Why Are FMCG stocks a must for your portfolio?
FMCG or Fast Moving Consumer Goods are consumer packaged products that sell quickly at a lower price. FMCGs usually have a short shelf life because of their perishability and high consumer demand.
FMCG is the fourth largest industry in the Indian economy. The three main segments in the sector include food and beverages(19%), healthcare(31%), and household and personal care(50%).
(Source: News Reports; Tavaga Research)
Following the growing awareness, constant innovation in the sector, easier and improving access to products, and constant policy-related initiatives in this industry it has been gathering positive attention.
The sectoral growth-
According to multiple reports published by World Bank and Neilsen Research, the Indian FMCG market in India is expected to grow at a CAGR of approximately 23.15%. The rise in rural consumption and better access to these consumable products has been a key growth factor for the industry. The rural FMCG market in India is estimated to grow to US$220.00 billion by 2025 from US$23.63 billion in FY2018.
(Source: World Bank; Tavaga Research)
Similar to other industries like education the dot com burst has been a blessing to the FMCG industry. With the ease of buying groceries and necessities online, more innovative and better quality products, and little or no geographical boundaries the industry has been growing at an unstoppable pace.
The major FMCG companies also exploited the pandemic as an opportunity in the crisis to focus on volumes and margins given the nature of the industry. The sector witnessed learning and innovation even as the world was grappling with the fear of lockdowns and Covid-19. The hero products of the pandemic included but not limited to food, personal care, and disinfectants which are an integral part of the FMCG ecosystem. These consumer durables pushed for a positive outlook despite the grim market conditions.
The consumer can for once think twice to buy a new car or even a house but not for everyday necessities like milk and bread. This is the indispensable nature of the FMCG industry that makes it a must in day-day life and investment portfolio.
Balancing act –
The SWOT analysis of the industry is as follows:
Strengths and opportunities of the sector
- Growth of E-Commerce – FMCG industry has seen a spike in growth with the growth of e-commerce. Couch-surfing and convenience shopping have not only impacted the volumes but also minimized the geography barrier.
- Better networks – With increasing manufacturing capacities and better transport facilities more consumer durables can reach more customers with more efficiency.
- Expansion and Innovation – Globalisation has been a catalyst for the sector. The companies in the industry are expanding their capacity not just with production units but also with the product range and their offerings.
- Government initiatives and policies – The government has been promoting the growth of the FMCG industry. There is an investment approval of up to 100% foreign equity in single-brand retail. The Union Government’s Product Linked Incentive (PLI) scheme is also a boost for the export opportunities.
Weaknesses and threats of the sector
- Low barriers to entry – As the industry is growing and evolving, the barriers to entry are almost negligible. Any individual or manufacturing company with the correct resources can enter and flourish their business.
- Dependence on agriculture and climate conditions – The industry due to its inherited nature is heavily dependent on agriculture and general climatic conditions. If there is any disruption in the agriculture cycle or a climatic disaster like droughts or floods the production of the FMCG products is heavily affected.
- Price sensitivity and elasticity of demand – Due to the excessive competition in the sector and the heavy margins by the giants of the industry the elasticity of demand is low. The consumers in India are price sensitive and any minor change in price will lead to a switch to competitors.
(Source: Tavaga Research)
Top stocks to watch out for –
Hindustan Unilever is the Indian subsidiary of the British company Unilever. HUL was established in 1913 and is headquartered in Mumbai. HUL is a market leader with a presence in over 20 consumer categories. The product portfolio of the company includes BrookeBond, KwalityWalls’, Domex, Surf Excel, Lakme’.
ITC or as it is uncommonly known as Imperial Tobacco Company is an Indian multinational headquartered in Kolkata. The company was established in 1970 and has been featured on the Forbes 2000 list. ITC is also listed on Luxemburg Stock Exchange. ITC is also the market leader for cigarettes in India and sells over 81% of the product. The product portfolio includes Ashirwad, Sunfeast, Fiama Di Wills, Savlon, and Classmate.
Marico is a global giant with a presence in over 25 countries. The company was established in 1990 and is housed in Mumbai. The company has 8 manufacturing units across the Indian subcontinent. The organisation runs multiple brands including Parachute, Saffola, and Livon.
Procter and Gamble is an American multinational based in Ohio and was founded in 1837. The company was restructured in 2014 and now has a product portfolio of over 100 products including Gillette, Oral-B, Pampers, Ariel, and Vicks.
Colgate Palmolive Company is an American multinational company that came to India in 1937 when hand carts were used to distribute cream tubes of toothpaste. Colgate- Palmolive India today has one of the best distribution networks in India with over 6 million retail outlets across the country.
FMCG stocks in your portfolio are like salt in food, an absolute necessity if you wish to enjoy your food in the desired way. Generally, be it inflation or the pandemic the consumers may try to reduce their spending on luxuries as mentioned above but can anyone cut down on their general intake of milk, bread, toothpaste, or even detergent? No. Thus, making FMCGs a key in your day-to-day life and portfolio.
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Disclaimer: The above analysis is solely for educational purposes only; Should neither substituted as investment advice nor a stock recommendation.