Friday, June 14, 2024

The FMCG Frontier: Exploring The Macro-Economic Environment in India

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In the face of a global economic slowdown, decoding the keys to India’s sustained growth reveals three critical trends. Shifting demographics fuel FMCG consumption, with robust growth in Modern Trade (22%) and e-commerce (5.24%). Consumers, concerned about rising food prices, employ coping strategies. Health and sustainability trends rise, influencing brand choices. Future strategies include adapting to inflation, consumer resonance, healthy propositions, and a robust online presence for FMCG success beyond 2024.

As the global economy experiences a deceleration, it becomes crucial to comprehend the factors contributing to India’s sustained growth and its advantageous position in the current scenario. There are three major promising and encouraging trend surfacing and strengthening India’s sustained growth narrative

One such aspect is the potential of Tier 2 cities. Accounting for 14% of India’s total population, T2+ cities already contribute 46% to the GDP, offering a significant boost to the Indian economy. T2+ cities are home to a majority of our MSMEs, and these small and medium enterprises play a crucial role in propelling India’s growth, contributing approximately 30% to the GDP. A parallel force in driving growth is the Indian startup ecosystem, which boasts the third-largest number of unicorns globally. This ecosystem is actively seeking to capture the consumer base in Tier 2 cities.

The second aspect of the growth is the changing income and consumption structure driven by the shift in the demographics. The presence of a substantial portion of the population can bring about several potential benefits, especially for the FMCG sector, with high level of consumption, early adopters for new technology and trends, more digitally engaged and significantly contributing to the workforce, impacting the overall economy.

And lastly rapid digital evolution, where India is in the forefront of transformative changes across various sectors, contributing to economic growth and innovation.

Against the backdrop of a continually fluctuating macroeconomic environment, the FMCG sector in India is confronted with a range of challenges and opportunities. Nevertheless, amid these intricacies, a promising and encouraging trend will strengthen the growth narrative of the FMCG sector in India.

The FMCG Landscape

According to NielsenIQ’s FMCG Retail Measurement Service (RMS), for 12 months ending Sep’23 (MAT Sep’23), the FMCG industry (FMCG + Non-alcoholic Beverages) in India is valued at Rs 6,51,375 cr, growing at a pace of 10.7%. This growth is largely consumption driven across the market.

The report further reveals that volume growth for the quarter is 8% higher than same period last year (i.e Q32022) NIQ, the world’s leading consumer intelligence company attributes the robust expansion of FMCG sector to increased consumption across the country.

Rural markets showing signs of recovery

Rural markets are showing signs of recovery, with consumption gradually picking up, while Urban market is growing faster and maintaining a stable rate of consumption growth. It is also observed, from a retail universe of about 11.5 million outlets across India, 42% of these stores spread in urban areas have seen an increased penetration while rural markets that account for the rest of the 58% retail stores had a slower growth.

Inflationary pressures and rising prices of essential goods along with uneven rainfall had impacted Rural growth and consumption. A recovery in rural areas is critical for FMCG companies, as it contributes to around 37% of the total FMCG sales. A thriving rural economy is also good for FMCG companies as the possibility of improving overall FMCG penetration grows.

Sustained and rapid growth for Modern Trade channel

Modern Trade is witnessing robust growth. The channel faced significant challenges during the pandemic but has experienced accelerated growth following the relaxation of pandemic restrictions and threats. For MAT Sept’ 23, the channel posted a growth of 22% over the same period last year, 2X faster than the growth from Traditional Trade channel.  The accelerated growth is not merely a result of a low base; rather, it is fueled by consumers reverting to pre-pandemic habits. Additionally, the consistent expansion of Modern Trade chains into new and emerging markets is a signifi cant driver of this rapid growth.

This growth in Modern Trade is largely driven by the non-top 8 metros. These metros have posted a growth of 28.5% for the period MAT Sept’23 over LY, while Top 8 Metros posted 16.8% for the same period.

