The consumer goods sectorneeds to rework their strategies to accommodate the changing consumer preferences in India.
What is their current status?
The consumer goods sector is a category of stocks and companies that relate to items purchased by individuals rather than by manufacturers and industries.
This sector includes companies involved with food production, packaged goods, clothing, beverages, automobiles and electronics.
Despite low investment and less export growth in the economy, consumer-facing companies are the only ones to have managed predictable earnings growth in recent times.
This is shown by the Nifty India Consumption index rising up 180% since December 2011, which is higher than the Nifty500’s 150% gain.
In the last five years, companies in the Nifty Consumption index have grown their sales at an annual rate of 7%, while their operating and net profits have expanded at 12% a year.
What are the concerns?
Deflation - Branded consumer goods players have always enjoyed the ability to raise their retail prices to compensate for rising input costs.
Increases in both price and volumeof goods have thus contributed to the sales growth of these companies so far.
However, consumer companies in India face threats to their pricing power, due to deflationary trends in the economy.
CPI inflation has collapsed to 4.8% in the last five years from the peak 10.3% between 2008-2013.
Inflation rates determine income growth which has a direct bearing on consumer spending.
Hence, the consumer companies have to rely more on their volume growth than on the pricing power.
Regulation - A new wave of consumer activism resulted in tightening of India’s weak consumer protection laws.
The anti-profiteering authorityunder the GST law, which is mandated to ensure that the benefits of GST rate reduction are passed on to consumers.
Under the Consumer Protection Bill 2018, a regulator will be appointed to oversee the entire gamut of consumer goods and services, with provisions for product liability claims.
These regulatory changes will raise compliance costs for consumer firms and could disrupt established brands and categories.
Rise of big retail - The organised retail sector in India now faces disruption from e-commerce players like Amazon and Flipkart.
Though online retail makes up less than 5% of retail trade in India, e-commerce players have already made significant headway in select products like mobile phones, beauty and electronics.
Hence the unquestioned clout of the listed consumer firms in India will possibly come down in the future.
What should be done?
Studies have shown that the current generation prefer customisation over mass production.
Their product and brand choices has the potential disrupt the large consumer categories.
Hence, the listed consumer firms in India should rework their strategies and get themselves adjust to these shifts.
