July 13th, 2020 Industry Research

Fast Moving Consumer

Overview
Goods (FMCG)...
A weak consumption story was reflected in the FMCG sector in FY20.
Is it still fast moving? Reduced job creation led to subdued demand, while erratic
monsoons led to lower farm income, which contributed to this
Contact:
slowdown in FY20.

Madan Sabnavis Mid-March 2020 onwards, with the outbreak of Covid-19 the entire
Chief Economist Indian economy came to a sudden standstill. Due to the imposition
madan.sabnavis@careratings.com
+91-22-6837 4433
of nation-wide lockdown, operations in manufacturing units dropped
to significantly low levels and with negligible availability of work in
Vahishta M. Unwalla
urban areas, labourers decided to migrate back to their villages. With
Research Analyst inadequate number of truck drivers and sealing of state borders,
vahishta.unwalla@careratings.com distribution became challenging and led to depletion in stock levels
+91-22-6837 4408
with retailers. This created wide spread fears in minds of consumers
and they indulged in panic buying for pantry loading.
Mradul Mishra (Media Contact)
mradul.mishra@careratings.com Additionally, salaried employees residing in urban markets are
+91-22-6837 4424
currently facing fears of job losses and fall in disposable incomes.
Hence even urban markets are showing gradual signs of saturation.
Disclaimer: This report is prepared by CARE Ratings Ltd. CARE All this comes against the backdrop of pre-existing sluggish consumer
Ratings has taken utmost care to ensure accuracy and
objectivity while developing this report based on information demand.
available in public domain. However, neither the accuracy
nor completeness of information contained in this report is However, as restrictions on lockdown eased, operations gradually
guaranteed. CARE Ratings is not responsible for any errors or
omissions in analysis/inferences/views or for results resumed and are now estimated to be at par with pre-Covid levels.
obtained from the use of information contained in this report
and especially states that CARE Ratings has no financial
In the on-going pandemic scenario, consumers have shifted their
liability whatsoever to the user of this report demand preferences, like having a greater demand for products in
the ‘health and nutrition’ category that boost immunity, etc. FMCG
manufacturers are accordingly reacting to these changes to support
shifting consumer needs.

The following sections of this report are an analysis of:

- FMG sector size and structure

- FMCG sector performance in FY20
- Extent to which disruptions caused by Covid-19 affected the FMCG
sector
- What to expect in following months
 Industry Research I Fast Moving Consumer Goods (FMCG) … Is it still fast moving?

Introduction - Size and Structure

The Fast Moving Consumer Goods (FMCG) sector is a vital contributor to India’s GDP and the 4th largest sector in the country1,
which is estimated to have grown from USD 31.6 bn in 2011 to USD 52.75 bn in FY182. The sector caters to the daily needs
of individuals which range from essential food items having an inelastic demand such as salt, sugar, edible oil, etc. to home
and personal care products such as soap, shampoo, detergent, etc. In addition to these, the sector also manufactures value
added products whose demand is discretionary in nature such as ice-cream, hair oil, body moisturizer, etc. As depicted in
chart 1, the FMCG sector can be broadly classified into four segments, of which home and personal care is the largest
segment accounting for ~50% of the overall FMCG market3.

Chart 1: Broad segments of FMCG sector with examples

Home & Food & Healthcare Tobacco

Personal Care Beverages products

Home care - Fabric softener,
detergent, dish washing
bar/gel, toilet & surface
cleaner, home insecticides,
etc.
Personal wash including
skin, hair and oral care-
soap, toothpaste, cosmetics,
body lotion, moisturizer, face
wash, hair oil, shampoo,
conditioner, deodorants,
hand sanitizer, etc.
Beverages- Tea, coffee, cold
drinks
Food products -
Salt, sugar, edible oil,
confectionery, processed
food
Dairy & dairy products -
milk, ghee, butter, ice-cream,
paneer
Bakery products - bread,
croissant, biscuits, cookies,
cake
Milling products- maida,
wheat flour, wheat bran,
milled dal, besan, rawa, etc.
Includes Over The Counter
(OTC) products and
ethicals
Consumers are increasingly
adopting a holistic lifestyle
Includes cigarettes,
and seeking products that
are closer to the Indian biri and other tobacco
heritage, which has products
increased demand for
Ayurvedic products.
Products made with natural
ingredients have seen great
demand for enhancing
health and well being.
Example: Chyawanprash,
honey, glucose, etc.