This is also due to the rise of the regional Modern Trade chains growing faster and stronger than the National chains and expanding rapidly. Several factors contribute to the competitive edge of these regional players. They excel in focusing on the regional market and tailoring their offerings to meet the specific needs of local consumers throughout the seasons. Emphasizing private labels across various categories not only enhances their margins and bottom line but also positions them advantageously. Furthermore, owning their store properties rather than being situated in a mall or renting space provides an additional benefit.

E-commerce fueling rapid growth

Finally, e-commerce, the shift in consumer behavior post pandemic towards online shopping has been a major catalyst for the accelerated growth of e-commerce in FMCG. Convenience, time-saving, and the availability of a diverse range of products contribute to this changing trend. As more consumers embrace online shopping, especially for everyday products, the FMCG sector will experience a rapid transformation. This rapid growth in e-commerce FMCG is largely driven by Metro markets, while non metros are small but are growing gradually.

As per NielsenIQ E-Commerce Measurement Service (EMS), e-commerce share within the total trade in All India Metros (TC 1 towns) is 5.24% for MAT Sept’23, gained by 1.4% over same period last year.

What is driving consumers’ choice and spending intention?

Prolonged inflationary pressures have shaped calculated spending, as consumers evolve their habits aligned to recent inflation deceleration. But the compounding effects of years of disruption continue to keep consumers bracing for what’s ahead. While FMCG prices continued to rise in double digit in several countries, India was in single digits. Thus, across the globe, it is no surprise that rising food prices remained top of mind concern for consumers. India was no different as the Indian consumer too recorded this as a top concern, as seen in the Fig no. 4, 21% of consumers quoted “Rising food prices” as a top concern followed by “Global warming/environment” and “Increased housing cost”.

However, besides the food price rise, increasing utilities and economic downturn plagued the consumers globally while for Indian consumers it’s environment and housing costs that also propped up as sore issues. COVID-19 still lurks in India as one of the top 10 concerns while globally another concern that emerged was ability to provide basics for family.

Consumers are coping despite harsh realities persisting, with 43% of global consumers believing they will be better off as per the Midyear Consumer Outlook 2023 by NIQ. Indian consumers were far more optimistic about their financial situation with 79% believing they will be better off. Multiple consumer data points paint a picture of recovery and optimism. 21% of Indian respondents reported that they experienced job or income loss but feel they are back on track. Part of that confidence might be attributed to the lower rate of unemployment, both current and forecast, and even though we are experiencing tough economic conditions the silver lining is jobs opening up.

 Regardless of the upbeat outlook, 90% of consumers are employing multiple strategies to manage their spending and this is unlikely to change in the short-term. Budgeting and cutting back on discretionary spending are preferred approaches to manage finances. Therefore, innovation will continue to be important, regardless of cost pressures. Retailers could benefit from traffic-generating offers in key categories, while manufacturers could target dis-loyal and highly promiscuous brand shoppers with differentiated offers.

How are consumers managing their spending for the next 12 months?

Indian consumers have positive intentions on spending, but on key essential segment like Education, Savings/ Investment and Groceries as compared to the global consumers, who intend to prioritize on Grocery and In-home spending. In-home priorities prevail across the next 12 months as consumers continue to focus on the basics and extend coping behavior that dominated the last 3 years. There is an expectation that necessities will take up a bigger part of wallet spend such as education, groceries, savings/ investments, health care, financial services and utilities and therefore plan to spend less on OOH, salon and grooming, holidays, appliances, and similar discretionary type spending.  Beyond this high-level strategy of redirected spend, consumers are conscious of their spending and intend to seek out value as often as possible.

Consumers adopt multiple strategies to manage FMCG spendings.

