Sector Analysis of FMCG

Basic Industry Information

If we recollect what products we have used from the moment we woke up to now as we read
this, most of them belong to Fast-Moving Consumer Goods (FMCG) sector. From toothpaste
to perfume, from alcohol to tobacco, all these products user buys and uses on daily basis
are the fast-moving consumer goods. They are quickly sold at relatively low cost.  Examples
include non-durable household goods such as packaged foods, beverages, toiletries, over-
the-counter drugs, and other consumables.
FMCG is the fourth largest sector in the Indian economy. It includes Household and personal
care product sales accounting to 50 percent. Fast moving consumer goods companies
deliver products to customers at a high rate of turnover and with a high level of innovation.
The market is exceptionally competitive and each company seeks to motivate, excite and
encourage people into buying and using their products.
Fast-moving consumer goods are the largest segment of consumer goods. They fall into the
nondurable category, as they are consumed immediately and have a short shelf life.
FMCGs can be divided into several different categories including:

 Processed foods: Cheese products, cereals, and boxed pasta

 Prepared meals: Ready-to-eat meals
 Beverages: Bottled water, energy drinks, and juices
 Baked goods: Cookies, croissants, and bagels
 Fresh, frozen foods, and dry goods: Fruits, vegetables, frozen peas and carrots, and
raisins and nuts
 Medicines: Aspirin, pain relievers, and other medication that can be purchased
without a prescription
 Cleaning products: Baking soda, oven cleaner, and window and glass cleaner
 Cosmetics and toiletries: Hair care products, concealers, toothpaste, and soap
 Office supplies: Pens, pencils, and markers

Because fast-moving consumer goods have such a high turnover rate, the market is not only
very large, it is also very competitive. Some of the world's largest companies compete for
market share in this industry including Dole, Coca-Cola, Unilever, Procter & Gamble, Nestlé,
Kellogg's, and General Mills. Companies like these need to focus their efforts on marketing
fast-moving consumer goods to entice and attract consumers to buy their products.
FCMGs are sold in large quantities, so they are considered a reliable source of revenue.
This high volume of sales also offsets the low profit margins on individual sales as well.

As investments, FMCG stocks generally promise low-growth but are safe bets with
predictable margins, stable returns, and regular dividends.

Growth drivers of industry:

The growth momentum in FMCG sector largely depends on its strong structural drivers like
high population and rising affluence level, which are key factors contributing to growth of the
sector. India is reporting an annual population growth of 1.1% and is expected to emerge as
the most populous country in the World by 2024. Nearly half of India’s population is under
the age of 25 and two-thirds are less than 35. India is expected to have the world’s largest
workforce by 2027, with a billion people aged between 15 and 64. This indicates that the
growth in the non-discretionary consumer demand, like food, healthcare, household and
personal care products, are likely to be there for a very long period. In addition, India is also
witnessing strong growth in per capita income, increasing from Rs.79412 in FY14 to
Rs.112835 in FY18 (source: Ministry of Statistics). This is leading to an increase in affluent
population and rise in disposable income in general, which in turn is resulting in rise in
discretionary spending. While the young population is likely to provide the steady growth in
revenue for FMCG companies, rising affluence and disposable income level is likely to bring
the incremental growth for the sector.
FMCG is growing dur to increased market penetration of the consumer products which are
targeted for low-income households, and are made available to the targeted segment. The
products like shampoo in sachet which is one use shampoo available at minimal price.
These when sold in large scale generates huge profits.
These factors are leading to growth of the sector.

Key success factors related to the industry:

1. Brand Equity
Brand equity refers to the intangible asset in the form of brand names. Brand names are the
perception about a particular brand in the form of quality of the product or the loyalty towards
the product. In the fast-moving consumer goods, almost all the competition brands offer
almost homogenous products, and therefore consumers have no reason to change the
brand and experiment with other brands. Hence the brand keeps growing steadily due to
customer loyalty.
2. Distribution Network
In FMCG sector, one of the most critical success factors is the ability to build, develop and
maintain a robust distribution network. One of the most important penetration strategies of
FMCG is making the products available. It takes great deal of effort and planning to make
the goods available to all the customers, who might buy alternative homogenous products
available in the market. It is even difficult to launch a new product in the market as the
vendors would be reluctant to sell the new products. If all the factors are taken care of, and
efficient distribution network is built, then brand equity can be achieved.
3. Studying Consumer Behaviour and producing what the consumer needs and
customising it as per their requirements of customer has now become a very important
success factor for the FMCG Industry. This is crucial as several competing brands producing
homogeneous products are present in the market. So to stand out, understanding the
Consumer behaviour towards a particular product has become very essential. Companies
spend quite a huge amount on this research and development just to deliver the best to the
customers and keep the success for its products going. The behaviour of customers keep
changing with time thus regular monitoring of this behaviour is done by companies so as
they don’t lose out on their existing loyal customers but even gain new potential customers
by producing goods as per their needs and requirement.
Risk factors:
1.Out of stock
This is the greatest and visible risk because customers would easily switch to use of
competitor products. As the products are homogenous, and all of them provide almost
similar experience, customers may find it easy to substitute another product as the stock for
the one they were using runs out.
2. High inventory
In contrary to the “Out of stock risk”, this risk is of having high inventory of the FMCG goods
is of having excessive inventory which could lead to losses. There is high risk of damage to
the products as most of them are perishable. It involves risk of the inventory costs being too
high, higher than the cost of the goods. As the goods have low profit margins of profit, it
leads to losses if inventory cost is more than the profit margin.
3.Ineffective sales force management
This is one of the most difficult risks, particularly with companies that have widely distribution
network and great number of staffs. The staff management gets more complex and payroll
for the staff gets more expensive.
 4.Non strict distributor management
Distributors may not agree to distribute new product launched in the market as they would
not confide in the brand. They might be biased towards a brand to increase their profit
margins. If distribution management is not in place then the brand might fail as customers
would not be able to buy the goods due to unavailability.

Stock recommendation:
ITC Limited listed as ITC Ltd in NSE(ITC) is one of the Nifty 50 stocks. ITC Ltd. is an Indian
multinational conglomerate company headquartered in Kolkata, West Bengal. The company
completed 100 years in 2010 and as of 2012–13, had an annual turnover of US$8.31 billion
and a market capitalization of US$50 billion. It employs over 30,000 people at more than 60
locations across India and is part of Forbes 2000 list.
ITC is in business of products like :

Consumer goods
Cigarettes
Apparel
Education
Hotels and Resorts
Paperboards &Specialty
Papers
Packaging
Agri-Business
 Information Technology

ITC's equity shares are listed on Bombay Stock Exchange, National Stock Exchange of
India and Calcutta Stock Exchange.

As we can observe in the above graph, the stock price trend in last one year, the stock
prices are dropping consistently over the span of one year. We can invest in this stock as the
stock prices are low as of now. We can buy the stock at lesser prices.
As we can see in the above figure, the trend of stock prices over a period of 5 years, the
trend of stock prices is positive and consistent. Hence investing in this stock would give good
returns over a period of time as the company has good revenue and profits. The ITC ltd. has
brand value and brand loyalty due to which the stock prices are expected to grow over a
period of time. So investing in ITC would be feasible and a good decision as the hope for the
growth is high and we would be investing less as the stock prices are low.