Source: CARE Ratings, Industry

Multiple players both in the unorganised as well as organised segments operate in the FMCG sector in India. With manifold
products manufactured, each product category has numerous brands and varieties, creating intense competition among
players operating in this sector. Therefore, FMCG companies operate on low margins and volume sales remains the key to
survival. Players greatly emphasise on expanding their distribution networks and spend extensively on marketing like sales
promotion, discounts, advertising, etc. Products sold by this sector are usually low priced and largely homogenous in nature
that can easily be substituted, which makes consumers spend minimal time in making a purchase decision.

Rural markets in India pose various challenges for FMCG manufacturers, due to the existence of multiple languages and
dialects, diversities in cultures, small and distantly located villages, lack of media penetration, etc. Rural consumers have high
dependence on rainfall which leads to uncertain disposable incomes. Additionally, due to insufficient infrastructure like
roads, electricity, power, etc. distribution gets challenging. For example, one of the largest FMCG companies which has
among the highest rural penetration, has a reach to ~55,000 villages, while India has about 7 lakh villages, clearly displaying
how underpenetrated rural India is.

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 Industry Research I Fast Moving Consumer Goods (FMCG) … Is it still fast moving?

Growth drivers of FMCG sector

- Rising population:
As viewed in chart 2, India added almost 1/3rd of its population in the past 2 decades from 1998-2018, while China (most
populated nation globally) grew by 12% in the same period. With this sharp surge, India is now the 2nd most populated
nation globally with 1.37 bn individuals or constitutes nearly 18% of world’s population. This rising population has given
way to newer and increasing consumption trends in the country for food, healthcare, home and personal care products.

Chart 2: Population in world’s two most populated countries

China India
in Bn 12%
1.4 32%
1.40 1.37
1.33
1.30 5%
1.25
6% 1.22 12%
1.20

1.10
1.04 17%
1.00
1999 2009 2019 1999 2009 2019

Source: World Bank, CARE Ratings

- Favourable demographics with growing per capita income:

India has a young population with 26% individuals below 15 years of age and 67% aged between 15 and 64 years, which
make the country one among of the world’s largest work forces. Also, India nearly tripled its per capita net national income
(at current prices) from ~Rs. 0.48 lakh in FY10 to ~Rs. 1.34 lakh in FY20. Such favourable demographics with rising
disposable income present a ample opportunity size for growth in consumer demand for products sold under the FMCG
space.

- Growing urbanisation: Chart 3: Greater urbanisation leading to higher disposable income

Development in metro cities and emerging
in Bn 73% 75%
towns continues to drive economic growth for 69% Urban
1.8
66% population
our country. Scope for a better job, lifestyle,
healthcare and education opportunities led to a
rise in immigration from villages to larger cities. 50% Rural
0.9
With this, population in the urban segment grew 1.2 population
0.85
68% in the past 2 decades and as of 2019, nearly
0.75
1/3rd of country’s total population resides in the 34% Urban as % of
31% 25%
urban space. Such growing population residing in 0.6 27% total
population
larger cities brings prospects for higher
disposable income and spending power, having 0.47
0.37 Rural as % of
0.28
an inclination towards branded products and total
0 0%
premium offerings. population
1999 2009 2019

Source: World Bank

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 Industry Research I Fast Moving Consumer Goods (FMCG) … Is it still fast moving?

- Rising penetration of technology:

Low data prices and affordable smart phones have helped in the advent of new E-commerce platforms in the country. India
has one of the lowest data prices globally with average cost of wireless data at ~Rs.7/GB. With such low data prices, the
average wireless data usage per subscriber grew manifold in past three years from 240 MB/month in Q2-FY17 to 10.37
GB/month in Q2-FY20. According to TRAI, India had ~688 mn internet subscribers in Q2-FY20.

