Fast Moving Consumer Goods: Time for a strategic pivot

The Ebitda (earnings before interest, tax, depreciation and amortization) margins of most consumer-goods companies have surpassed their pre-covid levels, aided by cost efficiencies. 

The quality of earnings of most companies has also improved materially, with a notable rebound in gross margins since the lows of September 2023.

However, FMCG volume growth remains subdued and is well below its long-term average. This is explained by inflation since 2012, which has eroded consumer affordability, curtailed consumption and driven consumers towards more economical options like low-unit packs (LUPs), thereby intensifying the challenge of achieving volume growth for FMCG companies.

Pricing action in LUPs is largely through adjustments of per-pack volume. In the current inflationary setting, a reduction in pack sizes has also hurt volume growth in the sector.

The significance of LUPs has grown considerably over the past few years, now constituting a substantial portion—ranging from 30% to 80%—of the overall volume mix across FMCG categories.

Against this backdrop, it is an opportune time for FMCG companies to prioritize volume growth over the defensive approach of safeguarding margins.

A gap between GDP growth and FMCG volume growth over the past 15 years underscores the imperative of this strategic turn.

While India’s real GDP expanded at an average rate of 5.9% from 2007 to 2023, FMCG volume growth averaged only 3.4%, as highlighted in a recent CII-BCG report.

The trajectory of Indian consumption presents promising prospects, with forecasts indicating a threefold increase in affluent households (earning over ₹27.5 lakh annually) by 2030. This has meant a growing emphasis on growth driven by premiumization.

However, there is also significant potential to enhance market penetration overall by prioritizing product affordability to expand both the scale and quality of consumption. Rising aspirations across middle India should help this process along.

Small towns, comprising 61% of the population but only 30% of FMCG consumption, have experienced growth rates 1.5 times those in metro cities over the past five years.

These markets represent a substantial consumer base, with growing aspirations for affordable, value-added products. Aligning strategies to cater to evolving consumer preferences here not only presents substantial long-term growth opportunities, but is also crucial as a hedge against market disruptions.

Fortunately, there is a noticeable shift underway as more companies direct efforts at addressing supply chain and distribution challenges in small towns and rural markets.

Even companies traditionally focused on urban areas, such as Nestle, are planning substantial distribution expansion in rural markets. As gross margin benefits accrue from reduced raw material costs, we anticipate that a portion of these benefits will be reinvested in brand development.

Undoubtedly, the volume-versus-margin debate in the FMCG space is complex and warrants a nuanced approach in optimizing pricing strategies and distribution channels across segments.

The three segments of HPC (home and personal care), F&B (food and beverages) and healthcare each present unique challenges and opportunities.

While HPC is highly penetrated (greater than 60-65%), with India’s top three players holding over 60% market share, there is still room for volume growth through new market entries and functional product launches.

Conversely, food and beverage categories, characterized by low penetration across most segments, offer opportunities for significant revenue growth by capturing market share from fragmented and unorganized competitors within the sector.

The current macro context presents an excellent opportunity for FMCG companies to strategically pivot towards enhancing market penetration.

This shift could not only broaden their consumer base, but also step up shareholder value creation; historically, FMCG sector multiples have witnessed their sharpest expansion during periods of high volume growth.

The potential of the FMCG sector in India lies in its vast opportunities for both premiumization and market penetration.

The author is is principal, Future Leaders Fund at Avendus.