Seven trends shaping India's FMCG industry

Few industries have been able to traverse the last two years unscathed - the FMCG industry in India is no exception. While the demand for staples, daily use items and health and hygiene categories shot up during COVID, discretionary goods and beauty and personal care products took a back seat.

Fast forward to 2022, the FMCG industry faces another problem - persistent inflation and shrinking demand in the short to medium term. While FMCG companies must deal with the immediate challenges, they must also be mindful of the long-term trends shaping the industry in a post-pandemic world.

On one side, consumers have formed new habits and preferences; on the other, the competition is only getting fiercer in the consumer products industry, with new players emerging and adopting aggressive strategies to destabilize the incumbents.

Our experts have identified seven majors trends shaping India's FMCG industry and unpick why FMCG managers will need to address them. While we are only seeing the first signs today, these trends will become the new standard in years to come, and FMCG companies need to adapt quickly to gain the upper hand.

Trend 1: New India is Digital India

While digitisation was an ongoing process before the Covid crisis, it has accelerated the process multifold: the internet user base has gone from 384 million in 2017 to 692 million in 2021 and is projected to rise to 900 million in 2025. In addition, 53% of users access the internet via smartphones, along with a surge in social media usage (448 million in 2021, +21% from 2020). 

More recently, the growth in online users has primarily happened in the rural market: 56% of internet users come from rural India, a 45% growth compared to 2019 (compared to 28% for the urban India). However, online shopping remains “heavily dominated” by the urban market, meaning the rural market is still largely underexploited.

How search and social are digitally influencing customer decision journey

With the surge in internet users and smartphone penetration, projected to further increase by the roll-out of 5G telecom services by the end of 2023, customers will have increasingly more influence from online search results, ratings, reviews and influencers. Making it essential for companies to understand customer decision journey and offer them products and value propositions to meet their needs wherever they want- online or offline.

Shift to digital advertising 

Digitisation has also increased digital advertising, with digital now contributing 36% of total ad revenue, compared to 24% in 2019. In comparison, TV remained stable at 40%.

Also, the average time spent on digital is now higher than on TV, with 105 minutes compared to TV’s 66 minutes. With the current momentum, media consumption will steadily shift towards digital media consumption. 

Digital advertising will grow at 14.75% CAGR to reach INR 35,809 crore by 2023, with FMCG industry being the biggest contributor at 42% share of the total digital spend.

Rise of digital commerce 

Digital commerce has become an integral part of the customer’s decision journey as the consumers formed a habit of buying online during the COVID lockdowns. Digital commerce will further grow with increase in digital shoppers to 500 million by 2030, up from 312 million in 2022. 

Consumers are also moving to digital payments. According to a new study conducted by YouGov and ACI Worldwide digital payments continue to be the payment method of choice. The study shows that overall 41 per cent of consumers choose digital payments as their preferred payment method, ahead of cash (26 per cent) and debit and credit card payments (23 per cent) while this number increases to 50 per cent in the 25-34 age group.

Metaverse - Emergence of a new reality

India’s digital population will further experience a new reality in metaverse. Leading FMCG companies have taken the initial steps in that direction by launching products, celebrating events and connecting with consumers in a new way on the metaverse platforms. 

Trend 2: The rise and rise of D2C brands

The traditional model of the FMCG industry in India required developing new brands, categories and products based on in-depth consumer research and taking them to market through a fragmented and unorganised distribution network. However, growth in digital technologies, millennial consumers' changed behaviour, and a start-up culture have led to a new type of FMCG company - Direct to Consumer or D2C.

There has been tremendous growth of D2C FMCG brands in India, with the number of companies more than doubling in the 2 years to 2020. The number is further projected to grow to 200,000 by 2025, a growth trend further reinforced post-pandemic.

These new D2C players have rapidly scaled as they capitalise on new consumer behaviour to reach them directly through digital marketing.

D2C brands have reached INR 100 crore revenue in 3-4 years compared to 18+ years taken by the traditional players. 

In the process, they have also built a strong brand connect with their core consumer base to help retain existing customers while making moves to attract new ones.

The D2C brands have become both a challenge and an opportunity for traditional FMCG companies. While the rapid growth of D2C brands fuelled through new digital capabilities poses a challenge to the existing brands, it also opens up opportunities to acquire these brands, boosting the capabilities of traditional brands, as reflected in the number of acquisitions made in this space.

For example, Marico has built a portfolio of three D2C brands which are now INR 500 crore business. On the other hand, the D2C brands are now looking to grow beyond their online presence going in direct competition with the traditional FMCG companies.

Trend 3: Industry structure gets shaped by new and existing players

The FMCG industry is going through a structural change with the entry of the new type of players and consolidation by the incumbent players.

In particular, three types of players are emerging: Mavericks - companies with a completely non-traditional background, scalers- those to spread their wings beyond their private labels and acquirers, looking to consolidate their position further. 

Mavericks

On the sidelines until a decade, Patanjali has seen a meteoric rise since then. The company’s FMCG business revenue (excluding Ruchi Soya) climbed to INR 9,241 crore in FY22 from INR 446 crore in 2011-12.

The company has grown with a different business model compared to the traditional FMCG brands on the back of natural products. As it prepares for the next stage of growth through listing multiple companies, the industry will witness a new type of competition to deal with.

Scalers

Reliance also announced its plans to enter the FMCG market earlier this year, focusing on small packs grocery segments, with diversification plans coming gradually. 

Reliance’s entry into the FMCG market will be through M&A, with plans on acquiring multiple FMCG brands to accompany its developing modern trade stores; these possible acquisitions include F&B brands Garden Namkeens, Lahori Zeera and Bindu Beverages.

