BREAKING FMCG Growth in India

As an aspiring Product Operator, I see a promising future for the Fast-Moving Consumer Goods (FMCG) sector in India, particularly in light of the insights from the report “SPURring Growth in FMCG, Retail, and E-commerce Sectors in India,” presented by FICCI in collaboration with Deloitte. This report highlights the significant transformations expected by 2030, showcasing the resilience of India's economy and the pivotal role the consumer sector plays in its growth.

Overview of the FMCG sector in India

The FMCG sector is crucial for driving India’s economic growth, especially as we approach 2030. In 2023, the FMCG market was valued at approximately US$144 billion, contributing around 3% to the country's GDP. Furthermore, the industry is a significant employment generator, providing direct jobs to about 3 million people and accounting for 8.4% of total factory employment in India.

As we delve deeper into the FMCG sector insights presented in this report, I am optimistic that the future holds immense potential for innovation and growth within this vibrant industry.

Market Urban VS Rural

Despite urban markets contributing around 65% of overall FMCG revenue, the rural market remains a critical focus. The stark discrepancy between its urban share of India’s population and its lower contribution to revenue underscores untapped potential in rural regions, where increasing disposable incomes and improved distribution channels could drive high-value purchases.

Growth, Volume VS Value

The FMCG sector demonstrated resilience by swiftly recovering after the pandemic and entering a rapid growth phase since 2022. As volume growth aligns with value growth, an evolving consumer dynamic is likely to shape FMCG growth strategies.

Emerging trends shaping the FMCG sector

1. Affluent up-trading and unaffluent down-trading

   
   

   Consumers with higher disposable incomes are opting for premium products, driven by:

   • Increased Disposable Income: More consumers are willing to spend on higher-quality products.

   • Health and Wellness Focus: Demand for organic and clean-label products is rising.

   • Brand Prestige: Higher-income consumers seek brands that signify status.

   
   

   Consumers with lower incomes are switching to more affordable options due to:

   1. Rising Inflation: Diminished purchasing power leads to choosing smaller pack sizes or lower-end brands.

   2. Economic Constraints: Prioritizing essentials over discretionary items drives a shift towards economy brands.

   3. Rural Market Dynamics: The rural segment is particularly affected by down-trading as households face tighter budgets, influencing their purchasing decisions towards economy brands.

      
      

   In 2010, there were 79 million households with annual household income of less than US$ 1.8K. This number declined to 64 million by 2019 and is expected to decrease to 40 million by 2030, reflecting a significant upward economic shift.

   The report notes that in 2010, there were 79 million households earning less than US$1.8K annually. This number declined to 64 million by 2019, a figure that is expected to drop to 40 million by 2030, indicating a significant economic shift.

   
   

2. Redefining channels

   
   

   The evolving preferences for cashless and contactless shopping are prompting FMCG companies to rethink their go-to-market strategies. Traditional trade, accounting for 70-80% of FMCG sales, has rebounded as Kirana stores adopt digital payments and quick delivery services.

   

   
   

   Quick commerce boom

   
   

   Quick commerce has surged during the pandemic, with 18% of shoppers now purchasing food and beverages through these channels, which have grown by 230% from 2021 to 2023. This trend is expected to continue, fueled by consumer demand for fast and convenient shopping experiences.

   
   

   In FY24, leading FMCG firms reported a nearly 2x increase in quick commerce's share of total e-commerce sales, reaching around 35%.

   
   

3. Impulse driving F&B growth

   
   

   The pandemic shifted daily routines, leading households to embrace at-home consumption and entertainment. As consumers gradually resume out-of-home activities, the trend of cooking and entertaining at home remains influential in the FMCG sector. This has resulted in significant growth in indulgent categories like chocolates and snacks, with pack sales nearly doubling in Q1 2024 compared to the previous year. Chocolates and biscuits saw consumption growth of 30% and 8%, respectively, while soft drink sales surged by 19% year-on-year due to high summer temperatures.

   
   

   Additionally, there is a rising demand for health and immunity-boosting products, making health supplements one of the fastest-growing categories.

   
   

Consumer behaviour and demand trends

Surveys reveal that modern trade, encompassing hypermarkets and supermarkets, is the preferred channel for urban consumers, especially in metro and tier 1 cities. However, general trade remains strong in rural markets.

• With internet penetration rapidly expanding E-Commerce reached over 907 million users by 2023.

• Online platforms now account for 17 percent of overall FMCG consumption.

• Consumers tend to favour quick commerce over traditional e-commerce for food and beverages due to impulse purchases or immediate needs.

• Home, beauty and personal care products are generally more planned purchases, making e-commerce the preferred option.

As household sizes shrink, there is a noticeable increase in the preference for quick commerce. Smaller households with both members working likely appreciate the convenience and speed of quick commerce, which caters to more immediate and flexible consumption needs. In contrast, larger households tend to favour general trade.

Supply trends

• Premiumisation focus amid price sensitivity: As consumer preferences shift, there’s a rising demand for premium products despite inflation. FMCG companies are expanding their premium portfolios to cater to affluent, health-conscious buyers.

  
  

• Relooking GTM (Go-to-Market) for rural markets: Rural markets, a key growth driver for FMCG, faced challenges in FY 2024 due to inflation, low wage growth, and adverse weather. As rural consumers became more price-sensitive, companies rethought their go-to-market strategies. To stay competitive, Companies have expanded rural distribution, adding over 200,000 outlets and introducing smaller, affordable pack sizes to boost sales by 15-20%.