New payment platforms developed by Fintech players have greatly proliferated, making digital one of the preferred modes
of making payments. These factors have led to the rise in adoption of E-commerce channels and strengthened delivery
logistics for large FMCG players. While currently E-commerce contributes less than 10% of total revenues, it is expected to
grow multi-fold in coming years.

- New and improved lifestyle creating demand for new product categories:
Changing lifestyle of Indians has led to emergence of new product categories in the FMCG sector. For example, skin and
hair care products which were earlier focused at the female gender, have now started introducing products for the male
gender with items like hair gel and sprays, deodorants, face wash, fairness creams, etc. Another example is of the ready-
to-eat food segment which witnessed a growth in penetration due to rise in working female population and nuclear
families. Also, as consumers increasingly adopt a healthy lifestyle and prefer products made with natural ingredients, the
Ayurveda space has witnessed good demand in recent times.

Performance of FMCG sector in FY20

Table 1: Production of fast moving consumer goods in FY20

Production in FY20 YoY growth (%)

Item
Unit Quantity FY19 FY20
Ghee 170 -1 0.4
Butter ‘000 tonnes 98 0.6 -25.6
Dairy products Milk powder 218 7.1 -16.7
Milk 6,714 4.5 -2.1
Mn litres
Ice cream 202 6.2 3.1

Cigarettes 88,366 1 6.1

Tobacco Products Mn sticks
Biri 81,489 6.7 -3.1

Groundnut oil 47 265.8 -12.3

Soyabean oil 1,784 51.7 -10.3
Vegetable Oils & Mustard & rapeseed oil 665 9.2 41.6
‘000 tonnes
Products Sunflower oil 633 814.3 81.6
Coconut oil 37 46.3 22.5
Refined palm oil 3,445 -2.2 2.8

Chocolate and cocoa

166 3.1 7.9
Cocoa products and powder
‘000 tonnes
confectionery Sweetmeat and sugar
118 2 -2.4
confectionery

Bakery products Breads, buns and croissant ‘000 tonnes 257 -1.1 -5.2

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 Industry Research I Fast Moving Consumer Goods (FMCG) … Is it still fast moving?

Biscuits / cookies 632 0.3 0.1

Cakes, pastries and muffins 8 -6.2 -5.4

Honey, artificially preserved 4 15.3 1.5

Processed food Fruit pulp and fruit juice ‘000 tonnes 119 3 -26.8
Instant food (ready to eat) 494 9.6 8.4

Maida 1,765 -3 -0.6

Wheat flour (atta) 1,396 -1.1 -6
Milling products ‘000 tonnes
Gram flour (besan) 233 -11.1 2.6
Rawa (sooji) 268 -5.6 -12.3

Soaps 1,153 3.3 -5.4

Detergents 1,515 2.3 0
Organic surface active 5 -11.1 36.2
agents ‘000 tonnes
Consumer goods Toothpaste 141 -1.2 -10.6
Hair oil 121 -5.6 -11.3
Hair shampoo 257 14.9 5.4
Hair dye 2,763 -34 -41.8
tonnes
Creams and lotions 238 -62.7 -18.5

Source: CMIE, CARE Ratings

The above table depicts production of fast moving consumer goods during FY20 and its analysis is as follows:

• Dairy products:
In FY20, three out of five dairy products reported negative growth in output. Butter, milk powder and milk production
deteriorated, while ghee grew marginally and a delayed onset of winter increased ice-creams demand. However, mid-
March onwards when the pandemic started, demand for value added products such as ice creams, ghee, lassi, yoghurt,
etc. were adversely affected. The nation-wide lockdown led to fall in demand for dairy products from large consumer
segments like hotels, restaurants, weddings, sweet shops and offices.

