on premium personal care products, better food options (both organic/healthy foods as well as time saving, such as ready-to-cook or ready-to-eat).

FMCG companies are ramping up their premiumization strategies, seizing on the growing willingness of Indian consumers to invest in value-added offerings. This trend is notably more pronounced in the top 100 cities, driven by increased disposable incomes, as seen in ordering patterns for products like coffee and chocolates, such as Nescafe Gold and Kitkat Dessert Delight, which are experiencing significant success.

Targeting those customers, who can afford better product options, are more and more sensitive about branding and product quality will prove essential to navigating this trend by selling high-quality products with right packaging, after-sales services, and marketing campaigns.

8. The future is sustainable

Sustainability will be an increasing concern with changing expectations of regulators, consumers and the employees. Global food and consumer goods production accounts for 60% of greenhouse gas (GHG) emissions, 80% of water usage, and 66% of tropical forest loss. The ban on single-use plastics is likely only to be the first step towards a more sustainable society, in which FMCG companies will have to make considerable efforts.

Multiple FMCG Companies have started serious sustainability plans: Unilever plans on having net zero emissions for operations in 2030and across their value chain by 2039. HUL and Dabur have alreadybecome plastic-neutral in 2021 (meaning they collected as muchplastic as they emitted that year).

FMCG companies like DS Group, owning brands like Catch, Pass Pass,are intensifying their sustainability efforts, engaging in initiatives across energy management, water conservation, material recycling, waste management, and the enhancement of their green footprint.

Regulations on sourcing (and especially local sourcing) could very much be set in motion by the government in the future, as is already the case in the UK (sustainable procurement) and in China.

Sustainability efforts are not only necessary in terms of compliance with future legislation but also can improve the company’s reputation and sales. 69% of consumers are willing to pay more for sustainable products, according to a survey by Rakuten Insight in 2022.

Finding a balance between dealing with short-term challenges and long-term opportunities can prove challenging; however, as the FMCG market gets more competitive, success will be measured by a company’s ability to anticipate and grow based on future trends.

The authors of the article are Shiv Sharma & Olivier Prexl, from Kanvic Consulting.

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