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1/ Why do I think so? Will try to explain my view in thread below. One key investing question to ask is “what competitive edge or growth metric am I buying?” the answer in Indian FMCG for the last decade was “distribution”
2/ Distribution is the basic infra pipe on which FMCG cos can launch multiple products at incremental costs. A brand may be strong but it loses value without good distribution
3/ All the money spent on brand building means nothing if the product is not available on the shelf when the customer demands it.
4/ FMCG cos which have been around for decades dominate these spaces because the customer “demands” them & the retailer doesn’t have to “push” them. But competition ie options have increased dramatically
5/ There are ~1 cr kirana stores in India up from 0.7 cr in 2006 (CAGR 3%). Modern Trade (MT) has grown much faster but it has cannibalising some share from GT. MT have also launched private labels which is a core aspect of their strategy
6/ There is also a natural limit to what you can consume. So the game for FMCG over the last decade has been increasing penetration, premiumisation and grammage play (keeping price constant but reducing weight)
7/ Penetration has a natural limit which most FMCG cos have juiced. Ditto for grammage play. This is already priced in
8/ So the big questions on growth simply boils down to when will the rural markets consume like the urban markets and how much headroom is there for premiumisation in urban markets
9/ India is a funny market. Many high earners are still price conscious esp on staples. There is occasional indulgence but the premium FMCG variant that has scaled consistently is rare or grows fast for a limited time before hitting a ceiling.
10/ The rural income story has been around for some time. Many saw a false positive due to MNREGA. Even with 3 decent monsoons (incl this year) rural growth has yet to kick in
11/ Given poor vol growth FMCG cos resorted to aggressive cost cutting and supply chain efficiency. Some benefited from lower commodity prices. Margins are at all time highs. Little headroom.
12/ My view is that rural income growth on aggregate will trend up but not at the pace at which FMCG valuations are assuming. Todays FMCG investor is paying for cash flow much father out. How much farther I don’t know
13/ In summary, distribution is priced in and is increasingly competitive. Ditto margins. Premiumisation and growth are yet to show results.
14/ Investors could also be paying for certainty (and hence defensive) since the trend seems very intuitive. But then if everyone knows, the trade is crowded and prices are bid up to a point where returns will be low (end)