Consumers are prioritizing their spending for the coming months as infl ation is still riding high for FMCG. They are also adopting various ways and strategies to manage their wallet when it comes to daily essentials, especially FMCG. Consumers are opting for a wide range of strategies to manage their grocery spending, ranging from shopping online to get better deals, to using digital technologies, monitoring the cost of overall basket, and even using loyalty points to manage spending. If we scroll over the list of strategies, most of these are fueling the emerging trends in retail.

Health needs, important to all

While health needs are universally significant, it’s crucial to tailor approaches for different markets. In the context of India, the hierarchy of top health concerns comprises environmental factors, physical health, sleep quality, emotional well-being, and dietary considerations, which diverges from the priorities observed in most other APAC markets, where physical health typically assumes precedence, followed by considerations related to sleep.

A trend-spotting survey conducted by NielsenIQ BASES has also identified the rise of Natural, Immunity, Holistic Wellness, and Sustainability as the prominent emerging consumer trends. Furthermore, when delving deeper into the realm of food trends, it becomes evident that consumers are showing an increasing preference for Food & Beverages that claim to be rich in nutrients and healthy ingredients or that claim to be healthier alternatives.

Examining the current brands available in the market that use healthy ingredients as a value proposition, we observe that these brands hold approximately 10% of the share in the Traditional Trade market. In the Modern Trade channel, the same brands command around 20% share and are experiencing robust double-digit growth.

What are consumers seeking in their Brands?

Now when it comes to consumable goods, exclusion of bad things (low sugar, low calories) is still among the most important factors in innovation. However, consumers seek more than that now. They’re willing to try new things if they are affordable when it comes to food but also with good quality ingredients.

For example, for things which are part of your daily basket such as Snacking and Confectionery, the idea of convenience needs to be there. These are more impulse and indulgent purchases; hence these factors matter. However, low calories, healthier ingredients, low sugar are the top attributes.

How to outperform in 2024 and beyond

In preparing for the journey ahead, it’s crucial to evaluate the forthcoming factors that will drive growth, maintain relevance, and foster imaginative thinking

  • ADAPT to inflationary reality. Executing effective and consistent price management strategies is essential for preserving profitability during prolonged periods of inflation. Careful monitoring of consumer optimism becomes paramount, particularly in tandem with the impact of inflationary pressures and shifts in employment dynamics. It is imperative to align your brand seamlessly with consumers’ deeply ingrained habits, focusing on their judicious spending and saving strategies
  • RESONATE with the consumer: Examining the economic segmentation of NIQ’s consumers to assess their “financial condition and future outlook” reveals a market polarization, with 46% of Indian consumers expressing a sense of vulnerability, while 54% adopting a cautious yet optimistic stance. This suggests a divergence in consumer spending, influenced by economic conditions. Observable changes in price tier dynamics highlight the continued significance of price as the primary factor in purchasing decisions. Therefore, industry players must acknowledge that private labels and local or regional brands will play a crucial role in the dynamics of the grocery market. Formulate strategies for coexistence rather than relying solely on price competition and differentiation, innovation, and carving out a unique space distinct from being perceived solely as a “cheaper alternative”.
  • FOCUS on the “Healthy” proposition: Consumers are displaying a growing inclination towards seeking Food & Beverages products with reduced negative attributes, all while considering both the financial and physical benefits. This entails a profound consideration for addressing specific concerns, including the minimization of negative attributes associated with products. To meet and exceed these evolving expectations, it becomes imperative for businesses to infuse innovation into their offerings, ensuring that they resonate with the intricacies of individual consumer needs while simultaneously delivering holistic benefits that transcend the boundaries of financial and physical realms.
  • BUILD a robust online strategy: Driven by the imperative to align with changing consumer preferences, leveraging the growth of e-commerce, and staying competitive in a digital-first business environment is crucial. It is a strategic imperative for FMCG brands to not only meet current consumer expectations but also future proof, as technology continues to shape consumer preferences and behaviors. FMCG companies and retailers leveraging digital platforms are poised for continued success in this rapidly changing market.

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