Why in news?
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.
Source: Business Line