  
  

• Addressing commodity price inflation: In FY 2024, FMCG companies in India faced rising commodity prices, with CPI inflation increasing to 6.8% from 5.8% in FY 2023. Key inputs like palm oil, crude oil, wheat, and edible oils saw significant cost hikes, notably crude oil rising from $78 to $83 per barrel, impacting logistics and production, particularly in rural markets. To manage this, companies selectively raised prices to protect market share, resulting in margin compression of 50 to 100 basis points. Many adopted procurement strategies, such as long-term contracts and bulk buying, while leveraging digital tools for effective cost management.

  
  

• Digital transformation focus across the ecosystem: Digital transformation has become essential for FMCG companies to stay competitive in today's tech-driven world. In FY 2024, many intensified their focus on end-to-end digitisation to enhance efficiency and consumer engagement.

  
  

• Supply Chain Digitisation: FMCG firms are using AI and machine learning to improve demand forecasting, cut inventory costs, and streamline operations. Some have implemented advanced automated factories for faster, cost-effective production.

• AI-Driven Personalisation: Companies are leveraging AI to gather real-time consumer insights, enabling targeted product offerings and marketing. In segments like beauty, AI and AR tools offer personalized product recommendations and virtual trials.

  
  

• Operational Efficiency: AI-driven analytics have reduced inefficiencies in logistics, improving inventory management and mitigating inflation impacts.

  
  

• Consumer Engagement: Many FMCG brands expanded into Direct-to-Consumer (D2C) channels, using digital platforms to provide personalized shopping experiences and better reach urban consumers. Digital transformation is set to continue driving cost savings, operational agility, and stronger consumer relationships across the FMCG sector.

• GenAI use cases in FMCG: Generative AI (GenAI) is rapidly transforming the FMCG sector, enhancing efficiency, optimizing costs, and elevating consumer engagement. Deloitte’s report emphasizes GenAI's ability to address complex challenges like supply chain disruptions and shifts in consumer behavior.

  
  

• Supply Chain Optimization: AI-driven demand forecasting models help companies reduce inventory costs by up to 20%, enabling more accurate predictions of consumer demand and better resource allocation during commodity price volatility. AI-powered analytics also streamline logistics, improving inventory management and reducing costs.

  
  

• Personalized Marketing: AI is crucial for creating tailored consumer experiences. Leading personal care brands use AI for targeted marketing campaigns and AR shopping experiences, while FMCG firms expand Direct-to-Consumer (D2C) channels through AI-driven personalization and faster services.

  
  

• Sustainability and regulatory challenges: Sustainability has become a business imperative for FMCG companies, driven by consumer demand for eco-friendly products and stricter regulations. In FY 2024, companies faced environmental challenges like climate change and compliance with new plastic and waste management rules. Many FMCG firms now prioritize achieving Sustainable Development Goals (SDGs) and regularly update their sustainability initiatives.

Mergers & Acquisitions

While overall deal activity, in terms of the number of deals and total deal value, has increased from 2020 to 2023, some key trends have been seen over the past 2–3 years.

The FMCG landscape has seen a strategic pivot in M&A activity, focusing on digital transformation and high-growth segments. Companies are increasingly acquiring Direct-to-Consumer (D2C) brands to tap into booming online markets.

Future outlook

India is poised to become the world's third-largest consumer market by 2030, supported by a young population and rising economic progress. Key trends shaping the future include:

• Increasing demand for health-focused products.

• The rise of quick commerce for daily essentials.

• Growing interest in eco-friendly goods.

  
  

With these shifts, India's FMCG sector is expected to continue its robust expansion, driven by increasing rural consumption and evolving consumer preferences.

Recommendation for growth

Premiumisation: Companies can tap into the growing demand from affluent consumers by enhancing high-end product offerings and introducing innovative variants, driving profitability through premiumization.

Rural Market Growth: The rural FMCG sector is recovering, accounting for 39% of the market. Enhanced distribution, improved income, and habit formation strategies can help companies expand their presence and drive sustainable growth.

Innovation in FMCG: Emphasizing new product development (NPD) and innovation is crucial for growth, with Indian consumers increasingly seeking new brands and international influences. Companies should align their portfolios with consumer health expectations.

Micro-Market Strategies: Tailoring strategies to local consumer behavior through decentralized decision-making and data analytics can unlock growth in underserved areas.

Content Marketing: A strong content marketing strategy centered on storytelling and education can enhance brand loyalty, particularly among Gen Z, who favor personalized digital experiences.

Engaging Gen Z: Understanding Gen Z's preferences for healthy, sustainable products, online convenience, and brand experiences is vital for businesses targeting this demographic.

Global Expansion: Companies should explore international markets by leveraging Indian heritage and health associations, drawing inspiration from successful global brands.

Digital Transformation: Embracing digital transformation is essential for visibility, productivity, and consumer engagement across the FMCG value chain.

GenAI Integration: Utilizing Generative AI alongside traditional AI can revolutionize the FMCG sector by improving efficiency, customer experience, and driving innovation, necessitating a comprehensive alignment with overall company strategy.

With these shifts, India's FMCG sector is expected to continue its robust expansion, driven by increasing rural consumption and evolving consumer preferences. Read report to know more Consumer health, Home, beauty and personal care, Food and beverages trends and insights.

Download full report here: SPURring growth in FMCG, retail and e-commerce sectors in India (deloitte.com)