• Tobacco products:
Production of cigarettes grew 6.1% YoY in FY20, while biri output fell by 3.1% YoY. Tobacco products manufacturers are
witnessing persistent weakness in the overall demand environment, especially in rural markets. The rise in taxes in recent
years led to decline in legal cigarette volumes and given way to minimally taxed and tax-evaded tobacco products. There
is widespread availability of illegal cigarettes and other tobacco products of low quality at affordable prices. This has
resulted in sub-optimization of the revenue potential for tobacco sector and led to loss to the Exchequer.

Over 2/3rd tobacco consumption in the country remains outside the tax net and it is estimated that on account of illegal
cigarettes alone, the revenue loss to the Government is more than Rs. 13,000 crores p.a.4 Along with this, rising health
concerns among consumers is gradually having an adverse impact on demand for tobacco products.

• Vegetable oils and products:

- Edible oils used for household consumption include rice bran oil, sunflower oil, cottonseed oil, groundnut oil, soya oil,
coconut oil, etc. Production of most of these varieties witnessed positive growth during FY20. Edible oils being an essential

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 Industry Research I Fast Moving Consumer Goods (FMCG) … Is it still fast moving?

item in household cooking, witnessed an upsurge in demand in the early stages of Covid-19 outbreak, aided by large scale
stocking at home.

- Palm oil, which is mainly consumed by bakeries, confectioneries, roadside eateries, restaurants, cosmetics
manufacturers, etc. witnessed marginal growth in production of 2.8% YoY in FY20. Out-of-home consumption or
institutional consumption remained subdued in March-end and therefore palm oil prices witnessed a fall towards the
end of the year.

• Bakery, Cocoa products and confectionery:

Chocolate and cocoa powder production grew 7.9% YoY in FY20, while sweetmeat and sugar confectionery output
declined 2.4%. Within the bakery segment, products such as breads, buns, croissants, cakes, pastries and muffins
witnessed fall in output, while biscuits and cookies remained at same levels as last year.

- Biscuit is among the fastest growing categories within the FMCG sector. Though its current per capita consumption in
India is lower than developed economies, it has witnessed widespread penetration among households in recent years.
Since the product category is homogenous in nature, manufacturers offer visual and taste superiority to remain
differentiated.

- Cake, is still not as developed as biscuits as a category, but is witnessing growing demand in past few years. The category
has innovated with new formats, lower price points, variety in flavours and variants, etc.

- Bread as a food category has been undergoing significant transformation with the introduction of healthier variants in
order to keep abreast of consumer demand for products that can be ‘tasty and healthy’. Rusk, a type of double baked
bread and also referred to as toast, is a popular example. Another example is of croissants, which is still at a nascent stage
in the country. However, given the busy lifestyles of the youth of the country, the product has demonstrated great
potential.

• Poultry:
Demand for poultry products, such as meat and eggs is usually higher during the second half of a Financial Year as
consumption rises during the winter months. Also, about 50% of meat products consumption is out-of-home. In the
beginning of February 2020 rumours of getting coronavirus infection through poultry and its products significantly
lowered sales volumes and prices. To add to this, Mid-March onwards restaurants in most parts of the country were shut
which further lowered demand for poultry products. With this, prices of chicken and eggs fell to a large extent and were
not at remunerative levels for producers. Therefore, production was reduced to match the reduced demand.

• Processed foods:
- Fruit pulp and fruit juice output witnessed a sharp decline of 26.8% in FY20. This product category has seen much sharper
down trading in the past quarter as consumers find it difficult to differentiate between multiple products in this category
such as juice, nectar and a drink. This is even more evident in the current scenario of slowdown, where consumers
prioritise their spending on low-priced items of the same category.

- Production of honey witnessed marginal growth, while instant food (ready to eat) category continued its healthy growth
momentum supported by elevated demand during lockdown.

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 Industry Research I Fast Moving Consumer Goods (FMCG) … Is it still fast moving?

• Milling products:
After displaying falling growth rates in all four milling product varieties in FY19, the same trend continued for FY20 (except
for gram flour flour (besan) which reported marginal single digit growth). However, demand for such products increased
prior to and in the initial days of lockdown due to panic buying.