Acquirers

As new firms continue to reshape the market, existing FMCG players have merged with or acquired other brands to enter new markets or to increase their portfolios in areas where they are already present.

For example, Nestle India bought Purina Care India, and Enami bought 30% of pet care startup Canis Lupus Services India. 

Trend 4: E-commerce is the new shopping mall

The covid crisis has profoundly shaken what products consumers buy and which channels they use: Far from a trend that would be gone after covid, e-commerce has proven that it will firmly remain in the FMCG landscape,

The Indian e-commerce market is expected to surpass modern trade by the financial year 2025.

It is expected to grow from $29 billion in FY20 to $100-105 billion by FY25 in comparison to modern trade’s $50-billion size that may increase to $85-90 billion during the same period. 

While e-commerce will surpass modern trade in overall sales, it will still remain a very important channel for the urban India. Metros (cities over 1 lakh population) now have almost one fourth of their sales coming from the modern trade stores.

Apart from the growth in digital commerce and relevance of modern trade, there will also be changes in the general trade channel which has stayed quite the same for decades. While some kiranas in urban areas will likely upgrade to look more like modern stores in the future, there would be a large scale adoption of digital payments and direct ordering from the FMCG brands.

Finally, the social commerce channel will see robust growth in the coming years, recording a CAGR of 62.4% during 2022-2028: as the number of internet and social media users surges. Social media will likely become a vital shopping platform as they allow for more customized offers and target-specific ads, thanks to the high volume of user data collected by social media apps.

Trend 5: Millennials and GenZ become the main actors

As Gen Z and Millenials account for a growing part of the population (34% for Millennials and 27% for Gen Zers), their consumption habits and preferences are becoming mainstream. Among them is a liking for quick deliveries and convenience, an increasing digital savviness and a desire for healthier products.

The requirement for quick deliveries is especially true for the convenience of having the product delivered at home or available at your doorstep; after having experienced these new channels during the pandemic, the consumers are more likely to use them than post-pandemic.

Hybrid shopping accounts for 27% of consumer purchases and 36% of purchases made by Gen Z.

Millennials and Gen Z are far more challenging to reach through old-fashioned marketing campaigns: 84% of Millennials don’t trust traditional advertising; they are far more sensitive to experiences than hard sells.

Gen-Z consumers are far more sensitive to money-saving opportunities (as they are less confident about the future and tend to check their bank balance more frequently) and socially and environmentally engaged companies. 

61% of Gen Zs believe brands are better positioned than governments to solve social problems. They also prefer buying Indian products: 92% of Indians have reported purchasing local products over imported ones.

More consumers will compare different options before buying, thanks to the increased online information. They will also be more attentive to the information displayed on the packaging (“knowing before buying” behaviour)

Health will remain a concern in the FMCG Market: in F&B, dietary preferences will shift towards organic/vegan products, driving sales of health & nutrition-focus brands.

Consumers will prefer branded products as they are perceived to be associated with better quality, safety and health benefits.

Women will become a new class of consumers online: they represented 44% of online consumers in 2020, up from 34% in 2010.

Trend 6: Consumers to get older and wealthier

By the year 2050, India will have a notably larger mid-age population. They will likely have more purchasing power (being a family and not single households) and will buy according to their life-cycle stages: couples typically buy more durable goods, parents buy children or family-related products, and their expenses in-home care/ personal care increase towards family-sized packs; finally when children leave the nest, the revenue of the parents stabilize, and they can spend more on luxury/health related items. 

Furthermore, the wealth pyramid will change considerably in the coming years, thanks to India’s GDP growth. The growth will primarily be concentrated in the top and middle-income consumers, with the number of lower-income consumers decreasing rapidly. As a result, economy products will give way to mass-premium, while the luxury market will gradually increase. 

Half of this new wealth will be spent on buying better or new products, while the other half will be spent on buying more of the existing products.

As consumers enter a higher income class, they spend 2-2.5x more on essential categories (F&B, apparel, personal care, transport and housing). Wealthier consumers also spend a higher proportion of their income on discretionary products; for the FMCG market, it will mean higher spending on premium personal care products, better food options (both organic/healthy foods as well as time-saving, such as ready-to-cook or ready-to-eat).

Targeting those customers, who can afford better product options, are more and more sensitive about branding and product quality will prove essential to navigating this trend by selling high-quality products with right packaging, after-sales services, and marketing campaigns.

Trend 7: The future is sustainable

Finally, sustainability will be an increasing concern with changing expectations of regulators, consumers and employees. 

Global food and consumer goods production accounts for 60% of greenhouse gas (GHG) emissions, 80% of water usage, and 66% of tropical forest loss.

The ban on single-use plastics is likely only to be the first step towards a more sustainable society, in which FMCG companies will have to make considerable efforts. 

Multiple FMCG Companies have started serious sustainability plans: Unilever plans on having net zero emissions for operations in 2030 and across their value chain by 2039. 

HUL and Dabur have already become plastic-neutral in 2021 (meaning they collected as much plastic as they emitted that year)

Regulations on sourcing (and especially local sourcing) could very much be set in motion by the government in the future, as is already the case in the UK (sustainable procurement) and in China.

Sustainability efforts are not only necessary in terms of compliance with future legislation but also can improve the company’s reputation and sales. One-third of consumers are willing to pay more for sustainable products, according to a 2021 global sustainability study.

Finding a balance between dealing with short-term challenges and long-term opportunities can prove challenging; however, as the FMCG market gets more competitive, success will be measured by a company’s ability to anticipate and grow based on future trends.