• Consumer goods:
- Within the homecare segment, Covid-19 outbreak created high demand for organic surface active agents, whose
production spiked January 2020 onwards and led to output growth of 36.2% YoY in FY20. Production growth of detergents
remained unchanged during the year.

- Within the personal care category, items such as soaps, toothpaste, hair oil and hair dye witnessed fall in production
growth in FY20, of which the most affected were hair oil and hair dyes, whose output de-grew 11.3% and 41.8% YoY
respectively. Demand for hair oil as a category, is gradually receding as youth are no longer using hair oil and older
generation have also reduced its usage. Demand for hair dyes/colors also remained weak due its discretionary nature
and consumers stretching their consumption. Therefore, companies are innovating with category extensions such as hair
serum, hair gels, pre and post wash - hair nourisher, which is a growing market.

- Due to delay in start of the winter season, creams and lotions output fell by 18.5% YoY, while shampoos benefitted by
5.4% YoY. Toothpaste and soaps are witnessing down trading to low unit price points since past few quarters now.

- During the lockdown, discretionary personal care products such as hair serums, male grooming and skin care lost favour
as consumers prioritized purchase of essential items. Also, due to distribution constraints in initial days of lockdown,
cosmetic brands were selling their products through chemists and online channels - that earlier made sales through
wholesale or beauty outlets.

Covid-19 impact on FMCG sector

Mid-March 2020 onwards, a gradual disruption in supply chain was witnessed and due to the nation-wide lockdown,
operations at multiple manufacturing, warehouses and offices locations were temporarily shut or scaled down or operating
as per local guidelines. Transportation of goods was the main constraint as large number of workers migrated to their villages
creating shortage of truck drivers and loading/un-loading staff at the origin and destination end. Further, state borders were
sealed and even ports did not operate at full levels. Though the government permitted movement and delivery of essentials
goods, accessibility remained a challenge and logistics became inefficient. Reportedly, the daily movement of trucks
decreased to less than 10% of normal levels in initial days of lockdown.

This led to difficulties in raw materials sourcing and therefore various manufacturing units of FMCG players witnessed a
sudden fall in capacity utilization of below 50%. With this, finished goods inventories at both distributors as well as retailers
level had drastically reduced by March end. This created widespread fears among end-use consumers and they indulged in
panic buying. Also, sales of branded products were affected as consumers were purchasing products based on availability
and not on choice.

Around mid-April onwards, government announced certain relaxations in lockdown. During that time, FMCG players focused
on restoring supply chains and getting required approvals from local authorities. Gradually, production ramped up and
distribution improved. By mid-May, FMCG players were operating at 70-75% capacity utilization levels, varying depending

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 Industry Research I Fast Moving Consumer Goods (FMCG) … Is it still fast moving?

on the number of distributors and the outlets in the red zone, orange and green zones. There were increasing efforts to
ensure uninterrupted supply of essential food and other products to customers across channels (General Trade, Modern
Trade and E-Commerce) within the existing constraints.

Specific initiatives undertaken by FMCG manufacturers to counter lockdown challenges:

- To protect the interests of distributors and supply chain members, large FMCG players offered selective and targeted
flexibility in managing credit terms.
- Increased distribution in the smaller retail stores that are closer to consumers’ homes.
- To cope up with the dual challenges of manpower and logistics availability, manufacturers made use of services offered
by home delivery platforms such as Zomato and Swiggy. This ensured last mile delivery of essentials during the crisis.
- Made extensive use of E-commerce as a distribution channel, it being one of the most preferred medium for consumers,
etc.

Production growth in April 2020

In the month of April 2020, production of most fast moving consumer goods witnessed double digit growth decline. Except
for few product categories of dairy and bakery and some varieties of vegetable oils, all other items witnessed a sharp fall in
output during the month.
Table 2: Production growth in April 2020

Growth Growth
Item YoY Item YoY
(%) (%)

Ghee -11.7 Breads, buns and croissant 17.4

Butter 23.3 Biscuits / cookies -19.2
Dairy products Milk powder 30.9 Bakery products
Milk -18 Cakes, pastries and muffins -43.9
Ice cream -98.4
Honey, artificially preserved -35.7
Tobacco Products Biri -98.8
Processed food Fruit pulp and fruit juice -88.8
Groundnut oil -63.5 Instant food (ready to eat) -68.7
Soyabean oil -56.3 Maida -45.1
Mustard & rapeseed
Vegetable Oils & -10.6 Wheat flour (atta) -8.6
oil
Products Milling products
Sunflower oil 49.6 Gram flour (besan) -40.4
Coconut oil 532.8
Rawa (sooji) -8.3
Refined palm oil -21.2
Chocolate and cocoa
-84.8 Soaps -33.9
Cocoa products and powder
confectionery Sweetmeat and sugar
-72.4 Detergents -26.7
confectionery Consumer goods
Organic surface active
-43.3
agents
Toothpaste -69.1

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 Industry Research I Fast Moving Consumer Goods (FMCG) … Is it still fast moving?

Hair oil -28.2

Hair shampoo -43.3
Hair dye -93.1
Creams and lotions -88.7
Source: CMIE

How is consumer behaviour and demand pattern expected to change with Covid-19?

- Rising consciousness of health and hygiene will favour demand for products that boost immunity
- High incidence of in-home cooking will foster demand for products in the ready-to-eat segment
- With fears of job losses and falling income, consumers may cut spends on discretionary categories
- Down-trading in the same product category
- Consumers to be more value seeking but still prefer trusted brands
- Preference towards online shopping to increase, etc.

Short term measures that FMCG players can take to support changing consumer demand patterns:

- Introduce smaller packaging and accessible price points i.e. Rs. 1, 5, 10, so as to ease pressure on consumers’ wallet. This
is even more relevant for personal care category, where demand is expected to fall, due to lower occasions of usage.
Examples for such products include cosmetics, face wash, hair gel, etc.
- Scale down advertising and other expenses, that are discretionary in nature
- Increase presence on E-commerce platforms
- Drive rural distribution aggressively as large proportion of urban population has migrated to rural, which is expected to
upsurge rural demand in near future
- Introduce new products in the ‘health’ and ‘hygiene’ category to serve the evolving consumer needs, etc.

Outlook

- In Q1-FY21, April will be the worst affected month due to multiple challenges faced by the FMCG sector such as
deterioration in production levels, distortion in distribution, shortage of labourers and declining sales. This comes against
the backdrop of pre-existing subdued environment. Impact of the on-going pandemic will be sharper, compared with
earlier large macro-economic events such as demonetisation and GST implementation that acted as impediments to
growth of Indian economy. However, in comparison with other sectors, FMCG sector is expected to perform much better
as demand for products in the food, health and hygiene categories have an inelastic demand and are expected to continue
their healthy growth trajectory.

- Demand for certain products from ‘household and personal care’ category like body shower, moisturisers, face wash, hair
gel, hair oil, etc. are expected to witness further downturn and may not recover until Q4-FY21. These products are
discretionary in nature and consumers tend to delay their purchases in times when there are fears of job losses and falling
disposable incomes.

- FY21 is expected to witness soft consumption trends leading to modest volume and sales growth during the year. At the
same time, as consumer’s personal expenses on traveling, tourism and out-of-home entertainment shall remain minimal
in FY21, which could lead to shift in such expenses on purchase of FMCG products.

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 Industry Research I Fast Moving Consumer Goods (FMCG) … Is it still fast moving?

- Expectations of a bountiful monsoon and good agricultural output will augur well for the rural economy, giving a boost
to income levels of rural consumers. Rural markets are expected to perform better than urban in FY21.

- Long term outlook for the FMCG sector remains positive and consumer spending shall accelerate supported by favourable
dynamics in the country such as rising young population, increasing affluence, increasing digital connectivity and
distribution, young population entering workforce, growth in nuclear families, etc.

Source:

1 – Dabur annual report FY19

2– Emami annual report FY19

3 – Dabur annual report FY19

4– ITC Ltd. quarterly result

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